The US Congress has recessed for the holidays, taking no action on enhanced Affordable Care Act (ACA) premium tax credits expiring at the end of the year. Senate Majority Leader John Thune (R-SD) confirmed that the enhanced credits are likely to expire at the end of the month but said "there is a potential pathway in January if Democrats are willing to come to the table" and consider proposals "that actually will drive down the costs of healthcare."

Congress also was unable to find a path forward on a potential bipartisan year-end bill that would have addressed other health, trade and tax issues, including cryptocurrency tax provisions, US-Taiwan tax relief and certain expiring provisions, among others.

US Treasury Secretary Scott Bessent this week urged countries to agree to the US proposal for a Pillar Two global minimum tax side-by-side system. The proposed system, first presented to the OECD/G20 Inclusive Framework at its plenary meeting last April, would exempt US multinationals from core elements of the Pillar Two global minimum tax rules, in recognition of the robustness of the existing US corporate income tax system, including the US minimum tax rules. Specifically, US parented groups would be exempt from the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR).

Following a meeting with European Union (EU) ambassadors to the United States this week, Secretary Bessent posted on social media: "The path forward on Pillar 2 is clear, and I would urge all remaining holdouts to join the consensus on the path forward for this critical issue." Press reports this week indicate that three EU countries that had raised objections to the side-by-side deal now have withdrawn their objections.

A senior Treasury official also said during a tax conference that if a side-by-side agreement is reached, the US exemption from elements of the global minimum tax rules would take effect for fiscal years beginning on or after 1 January 2026. The official noted that the transitional UTPR safe harbor expires at the end of 2025, and the US is keen that there not be a gap between the expiration of the safe harbor and implementation of the side-by-side agreement. Given that countries will still need to pass legislation to implement rules associated with a side-by-side deal, the official noted such legislation will need to be retroactive to 1 January 2026.

The Inclusive Framework is also considering changes to the Pillar Two treatment of substance-based nonrefundable tax credits — such as research and development tax credits — that would ensure greater alignment with the treatment of refundable tax credits. This issue is important to the US government. In addition, the Inclusive Framework is developing a compliance simplification safe harbor to replace the transitional country-by-country reporting (CbCR) safe harbor, which expires at the end of 2026. An OECD official indicated that both a routine profits test and a de minimis test, similar to tests in the transitional CbCR safe harbor, will be developed in early 2026 for inclusion in the new compliance simplification safe harbor. The Inclusive Framework is also considering extending the transitional CbCR safe harbor, which would provide a bridge to the new safe harbor. These elements are expected to be packaged together with the side-by-side system.

Attention is focused on the Inclusive Framework to see whether consensus can be reached on this Pillar Two package so that documents can be released before the end of the year.

Treasury and the IRS on 17 December issued final regulations (TD 10041) under IRC Section 59A for determining and reporting qualified derivative payments (QDPs) on securities lending transactions. The final regulations adopt the January 2025 proposed regulations with some clarifying amendments.

Recall the proposed Base Erosion and Anti-abuse Tax regulations included favorable guidance on QDPs in securities lending transactions. Specifically, the proposed rules called for excluding mark-to-market gain or loss on a securities loan from "base erosion payments." The proposed regulations also provided an alternative method for determining the recipient of a substitute payment on a securities loan. A Tax Alert on the final regulations is forthcoming.

US Trade Representative (USTR) Jamieson Greer on 16 and 17 December briefed the House Ways & Means Committee and the Senate Finance Committee, respectively, on the operation of the US-Mexico-Canada Agreement (USMCA ) and the Administration's plan for the upcoming 1 July 2026 review of the accord and whether it will extend the terms of the Agreement as part of the 1 July joint review.

Ambassador Greer indicated that the US would not automatically extend the terms of the USMCA. Instead, the "USTR will keep the President's options open, negotiating firmly to resolve the issues identified, but only recommending renewal if resolution can be achieved." The Ambassador did not comment on intentions to move the USMCA into bilateral arrangements or to withdraw from the Agreement.

The USTR acknowledged that there is strong support for the USMCA among stakeholders and that the "USMCA has been successful to a degree," including the certainty it provides for North American trade and increased US exports to Canada and Mexico. The Ambassador also emphasized the Agreement's shortcomings and noted that although stakeholders were mostly supportive of the USMCA, they said improvements are needed. A WCEY Alert provides details.

The USTR also recently posted a statement warning the European Union about digital services taxes and regulations. The USTR statement read, in part, "If the EU and EU Member States insist on continuing to restrict, limit, and deter the competitiveness of U.S. service providers through discriminatory means, the United States will have no choice but to begin using every tool at its disposal to counter these unreasonable measures. Should responsive measures be necessary, U.S. law permits the assessment of fees or restrictions on foreign services, among other actions."