TAX TAKE: Time is On My Side (Yes It Is!)
As the size of the pending reconciliation package is expected to shrink (perhaps closer to Senator Manchin's $1.5T target than the $3.5T package passed by the relevant House committees of jurisdiction), tax policy observers are keenly focused on what corresponding reductions will be made to the tax title's revenue raising proposals. Although the potential remains that certain proposals passed by the House Committee on Ways and Means will be dropped entirely or significantly scaled back (such as ratcheting the corporate tax rate down to the 25 percent rate proposed by Senator Manchin), there is increased speculation that the reduced need for revenue will be used to delay the implementation of various revenue raising proposals. Utilization of such delays will not only reduce the revenue raised by these provisions but also, arguably allow companies to continue to recover from the COVID-19 crisis while conveniently deferring implementation of significant tax increases until after the 2022 mid-term Congressional elections.
There is increased discussion of the possibility that the tax title will include a one-year delay of various international tax provisions, which would have the added benefit of allowing further OECD developments, including implementation by member countries. In this regard, the proposed modifications to the GILTI regime included in the House Ways and Means Committee tax bill has received the most attention in the delayed effective date conversation, since the delay is ostensibly to more closely align its implementation to that of the global minimum tax under the OECD's Pillar 2 regime. A group of influential House Democrats recently sent a letter to Speaker Pelosi and House Committee on Ways and Means Chairman Neal requesting a delay to the implementation of the proposed modifications to the GILTI regime to allow Congress to see how and to what extent other members of the Inclusive Framework adopt their own minimum tax regimes.
It should be noted that given that the global minimum tax rule is only one half of the Pillar 2 framework, any effective date delay with respect to the GILTI regime could also extend to the proposed modifications to the BEAT regime. In a statement released October 8, the Inclusive Framework indicated that 2023 is the targeted effective date for the global minimum tax rule, while Pillar 2's BEAT analogue is not expected to become effective until 2024.
While a proposed delay to the marquee international provisions will have obvious revenue implications, the delay could prove fruitful in that it will afford the Administration more time to hammer out technical rules in regulatory guidance. This would be a welcome development, particularly in the context of moving GILTI to a country-by-country regime and the attendant impacts such a shift will have on foreign tax credit calculations. On the other hand, the built-in effective date delay could herald the creation of a new extender, if the progress toward widespread adoption of the Pillar 2 framework takes longer than anticipated. Indeed, the Administration's primary rejoinder to the complaint that the proposed increase to the GILTI rate to anything higher than the 15 percent rate for the global minimum tax is unfair is that there is more parity for U.S. multinationals than there ever was before (i.e., prior to the progress made in the Pillar 2 framework, U.S. multinationals were subject to a 13.125 percent minimum tax rate, while their competitors were subject to 0 percent rates; now the differential would be less than two percentage points: 16.6 percent compared to 15 percent). But the longer it takes for country members of the Inclusive Framework to adopt local country minimum taxes, the less compelling that argument will become (if it ever was).
Taxpayers hoping that the reduced need for revenue will result in revenue raising proposals being completely dropped from the bill are likely to be disappointed by a short-term delay of certain provisions. And the proposed delay may be more theoretical than practical given the interaction of the various international proposals, as well as the continuing developments at the OECD. Nevertheless, it is important to monitor whether such delays become reality! #TaxTake
Upcoming Speaking Engagements and Events
- Marc will discuss the upcoming tax legislative agenda at the Savannah Estate Planning Council's 2021 Fall Meeting on October 21.
- Marc will speak at the 56th Annual Southern Federal Virtual Tax Institute on a panel titled, "The 2021 Legislative Landscape: Evaluating Actual and Potential Changes," on October 25.
- On November 8, Loren will speak on the tax policy panel at the 32nd Annual Philadelphia Tax Conference.
- Loren will present, "Pending Regulatory Challenges to Select International Provisions of the Tax Cuts and Jobs Act," at the 67th Annual William & Mary Tax Conference on November 12.
- On November 30, Loren will speak on the North America panel at IFA's 2021 virtual event, "The Global Tax Agreement: The Two-Pillar Solution."
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