Tax in the time of

COVID-19 (December 17, 2021)

Update on legislative,
economic, regulatory and
IRS developments
Disclaimer

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Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of
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of Ernst & Young LLP.
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Page 2 Tax in the time of COVID-19

Today’s
moderator
Michael Mundaca
National Tax Department Leader
Ernst & Young LLP

Page 3 Tax in the time of COVID-19

Today’s
presenters

Margie Rollinson Kirsten Wielobob

National Tax Department Principal, Tax Policy
Deputy Leader and Controversy
Ernst & Young LLP Ernst & Young LLP

Page 4 Tax in the time of COVID-19

Course description and learning objectives

Course description
The panelists will discuss how businesses can navigate the tax policy environment and continue
to effectively operate their tax function in this time of crisis and change. The panelists will also
provide updates on the US economy and tax policy, what’s happening at the IRS, and breaking
developments.

Learning objectives
► Recognize how changes in the economy may affect my company’s financial situation

► Identify how tax policy developments may impact my business operations

► Recognize how IRS changes could affect my organization

► Recognize changes in 2021 in the US political environment and the potential effects on
pending legislation

Page 5 Tax in the time of COVID-19

Today’s
agenda
Economic update
What’s happening at the IRS
Tax policy developments
Year-end overview

Page 6 Tax in the time of COVID-19

Economic update

Page 7 Tax in the time of COVID-19

 US economy by the numbers
4.2%
US unemployment rate in November,
down 0.4 ppt from October rate
► Labor force participation rate edged
up to 61.8%; workforce increased by
600,000 but still about 2.4m workers
smaller than pre-pandemic
► 6.9m unemployed; 149m employed,
3.9m fewer than in February 2020
210,000
Jobs added in November
► Significantly below expectations of
500,000 to 600,000
► Notable gains in professional and
business services, transportation
and warehousing, construction, and
manufacturing; losses in retail trade
Recovery supported by vaccines and stimulus; variants, shortages, restrictions creating headwinds
Page 8
4.8%
November average hourly wage increase
year over year
► There have been significant average
hourly wage increases every month
since April
► Job openings are at record levels (11m)
and significantly exceed the number
looking for a job (7.4m)
5.5%
Approximate real GDP growth expected for
both the US and the globe in 2021
► Forecasts increasingly less optimistic,
given virus resurgence, and supply chain
issues
Tax in the time of COVID-19
6.8%
November Consumer Price Index (CPI)
increase year over year (y/y)
► Largest y/y increase in almost 40 years
(June 1991)
► Core CPI rose 4.9% y/y, the largest such
increase in almost 30 years
► Month over month CPI increase was 0.8%
0.3%
Increase in retail sales in November
► Following an 1.8% increase in
October, below expectations and the
smallest increase in the last 4 months
► These figures, which are not inflation
adjusted, suggest a slowing in
consumer spending
US COVID-19 numbers

Source: nytimes.com, accessed December 17

Page 9 Tax in the time of COVID-19
UK COVID-19 numbers

Source: nytimes.com, accessed December 17

Page 10 Tax in the time of COVID-19
COVID cases show an upward trajectory in Vietnam, UK, and EU

Source: John Hopkins University, Center for Systems Science and Engineering; Bloomberg COVID Vaccine Tracker; Our World in Data.

Page 11 Tax in the time of COVID-19

GDP and employment: COVID-19 impacts persist, recovery continues
US GDP close to exceeding pre-COVID US unemployment continues gradual
forecast decline
(Change from 2019 Q4 GDP) (Projected unemployment rate)

14.8%
Blue Chips (10-Dec)
8.1%
Oxford Economics (6-Dec)
Merrill Lynch (3-Dec)

Pre-COVID forecast Wells Fargo (12-Nov)

6.7%
3.8%
6.2%

5.9%
6.8% 5.1%
4.5%
Wells Fargo (12-November 2021) 3.8%

Oxford Economics (06-December 2021) 4.3%

Blue Chips (10-December 2021) 3.5%
-10.1% November 3.5%
Blue Chips (10-January 2020) unemployment rate
CBO (July 2021) 4.2%
2019 2020 2021 2022
February Peak Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q4 2022
2019 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 (Apr 2020)
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Note: Actual unemployment rate for each quarter is calculated as the average of the unemployment rate in the
months in each quarter.
Page 12 Tax in the time of COVID-19
Real-time data: Broad-based economic recovery with impacts from
delta variant and supply chain disruptions
The shaded area in each chart highlights the rebound period for each metric from its lowest point since February 2020. While the date of the trough varies for each metric,
it is mostly between late March and early May.
New privately-owned housing units started, Oil price (WTI), Weekly US petroleum products supplied,
Total units, Feb 2020 – June 2021 dollars/barrel Million barrels/day
2,010 + 42% + 11%
Rebound period $90 (since 3 Feb 2020) 25 (since 7 Feb 2020)

