Tax Update (October 21)
This week, the Internal Revenue Service (IRS) issued a notice announcing that, following the expiration of the temporary regulations under section 385, taxpayers may rely on the notice of proposed rulemaking cross-referencing the temporary regulations. The temporary regulations expired on October 13, 2019.
Last week, the IRS released updated guidance for taxes owed on cryptocurrency holdings. Along with the guidance, it issued a FAQ to help clarify questions asked by taxpayers regarding the tax treatment of a hard fork. While much of the FAQ solidifies the tax treatment of cryptocurrency, the FAQ also gave some confusing signals. Jim Harper, Visiting Fellow at AEI, explained in a blog post that the FAQ is “quirky” due to the collapsing of the concepts of forks and airdrops in one section while phrasing a fork and an airdrop as “technically distinct events” in another. Another challenge the FAQ involves how a new cryptocurrency is “received.” The FAQ says a transaction is recorded once the person has the “dominion and control” over the cryptocurrency so it can be exchanged, sold, transferred, or disposed. Harper noted that the dominion and control provision makes the the liability rely on technical skill. Because different people have different dominion and control over forked cryptocurrencies, they can transfer, sell, exchange or dispose new cryptocurrencies at different times, and in some cases, never. This is a difficult and confusing standard to enforce. The new guidance and FAQ makes forked or airdropped cryptocurrency taxable as income in the year received. Harper explains that generally income is taxed only when it is realized (traded or sold), often at market price. In a similar way, tax liability is supposed to accrue when property is sold, not when “received.” Overall, the IRS has more clarification to offer on these topics. You can find the FAQ page here.
Economic Impact of U.S. Tariffs
The Tax Foundation has been tracking the economic impact of U.S. tariffs imposed by the Trump administration and the retaliatory actions put forth by other countries. The Tax Foundation analyzes the effects of imposed, threatened, and retaliatory tariffs through their taxes and growth model. Thus far, they estimate that the negative impact of tariffs is nearly 40 percent of the total impact of the Tax Cuts and Jobs Act (TCJA). You can see its tracking tool and find updates here.
Next Wednesday (Oct. 23), the House Committee on Ways and Means may hold a markup of legislation on an excise tax on vaping and e-cigarettes. As of yet, it is unclear which standalone bill will be marked up, but it is likely a House companion of Sen. Ron Wyden’s (D-OR) nicotine equivalency bill.
US Likely to Support Pillar One to Replace Digital Services Taxes; Discussions on Pillar Two and Minimum Tax Underway
Organisation of Economic Cooperation and Development (OECD) is expected to issue a statement on a global agreement on digital taxes this week. “We expect this communique to express reasonable support to the approach,” Pascal Saint-Amans told reporters at a briefing. “We take [it] as a positive welcome, if not endorsement, of the proposal.” Chip Harter is the US Department of Treasury lead on the issue. The initial step in the plan is known as Pillar One, which would theoretically generate more revenue in countries where businesses operate and make money without a physical footprint. The so-called FANG companies (Facebook, Amazon, Netflix and Google, among others) are in the mix for being taxed under the plan. US officials are backing the plan, although it will require virtual unanimous support from every country in the world. The threshold for the tax is currently €750 million ($822 million); country-by-country sales amounts are also likely to be set. The tax would hit the residual profits not taxed in a company’s home country. The current version of the proposal would exempt extractive industries and commodities; financial services are also seeking a carve-out. The Pillar One proposal also includes a legally binding tax dispute arbitration process. One remaining issue is distinguishing business-to-business income from business-to-consumer income, the latter of which is intended to be exempt. For example, shipping companies would get exempted because they conduct services for other businesses, not consumers. Jason Yen from Treasury International said this morning (Oct. 18) that the minimum tax effort, known as Pillar Two, has been insisted by the US to be included in the effort. The US argues that the Global Intangible and Low Taxed Income (GILTI) regime should qualify as a version of such a minimum tax (although given its extraordinary complexity and harsh impact, especially in later years, the US is not holding GILTI out as enacted in the TCJA as a model for the Pillar Two effort). The challenges facing Pillar Two are also formidable, including whether to use financial, opposed to tax, books to determine whether and how much tax has been paid; finding a tax base that is acceptable globally; how to treat timing versus permanent differences between taxes and financial accounting; and what the minimum tax rate should be. Mr. Yen said there is consensus it should not be a “single digit” rate nor higher than 13 percent. A paper outlining some of these issues is expected in mid-December after another meeting of the Pillar Two working group. How the new regime would affect tax receipts in the 134 countries involved in the global tax effort is a key consideration, but impossible to determine now given the many moving parts of both Pillars. Some countries stand to gain money, given their large consumer bases, though countries with low tax rates but small populations (and no digital company headquarters) look likely to lose revenue. Saint Amans also said that the OECD has set a deadline of June 2020 to conclude discussions and finalize a proposal. Given the wide range of views on the key issues facing the OECD working groups, together with the difficulty of finding consensus among all those countries, most are highly skeptical that these issues will be resolved in 2020.
U.S. Retaliation Still Looms in French Digital Tax Talks
Despite the movement on an internationally agreed upon digital tax structure, a tax on digital companies’ sales known as a “DST” has been imposed in France. Numerous other countries including Italy, the United Kingdom, Spain and Australia, are considering DSTs, much to the displeasure of the US. The Trump administration may still consider retaliatory measures against France’s DST, which it deems discriminatory against US companies. In early September, Treasury Secretary Steve Mnuchin noted that if the two countries do not come to an agreement within 90 days, the administration may consider action under Section 301 of the Trade Act, which allows the president to take action against a country if they restrict US commerce or violate trade agreements. The administration could also utilize tax code Section 891, a 1930s law that allows the president to double taxes on French citizens and countries residing in the US. The law has never before been enacted and it is unclear how the process would play out. However, Treasury has acknowledged that Section 891 is under consideration.
 Harper, Jim “The IRS’s confusing cryptocurrency FAQ” American Enterprise Institute, Oct 18 2019 https://www.aei.org/technology-and-innovation/the-irss-confusing-cryptocurrency-faq/?mkt_tok=eyJpIjoiWkRrNU5tRTJNR1JrWmpSayIsInQiOiJ2N1ZQTFNsaDBpWEJhTDBqQUpDRm5NUHFEM2kyXC9Xd3pmU0gxNXNMaUZhSmp3WGVBaHAwUkFlbmx6Y3RcL0F3cUxmT28xa1wvNUh0dHZnK2E3a3pibmNzM3RORGFnUGJvV2xUQ3p0XC90NnpaT1ZuT3NndGZQZENQSkxaVVpkYUtxa3AifQ%3D%3D
 Lorenzo, Aaron “OEDC expects support for initial plan to tax digital economy” Politico Pro, 17 Oct 2019 https://subscriber.politicopro.com/article/2019/10/oecd-expects-g-20-support-for-initial-plan-to-tax-digital-economy-3973087
Wilhelm, Colin “US Retaliation Still Looms in French Digital Tax Talks” Bloomberg Tax, 17 Oct 2019 https://news.bloombergtax.com/daily-tax-report/u-s-retaliation-still-looms-in-french-digital-tax-talks