Tax and other policy-related developments
The political dynamics and unpredictability of the current Congress have so far yielded little in terms of tax legislation, but it is still possible that a tax bill could advance in late 2023 if a mustpass legislative vehicle, such as Federal Aviation Administration authorization or the fiscal 2024 National Defense Authorization Act, emerges. Among the items that might be included are modifications of some expired provisions from the Tax Cuts and Jobs Act (TCJA). These include addressing a change to Section 174 that requires five-year or 15-year research and development (R&D) amortization, depending on the location of the activity, rather than expensing; changes to the interest deduction limitation calculations under Section 163(j); and 100% expensing.
So far, however, these priorities have remained mired in a partisan standoff, which makes the path forward unclear. Congressional Democrats wish to expand the Child Tax Credit, while Republicans would aim to partially offset a tax package’s revenue losses by rolling back clean energy tax provisions from last year’s Inflation Reduction Act (IRA). Some members of both political parties in high-tax states would also like to enact some form of relief from the TCJA’s $10,000 cap on deductions for state and local taxes (SALT).
Insights from administrative guidance
While tax legislation has been slow to move, the Treasury Department and IRS continue to issue administrative guidance on a range of issues that may affect companies’ tax positions. Topics of recent guidance have included the IRA’s corporate alternative minimum tax (CAMT), the 1% excise tax on certain corporate stock repurchases, and different aspects of clean energy incentives included in the IRA legislation.
Additionally, in a July 2023 notice (Notice 2023-55), the U.S. Treasury Department announced temporary relief for taxpayers seeking foreign tax credits (FTCs). For tax years ending on or before 31 December 2023, the notice generally allows taxpayers to claim certain FTCs that otherwise may not have been available. Further relief, and additional changes to the FTC regulations, might be considered in the future. Companies should evaluate the notice’s impact on their tax returns, financial statements and FTC profile.
The IRS also issued highly anticipated proposed digital asset rules (REG-1122793-19) that would define key terms and introduce new standards that would apply uniquely to digital assets. The package adopts many of the long-standing concepts and terms that apply to sales of securities, including the reporting of a customer’s tax basis and gross proceeds from a sale. More regulatory guidance on a variety of topics is expected from Treasury and the IRS before year-end. Audit committees should ask how management is tracking relevant tax guidance and determining the potential impact on their organization’s reporting and compliance obligations, supply chains and effective tax rate (ETR). Depending on the topic, such guidance can affect future decisions and provide opportunities for engagement with tax policymakers.
State outlook
State tax policy often flows from federal tax policy changes and their impact on state fiscal conditions. Having reported record revenues over the last few years, many states experienced a decline in tax revenue collections this year.
Current revenue declines — in combination with inflation, the ending of pandemic-related federal aid, and migration of businesses and individuals — could lead to future business tax increases in some states. Businesses in states with stronger fiscal conditions may consider tax rate reductions and other business tax relief in the coming year.
Global tax — unprecedented cross-border cooperation
Globally, it is a time of fundamental tax change and cross-border coordination that may have profound implications for multinational entities (MNEs) and their global tax obligations. In October 2021, agreement was reached on new global minimum tax rules that establish a minimum tax rate of 15% and give priority of rights to impose a “top-up tax” to the local country, the headquarters country or other countries where an MNE group has taxable presence. Known as Pillar 2 of the OECD/G20 project on addressing the tax challenges arising from the digitalization of the economy (commonly referred to as the BEPS 2.0 project), it applies to companies with global revenue of at least €750m (roughly $825m) and is being implemented through changes to country tax laws.
Regulatory developments
Market participants should continue to expect regulatory changes in 2024 as the SEC works through its rulemaking agenda. As has been widely observed, the SEC under Chair Gary Gensler has issued more rule proposals at this stage of his tenure than it had under most other recent SEC chairs at the same point in their tenure. The SEC is now in the process of finalizing some rules as well as planning new proposals. Chair Gensler also remains focused on a vigorous enforcement program. The Public Company Accounting Oversight Board (PCAOB) also has a number of standard setting initiatives planned for 2024. Outside the U.S., regulators are likely to continue to be similarly active, as, for that matter, are certain state authorities. Audit committees and SEC registrants and other companies should keep abreast of these areas to be able to meet regulatory expectations.
SEC’s regulatory agenda
In 2023, the SEC issued a number of final rules that impact public companies. These include final rules on cybersecurity risk management, strategy, governance and incident governance; share repurchase disclosure modernization; and recovery of erroneously awarded compensation (clawbacks). Still pending is action on climate-related and several other ESG disclosure matters (e.g., board diversity, human capital) as reflected on the SEC’s rulemaking agenda, which is updated semiannually.
Climate-related disclosures: One of the major areas of expected activity in 2024 relates to climate-related disclosures. The SEC continues to consider the public’s feedback on its proposal to enhance and standardize disclosures that public companies make about climate-related risks, their climate-related targets and goals, their greenhouse gas (GHG) emissions, and how the board of directors and management oversee climate-related risks. The proposal would also require registrants to quantify the effects of certain climate-related events and transition activities in their audited financial statements. There is no clear indication of when a final rule may be issued, although Chair Gensler has indicated that it remains high on the SEC’s agenda.
In the meantime, US companies should also consider whether they will fall within the scope of climate disclosure requirements that have been finalized by California and the European Union (EU) and that will begin to take effect in the next several years. The EU Corporate Sustainability Reporting Directive (CSRD) includes a mandate to disclose sustainability information that applies to a wide range of entities operating in the EU, including subsidiaries of non-EU entities and non-EU subsidiaries of EU holding companies.
SEC enforcement and auditor independence
The SEC Division of Enforcement also continues to be active. SEC Chair Gensler has discussed five themes that capture his priorities for the enforcement program, including holding individuals and entities accountable for securities law violations as well as prioritizing high-impact cases. This approach has meant that the SEC regularly imposes high fines and mandates corrective actions via its enforcement actions. Gensler also has focused on accountability for gatekeepers, including lawyers, auditors, underwriters and others, on whom he says trust in the markets depends. Division of Enforcement Director Gurbir Grewal also has highlighted the SEC’s expectations for compliance personnel, including that they will create a culture of proactive compliance.