1,510
$40 20
1,010

510 + 6% -$10 Rebound period 15

(since Feb 2020)
Rebound period

10 10
February 2020 November 2021 -$60 3 February 2020 13 December 2021 7 February 2020 10 December 2021
NAHB Housing Market Index, OpenTable US seated diners, The Conference Board Consumer Confidence Index,
Index, monthly all data compared with 2019, seven day moving average Index, monthly
110 0.2 140
+ 12% Rebound period
(since Feb 2020) Rebound period
90 0
120
-0.2
70
-0.4 100
50
-0.6
30 Rebound period 80
-0.8
10 -1 60
February 2020 November 2021 18 February 2020 15 December 2021 February 2020 November 2021

US Apple mobility data (avg. of drive, walk, transit), US TSA checkpoint numbers, traveler throughput Light vehicle unit retail sales,
Seven-day average, relative to 13 Jan 2020 all data compared with same weekday in 2019 millions of units, monthly
85% 20%
Rebound period + 42% 19
(since Feb 1 2020) Rebound period
0%
35% -20% 14

-40% - 24%
9 (since Feb 1 2020)
-15% -60%
4 Rebound period
-80%
-65% 1 February 2020 15 December 2021
-100% 1 February 2020 15 December 2021 -1 February 2020 November 2021
Source: FRED, EIA, NAHB, OpenTable, TSA, Apple Mobility Data, NY Fed, RedBook, The Conference Board.
Page 13 Tax in the time of COVID-19
Shift of consumer spending towards goods, away from services, may
be main source of supply chain difficulties and inflationary pressures
Real GDP Real personal expenditure on services, less housing
$20.0 t
$6.6 t
$19.5 t $6.4 t
$6.2 t
$19.0 t
$6.0 t
$18.5 t $5.8 t
$18.0 t $5.6 t
$5.4 t
$17.5 t $5.2 t
$17.0 t $5.0 t
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021

Real personal expenditure on goods Real private non-farm industry inventories

$5.8 t $2.9 t
Nominal goods +20% above trend
$5.6 t $2.8 t
Real goods +12% above trend $2.8 t
$5.4 t
$5.2 t $2.7 t
$5.0 t $2.7 t
$4.8 t $2.6 t
$4.6 t $2.6 t
Real inventories 7%
$4.4 t $2.5 t
below baseline
$4.2 t $2.5 t
$4.0 t $2.4 t
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021

Note: Next GDP release December 22, 2021; trend (i.e., dashed line) from Blue Chip Economic Indicators, January 10, 2020.
Source: Bureau of Economic Analysis; Blue Chip Economic Indicators.
Page 14 Tax in the time of COVID-19
US industrial production above pre-pandemic levels

Total industry industrial production index

2017=100
105

100

95

90

85

80

Industrial production Capacity utilization

Industry Feb ’20 Apr ’20 Nov ’21 Feb ’20 Apr ’20 Nov ’21

Total industry 101.3 84.2 102.3 76.3 63.4 76.8

Manufacturing 98.7 79.4 100.6 75.5 60.8 77.3

Mining 118.4 102.9 109.5 82.6 71.7 77.7
Utilities 101.5 99.3 102.9 75.7 73.7 73.2
Note: Next update on January 14.
Source: Federal Reserve.
Page 15 Tax in the time of COVID-19
 1.8m
March 14

►
►
March 14
March 21 March 21

Page 16
March 28 March 28
April 4 April 4
April 11 April 11
April 18 April 18
April 25 April 25

256k
May 2 May 2
May 9 May 9

6.1m
May 16 May 16

23.1m
May 23 May 23
May 30 May 30
Jun 6 June 6
Jun 13 June 13

Source: US Department of Labor.

Jun 20 June 20
Jun 27 June 27
July 4 July 4
July 11 July 11
July 18 July 18
Jul 25 July 25
August 1 August 1
August 8 August 8
August 15 August 15
August 22 August 22
August 29 August 29
September 5 September 5
September 12 September 12
September 19 September 19
September 26 September 26
October 3 October 3
October 10 October 10
October 17 October 17
October 24 October 24
October 31 October 31
November 7 November 7
November 14 November 14
November 21 November 21
November 28 November 28
December 5 December 5
December 12 December 12
December 19
Weekly new US jobless claims

December 19
December 26 December 26
January 2 January 2
January 9 January 9
January 16 January 16
January 23 January 23
January 30 January 30
February 6 February 6
February 13 February 13
February 20 February 20
February 27 February 27
March 6 March 6
Tax in the time of COVID-19
March 13 March 13
March 20 March 20
March 27 March 27
April 3 April 3
April 10 April 10
April 17 April 17
April 24 April 24
May 1 May 1
May 8 May 8
May 15 May 15
May 22 May 22
May 29 May 29
June 5 June 5
June 12 June 12
June 19 June 19
June 26 June 26
July 3 July 3
July 10 July 10
July 17 July 17
July 24 July 24
July 31 July 31
August 7 August 7
August 14 August 14
August 21 August 21
August 28 August 28
September 4 September 4
September 11 September 11
September 18 September 18
September 25 September 25
206,000 new jobless claims filed for week ending December 4, 2021 (new weekly jobless claims, millions)

October 2 October 2
October 9 October 9
Declines in continuing jobless claims suggest improving labor market (continuing jobless claims, millions)

