tax

November 25, 2024, Covington Alert

The inauguration of President Trump on January 20 is expected to bring important changes to U.S. trade policy that are likely to affect companies that supply international customers, or are reliant on global supply chains. As discussed in our prior client alert, international trade is expected to be a key focus of President Trump, who has repeatedly expressed a preference for using tariffs as a policy tool to create perceived leverage for dealmaking with international partners on both economic and non-economic issues. Recent announcements by the Trump transition team regarding cabinet and staff appointments reinforce the view that trade policy under a second Trump administration could involve significant unilateral U.S. action, including the imposition of substantial new tariffs and a hawkish stance toward China. These new tariffs could be implemented swiftly after Trump takes office, or could alternatively be subject to more extensive investigative and reporting procedures, depending on the legal authority invoked. New tariff measures, as well as other trade actions Trump has proposed, could lead to retaliatory responses by U.S. trading partners, including key U.S. allies. This alert explores how trade policy may be implemented by a second Trump administration, and considers how companies may prepare for and mitigate the risks associated with these developments.

Cabinet Nominations and Other Economic Appointees

In recent weeks, Trump has announced several cabinet and staff appointments for his second administration, including individuals responsible for implementing trade policy. Key among them is Howard Lutnick, chairman and CEO of a Wall Street investment firm and co-chair of Trump’s transition team, whom Trump has selected to be Secretary of Commerce. Echoing Trump’s own views, Lutnick has been a strong advocate for using tariffs as an industrial policy tool and bargaining chip to rebalance U.S. trade, though he has suggested tariff measures under a second Trump administration may be more “targeted” than the universal 10 to 20 percent tariffs proposed by Trump during his campaign. In announcing Lutnick’s forthcoming nomination, Trump noted Lutnick would lead the administration’s “Tariff and Trade agenda,” and that he would have direct responsibility over the Office of the United States Trade Representative (“USTR”). As USTR is a separate agency established by Congress within the Executive Office of the President to lead on trade issues, it is uncertain if the announcement was referring to informal oversight over USTR or a formal restructuring of the agency. Should Trump seek to consolidate USTR within or under the Commerce Department, he may face opposition from Congress, whose approval would be required for such a reorganization. Continue Reading Trade Policy Under a Second Trump Administration and Implications for Business

November 1, 2024, Covington Alert

In a unanimous decision, the U.S. Court of Appeals for the Fifth Circuit affirmed the Tax Court’s denial of tax-exempt status for Memorial Hermann Accountable Care Organization (MHACO) as an organization described in section 501(c)(4) of the Internal Revenue Code. The decision could have implications for lobbying, political, and member-related activities of social welfare organizations.

Background

As a Texas nonprofit corporation, MHACO provides healthcare to patients under either its “Medicare Shared Savings Program” (MSSP), which specifically benefits Medicare patients, or under employer-sponsored commercial insurance plans.

MHACO applied to the IRS for recognition as a 501(c)(4) organization. The IRS issued a final adverse determination letter, stating that MHACO did not meet the requirements for tax-exempt status of operating exclusively for social welfare purposes because its activities primarily benefitted commercial payors rather than the public.

Legal Issue

The crux of the issue is the permissible threshold of so-called “nonexempt” activity that an organization may engage in and still qualify for exemption. Under one, narrower, legal standard—referred to as a “substantial nonexempt purpose” test and based on the Internal Revenue Code and a 1945 Supreme Court case—the presence of a single substantial nonexempt activity disqualifies an organization from exemption. Under a second legal standard—referred to as the “primary purpose” test and based on the Treasury Regulations—as long as an organization is primarily engaged in exempt activity, it will qualify for exemption. Stated another way, the primary purpose test permits a higher level of nonexempt activity: To the extent the nonexempt activity is not the organization’s primary activity, the organization will qualify for exemption under this second test.Continue Reading 501(c)(4) Organizations Could Face Additional Scrutiny Following Court Decision

Latin America

Scope and format

The Brazilian National Congress approved a historic tax reform that revamps the existing consumption tax system, in place since the 1960s.  The reform generally simplifies the Brazilian tax system, reducing the compliance cost for business.  However, it also creates a new tax on certain goods and services.

The reform takes the form of a constitutional amendment and requires implementing legislation and regulation. The administration must introduce implementing legislation to Congress within 180 days.  Implementation dicussions will be relevant because they will set the new system tax rates and, in some cases, scope, as well as detail exceptions.

Although primarily focused on the consumption tax system, the reform also includes provisions related to taxes on property and financial operations.

Why a constitutional amendment?
Brazil adopts a descriptive constitutional model in which the principles and limits of the tax system, as well as all federal, state, Federal District and municipal taxes, and their respective scope and revenue distribution, are detailed in the Constitution.  Therefore, any substantial change of the system requires a constitutional amendment.

Need for reform

Over decades, the consumption tax system increased in complexity and compliance costs, ranking Brazil as one of the most inefficient tax jurisdictions among large economies.

The system, built upon thousands of tax-related norms and judicial interpretations, generated legal uncertainty and capital misallocation, creating negative incentives for investment, exports, and economies of scale and proximity, among others.  It also generated numerous tax disputes, with estimates as high as 75 percent of Brazil’s GDP, increased tax inequality, and reduced private sector competitiveness.

Many of the existing inefficiencies were created by federal government policies, or state and local governments providing tax incentives to attract investment, as well as economic sectors lobbying Congress and the administration for special tax regimes.

The need for a redesign of the consumption tax system was clear since the 1990s, when Brazil successfully curbed hyperinflation.  With a stable currency, structural issues impacting business competitiveness resurfaced.  These issues were grouped under the catch-all “Brazil Cost” concept, with the tax system as a prominent component of it.Continue Reading Brazil’s Historic Tax Reform: A Primer

Funding incentives under the U.S. Inflation Reduction Act of 2022 (IRA) to transition to a clean energy economy are unleashing opportunities for key U.S. allies and partners around the world. In particular, tax credits exceeding 10% of the price of average electric vehicle (EV) sold in the United States are leading to new investments in Mexico and Canada, and have triggered high-level political negotiations from U.S. partners such as the European Union and Japan.

IRA Tax Credits for EV Critical Minerals and Battery Components

Under the IRA, EVs and batteries produced in North America (including Mexico and Canada) may qualify for significant tax breaks. Partial tax breaks are also available for EVs with batteries utilizing critical minerals extracted or processed in countries with which the U.S. has a free trade agreement (FTA).

As we previously discussed in greater technical detail, the IRA amended the Clean Vehicle Credit under section 30D of the U.S. tax code to provide a $7,500 consumer tax credit for the purchase of a qualified vehicle such as an EV. This consists of $3,750 for vehicles meeting the “critical minerals” requirements and $3,750 for those meeting the “battery components” requirements.

  • Under the critical minerals requirements, a share of critical minerals contained in the battery of a qualified vehicle must have beenextracted or processed in the U.S. or in a country with which the U.S. has an FTA, or recycled in North America. The applicable share is at least 40 percent for vehicles placed in service in 2023, and increasing by 10% per year until reaching 80% for vehicles placed in services after 2026.
  • Under the battery components requirements, final assembly must have occurred in North America and the percentage of the value of the components contained in such battery that were manufactured or assembled in North America must be equal to or greater than the “applicable percentage,” i.e., “60% for 2024 and 2025 vehicles, and going up 10% per year till past 2028 at 100%.”

Continue Reading Global Spotlight: the IRA’s Implications for Key U.S. Allies

At the beginning of a new year, we are looking ahead to five key technology trends in the EMEA region that are likely to impact businesses in 2023.

1. Technology Regulations across EMEA

European Union

If 2022 was the year that the EU reached political agreement on a series of landmark legislation regulating the technology sector, 2023 will be the year that some of this legislation starts to bite:

  • The Digital Services Act (DSA): By 17 February 2023, online platforms and online search engines need to publish the number of monthly average users in the EU. Providers that are designated as “very large online platforms” and “very large search engines” will need to start complying with the DSA in 2023, and we may start to see Commission investigations kicking off later in the year too.
  • The Digital Markets Act (DMA): The DMA starts applying from 2 May 2023. By 3 July 2023, gatekeepers need to notify their “core platform services” to the Commission.
  • The Data Governance Act (DGA): The DGA becomes applicable from 24 September 2023.

Also this year, proposals published under the European Data Strategy—such as the Data Act and European Health Data Space—and EU legislation targeting artificial intelligence (AI) systems—including the AI Act, AI Liability Directive and revised Product Liability Directive—will continue making their way through the EU’s legislative process. These legislative developments will have a significant impact on the way that businesses ingest, use and share data and develop and deploy AI systems. In addition, the new liability rules will create potentially significant new litigation exposure for software and AI innovators.Continue Reading Top Five EMEA Technology Trends to Watch in 2023

On November 1, 2022, the Office of the U.S. Trade Representative (“USTR”) published a questionnaire for interested parties to use in commenting on the effects of the tariffs imposed on Chinese imports under Section 301 of the Trade Act of 1974 (“Section 301 Tariffs”). USTR issued the questionnaire pursuant to its October 17, 2022 notice initiating the second phase of its statutory four-year review of the Section 301 Tariffs. Questionnaire responses may address the tariffs’ impact on the whole economy, specific sectors and industries, or individual tariff headings. Responses may be submitted between November 15, 2022, and January 17, 2023. This process offers a new opportunity for companies to make a record with the Biden Administration regarding the future of the Section 301 actions, including as to specific product categories that should not be subject to duties if the tariffs remain in force.

Background

The United States imposed the Section 301 Tariffs after determining in March 2018 that China’s technology transfer and intellectual property policies and practices harmed U.S. companies. Between July 2018 and September 2019, the United States applied four tranches of tariffs on over $360 billion in Chinese imports.

The administration is defending the List 3 and List 4A tariffs against legal challenges pending before the U.S. Court of International Trade. On April 1, 2022, the court remanded those lists to USTR for further explanation or reconsideration, and USTR filed its remand determination responding to significant comments on the List 3 and List 4A tariffs on August 1, 2022. The court is now evaluating the sufficiency of that remand determination.

Under the statute, Section 301 Tariffs expire after four years unless a representative of a domestic industry that benefited from the tariffs submits a written request for continuation.[1] Accordingly, on May 3, 2022, USTR initiated its statutory four-year review of the Section 301 Tariffs in advance of their expiration beginning on July 6, 2022. (See our prior alert.) Prior to launching the statutorily mandated review, the Biden Administration’s principal action with respect to the Section 301 Tariffs was to reinstate a limited set of previously expired product exclusions. Those 352 reinstated exclusions are now set to expire on December 31, 2022.Continue Reading USTR Seeks Public Comment in Second Phase of Four-Year Review of Necessity for Section 301 Tariffs on Chinese Imports

On October 5, 2022, the Treasury Department and the IRS issued notices requesting comments on different aspects of the energy tax benefits in the Inflation Reduction Act (“IRA”). All comments are due by Friday, November 4, either electronically on www.regulations.gov or alternatively by mail to the IRS. Written comments submitted after that date will be considered as long as such consideration will not delay the issuance of guidance.

In each case, the Notices focus on a subset of the IRA expanded and enhanced existing consumer and business energy tax credits and the new credits, including tech-neutral production and investment tax credits, a clean hydrogen production credit, a nuclear power production tax credit, and credits for producing necessary components for clean energy production, among others. The Notices solicit general comments, but also focus on specific definitional and operational issues. The requests emanate from, among other things, the new domestic production and sourcing requirements in the IRA, including requirements for sourcing critical minerals for the manufacturing of electric vehicles and for constructing certain qualified facilities using materials produced in the United States. Requests also arise in reference to the new two-tiered credit structure, where, for many of these credits, taxpayers are eligible for a higher credit (typically five times the base amount) if they meet certain wage and apprenticeship requirements. And one Notice focuses on the new direct pay or transferability feature for some credits, which essentially results in a cash payment to the taxpayer regardless of whether they have any tax liability in the year in which the credit is claimed.Continue Reading IRS issues notices requesting comments on IRA clean energy tax credits

In a series of prior blog posts, we previously highlighted the historic implications of the Inflation Reduction Act (IRA) for the U.S.’s international climate commitments, as well as for private companies navigating the energy transition.  Shortly after our series published, the Senate passed the IRA on Sunday August 7th with only minor modifications to the bill’s $369 billion in climate and clean energy spending.  Today, the House passed the IRA without any further changes, and soon hereafter President Biden is expected to sign it into law. 

However, this is only the beginning of the road; the IRA will have sweeping implications beyond the four corners of its pages.  In the coming months and years, we expect to see intense jockeying over agency rulemakings that will shape the IRA’s implementation, as well as determine its ultimate success as an energy policy.  

I. Congressional Permitting Reform

As an initial matter, it seems Congress has not finished its work revamping the nation’s climate and energy laws.  As part of his agreement to support the IRA, Senator Joe Manchin (D-WV) announced that “President Biden, Leader Schumer and Speaker Pelosi have committed to advancing a suite of commonsense permitting reforms this fall that will ensure all energy infrastructure, from transmission to pipelines and export facilities, can be efficiently and responsibly built to deliver energy safely around the country and to our allies.”  While the exact contours of this legislation are not currently known, Senator Manchin’s office recently released a legislative framework, which includes proposals to, among other things:Continue Reading House Passes Inflation Reduction Act, Marks a New Era for Climate Policy

Background

As we previously reported, President Biden and Congress took steps in March 2022 to revoke Russia’s most-favored-nation (or “MFN”) trade status, known as Permanent Normal Trade Relations (“PNTR”) status under U.S. law.  As a result of these actions, the Suspending Normal Trade Relations with Russia and Belarus Act (“Suspending NTR Act”) entered into force on April 8, 2022, formally revoking PNTR status for Russia and Belarus.  Under the terms of the Act, imports into the United States of products from Russia and Belarus became subject to tariff rates set out in column 2 of the U.S. tariff schedule, rather than the column 1 rates that had previously applied.  Column 2 tariff rates are often higher—sometimes much higher—than MFN tariff rates in column 1, and as a result of this change, tariffs on U.S. imports from Russia increased from an average of approximately three percent to 32 percent.  In addition to implementing this immediate change in applicable tariff rates, the Suspending NTR Act also temporarily authorized the President, through the end of 2023, to increase even further tariffs applicable to imports from Russia and Belarus.

On June 27, pursuant to the authority granted under the Suspending NTR Act, President Biden issued Presidential Proclamation 10420, announcing that the United States would further increase tariffs applicable to certain categories of imports from Russia, worth approximately $2.3 billion annually.  U.S. Customs and Border Protection (“CBP”) recently issued guidance on these tariff increases, which will apply effective July 27, 2022.  This alert provides additional information on the forthcoming tariff increases, and discusses potential implications for importers of Russian goods.

Overview of July 27 Tariff Rate Increase on Certain U.S. Imports from Russia

Since revocation of PNTR status in April, products imported into the United States from Russia and Belarus have been subject to tariff rates set forth in column 2 of the U.S. tariff schedule.  Under the terms of Presidential Proclamation 10420, however, duty rates of 35 percent ad valorem will apply to 570 categories of Russian products in lieu of column 2 rates, beginning July 27, 2022.  These product categories have an estimated value of approximately $2.3 billion annually.  The Proclamation does not impact imports from Belarus, which will remain subject to column 2 tariff rates.Continue Reading Increased Tariffs on Certain U.S. Imports from Russia Effective July 27, 2022: What Companies Need to Know

On July 1, 2022, the U.S. Department of Commerce (“Commerce”) issued proposed rules implementing President Biden’s emergency declaration to provide temporary tariff relief on certain imports of solar cells and modules from Cambodia, Malaysia, Thailand, and Vietnam.[1] Commerce has provided the public with a 30-day period to comment on…

Continue Reading Commerce Invites Comments on Proposed Rules Implementing Presidential Emergency Declaration on Solar Tariffs