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February 18, 2022
Report on recent US international tax developments – 18 February 2022
The United States (US) Senate this week pivoted from discussions regarding the Build Back Better Act to what can be done to address inflation and who will support it. The press is reporting that Senate Democrats plan to bring forward legislation in March that would reduce expenses for American households, with possible options that include a gas tax holiday and lowering the cost of prescription drugs. Senate Majority Leader Chuck Schumer suggested that separate bills would be brought up, not combined or attached to a legislative package. Congress is out next week, with both chambers returning on 28 February in time for President Joe Biden’s State of the Union address on 1 March, which should provide some clarity as to the Administration’s priorities going forward.
The Internal Revenue Service (IRS) on 16 February released Frequently Asked Questions (FAQs) on transition relief for certain domestic partnerships and S corporations completing new Schedules K-2 and K-3. According to the IRS, the new schedules K-2 and K-3 “improve reporting by standardizing international tax information to partners and flow-through investors, making it easier for them to report these items on their tax returns.” The FAQs on Schedules K-2 and K-3 provide details on additional transition relief to make it easier for those domestic partnerships and S corporations to change to and prepare the schedules. An exception for tax year 2021 to file the Schedules K-2 and K-3 for certain domestic partnerships and S corporations may be available if certain requirements are met. For more information see the IRS press release.
In an 11 February letter to six Senators, the Treasury Assistant Secretary for Legislative Affairs wrote that future proposed regulations on cryptocurrency reporting requirements for brokers based on the recently enacted infrastructure legislation would be limited to those with access to certain information. Last year’s Infrastructure Investment and Jobs Act applied information reporting requirements to digital assets (including cryptocurrency) and updated the definition of broker to reflect the realities of how digital assets are acquired and traded, by adding to the definition “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”
The Treasury official wrote “ancillary parties who cannot get access to information that is useful to the IRS are not intended to be captured by the reporting requirements for brokers.” As examples of who would not be covered by the proposed regulations, the official pointed to those “validating transactions through a consensus mechanism” as well as individuals “selling storage devices used to hold private keys or persons who merely write software code.” Treasury will study the extent to which others in the digital asset market, including centralized exchanges, decentralized exchanges and peer-to-peer exchanges should be treated as brokers, the official said.
The period to provide comments on the Organisation for Economic Co-operation and Development’s (OECD) BEPS 2.0 draft Pillar One consultation document (draft model rules for revenue sourcing and nexus) released on 4 February closes on 18 February. The press this week quoted Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration as saying: “We fully acknowledge the complexity of the rules and the frustration of a number of players not to have been consulted in more detail.” Saint-Amans was quoted as saying the OECD is trying to reduce some of the complexity. In regard to collection of the necessary data, Saint-Amans said there are no plans for a central database containing company data that governments would be able to access. Rather the OECD plans to develop a mechanism that uses the information in a company’s country-by-country report and that are exchanged under Base Erosion and Profit Shifting (BEPS) Action 13.
Addressing the BEPS 2.0 negotiations, Republican Senate Finance Committee members wrote to Treasury Secretary Janet Yellen on 17 February, highlighting their concerns and underscoring the need for bipartisan discussions with Congress over the plan. The Republican committee members wrote that the BEPS Pillar Two global minimum tax model rules released in December 2021 apply “far more broadly and adversely” to US companies than foreign competitors. According to the letter, other countries appear to have “negotiated more successfully to protect their domestic tax laws and companies” to receive exemptions from a global minimum tax. The Senators wrote: “It is one thing for the Administration to advocate for higher taxes as part of its domestic tax agenda, but quite another to explicitly negotiate an international agreement that would subject U.S. companies to double taxation unless Congress acts accordingly.”
On 18 February, the OECD released Draft Rules for Tax Base Determinations under Amount A of Pillar One. The OECD/G20 Inclusive Framework on BEPS has agreed to release this public consultation document for public comments, but the draft rules do not reflect consensus regarding the substance of the document. Interested parties are invited to send their written comments by 4 March 2022.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC