This week in tax: Biden’s energy tax holiday runs out of gas?
This week the Biden administration has run into opposition over a proposal for a federal gas tax holiday, while the European Parliament has approved a plan for an EU carbon border mechanism.
US President Joe Biden called on Congress on Wednesday, June 22, to impose a three-month federal tax holiday on diesel and petrol amid rising inflation, but the proposal is facing strong opposition from both sides of the aisle.
The proposed federal fuel tax holiday would involve a three-month suspension of two levies on every gallon of diesel and petrol respectively. It would aim to cut the 24 cents levy on every gallon of diesel and the 18 cents on the petrol price paid by US drivers.
It is estimated that the proposal would cost the government around $10 billion in lost taxes intended for the highway trust fund, which finances federal government spending for highways and mass transportation.
US inflation has hit a 40-year high of 8.6% driven by global food and energy costs. The price of petrol soared to a peak of over $5 per gallon before settling just below the watershed mark.
President Biden has been keen to provide some relief for hard-hit motorists amid opposition from Republicans and even within his own Democratic party.
There are fears from some that the cut to fuel costs for consumers could have the unintended consequence of stoking demand and leading to a further increase in inflation ahead of crucial mid-term elections in November.
It is not the first time that Biden has looked at implementing a gas tax holiday, following his earlier decision not to do so in February.
Parliament green-lights CBAM to lower carbon emissions
On the other side of the Atlantic, the European Parliament found a consensus for a carbon border adjustment mechanism on Wednesday, June 22, along with several more tax measures that will reform the EU’s emissions trading system.
Parliament will start negotiations with the European Council as soon as August on an emissions trading scheme (ETS) that is less ambitious than the European Commission’s earlier proposed Fit for 55 package. Both have CBAMs.
While the Commission’s package could reduce greenhouse emissions by 55% by 2030, tax professionals say the ETS could achieve higher carbon reductions by the same year.
The CBAM will replace carbon emissions permits in 2032, one year later than originally proposed by the Commission. The mechanism will apply higher costs to goods from third-country companies associated with large carbon emissions because of less strict local climate protection rules. This could lead to more costly cross-border trade and supply chain issues.
The German Chemical Industry Association (VCI) denounced any type of CBAM and other measures to reform the ETS in the EU in the near term. The VCI argued for a return to World Trade Organization (WTO) standards.
"The effectiveness of this project for climate protection is highly controversial and a WTO-compliant design is still in the stars,” according to the VCI, which stressed that the CBAM should be postponed amid high energy prices from the Russia-Ukraine war.
The VCI suggests solutions that support affordable energy and stabilise the economy should be a priority, including reducing energy taxes or suspending near-term plans to cut coal-fired power. Other European industries may also be heavily affected by the incoming CBAM and emissions regulations.
Amid the high inflation rate and record price levels for oil, the emissions reforms are less welcome than before. Ongoing supply chain bottleneck issues could lead companies to pay higher prices for cross-border trade under a CBAM if the Council reaches a unanimous vote as early as 2023.
Companies urged to pause Northern Ireland supply chain changes
As ITR reported this week, tax professionals have urged suppliers of goods from Great Britain to Northern Ireland to pause restructuring plans following the UK government’s publication of the Northern Ireland Protocol Bill on June 13.
The bill would give the Conservative government the power to override the Northern Ireland Protocol, which established rules for the treatment of NI following the UK’s departure from the EU.
“Just pause, don't go ahead and restructure your supply chains, if you're going to,” said Richard Asquith, CEO of VAT Calc, an international VAT/GST reporting and calculations firm in the UK.
He said that developments over the summer may affect the Northern Ireland Protocol and could mean that suppliers no longer need to restructure or rethink their strategies. These could include challenges to the legislation in the House of Lords, the upper chamber of Parliament, and legal cases from the EU.
Companies must prepare for TP risks as US dollar Libor’s deadline nears
In other ITR news, corporations must amend their transfer pricing studies as risk-free-rates gain momentum ahead of the US dollar London interbank offered rate’s cessation date scheduled for June 2023.
If they don't, they risk facing mismatches between their legal agreements and transactions.
Ensuring legacy transactions include the new benchmark rate will be key as well as revising intra-group arrangements. This means corporations must initiate discussions with tax authorities to approve the rate.
In the US, market participants are expected to adopt the secured overnight financing rate data to switch away from Libor.
Switching to an RFR means TP teams will also have to include a risk premium, which must be documented efficiently and communicated with any subsidiary involved in the transaction. The fallback language will need to be incorporated as well.
Failure to do so could leave TP teams at risk in which the pricing of a transactions does not align with a legal agreement, creating a mismatch.
Intra-company loans could face a significant risk if not updated.
However, the switch from Libor could be an opportunity for corporations to refinance their transactions in place.
Other ITR headlines this week include:
Next week in ITR
ITR will unpack EY’s plan to split its auditing and consulting activities into separate businesses, a move that will likely draw more business to the accounting firm. This could lead to similar corporate restructurings at the 'Big Four' accounting firms too.
ITR will also be summing up the most important tax disputes of 2022 so far, including cases concerning companies such as Exxon, McDonald’s and Netflix.
In other news, ITR will look at how tax directors are preparing for e-invoicing and e-reporting requirements including steps they are taking to mitigate against disparate measures adopted by some EU member states.
Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.