October 16 October 16
October 23 October 23
October 30
1.8m

October 30
November unemployment rate fell to 4.2%; 14.8% in April 2020 and 3.5% in February 2020

206k
Average new claims from 2015-2019 were 244k

November 6 November 6
November 13 November 13
Average continuing claims from 2015-2019 were 2.0m

November 20 November 20
November 27
November U-6 unemployment rate fell to 7.8%; 22.9% in April 2020 and 7.0% in February 2020

November 27
December 4 December 4
December 11
 US labor markets continue to recover; uneven industry and sector impacts

Note: Percentage is share of industry employment. Job losses in thousands. ‘*’ Motor vehicles and parts is a subsector of the manufacturing industry and has been excluded from the calculation of the totals in the table.
Source: US Bureau of Labor Statistics, (Establishment data), EY analysis. Next update on January 7.
Page 17 Tax in the time of COVID-19
Job openings are at record levels
Job openings vs unemployed workers Unemployed workers per job opening Unemployed workers per job opening
Job openings are at record levels and The ratio of unemployed workers per job In October 2021, almost all industries
exceed the number of unemployed workers openings is at an all time low have more job openings than
unemployed, including construction
7x
Mining 1.62

Construction 0.95
Unemployed workers 6x
Wholesale & retail 0.65

Transport & Utilities 0.62

5x

Leisure & hospitality 0.55

4x Non-durable goods 0.52

Other services 0.51

3x
Maufacturing 0.49

Durable goods 0.47

2x
Information 0.43

1x Prof. & bus. Services 0.41

All
Job openings Financial activities 0.39
0.67 unemployed workers per job opening sectors
0x
Education & health 0.17 = 0.67
Jan 2006 Oct 2021 Jan 2006 Oct 2021
Note: Job openings data is available through October 2021; next release January 4. Source: US Bureau of Labor Statistics. Note: Unemployment level and job openings by industry data is not
Source: US Bureau of Labor Statistics. seasonally adjusted.
Page 18 Tax in the time of COVID-19 Source: US Bureau of Labor Statistics.
US labor markets continue gradual recovery

► Both goods-producing and service-providing industries have regained a significant portion of the jobs lost
due to COVID by November 2021
► Leisure and hospitality was the hardest hit and slowest to recover
Percentage change in employment from February 2020 in Percentage change in employment from February 2020
good-providing and service-providing industries by industry
0% 0%

-2% -2.0%
-10%

-4%

-2.7% -20%
-6%

-8% -30%
Total nonfarm
-10% Construction
Goods-producing industries -40%
Manufacturing
-12% Service-providing industries Retail trade
-50% Leisure and hospitality
-14%

-16% -60%

Jan-20

Jun-20
Jul-20

Jan-21

Jun-21
Jul-21
Mar-20

Mar-21
Feb-20

Feb-21
Aug-20
Sep-20

Nov-20
Dec-20

Aug-21
Sep-21

Nov-21
Apr-20
May-20

Oct-20

Apr-21
May-21

Oct-21
Jul-20

Jul-21
Jan-20

Jun-20

Jan-21

Jun-21
Feb-20
Mar-20

Feb-21
Mar-21
Aug-20
Sep-20

Nov-20
Dec-20

Aug-21
Sep-21

Nov-21
May-20

Oct-20

May-21

Oct-21
Apr-20

Apr-21

Source: US Bureau of Labor Statistics (Establishment data). Source: US Bureau of Labor Statistics (Establishment data).

Page 19 Tax in the time of COVID-19

Polling question 1

A COVID-19

What has been your company’s B Inflation

biggest pain point in 2021? C Tax uncertainty

D Supply chain
[Select one]
E Staffing/retention

F None of the above

G Does not apply (EY, faculty, other)

Page 20 Tax in the time of COVID-19

COVID may pose longer-term challenges for labor markets
US unemployment rate Underemployment rate (U6) US labor force participation rate
3.9 million fewer workers employed than The underemployment rate remains The reduced labor force participation
in February 2020 elevated rate means the labor force is smaller by
2.4 million

22.9% 63.4%
14.8%

61.8%

4.2%

7.8%

7.0%

60.2%
3.5%
Jan 2020 Nov 2021 Jan 2020 Nov 2021 Jan 2020 Nov 2021

Source: US Bureau of Labor Statistics, EY analysis.

Page 21 Tax in the time of COVID-19

Prices rising at a pace not seen in well over three decades
► US consumer prices (CPI) increased by 0.8% in YoY change in CPI-U and Core CPI-U
November and by 6.8% over the past 12 months; 17%
core CPI, which excludes volatile energy and food 15% CPI-U
13% Core CPI-U
prices, increased by 0.5% in November and 4.9%
11%
over the past 12 months 9%
► US Producer Price Index (PPI) is surging, 7%
5%
suggesting demand pressures
3%
► Wages costs accelerating, which may reinforce price 1%
increases going forward, although real wages (y/y) -1%
-3%
fell in November, i.e., nominal wages rose more

1970
1972
1974
1976
1979
1981
1983
1985
1988
1990
1992
1994
1997
1999
2001
2003
2006
2008
2010
2012
2015
2017
2019
2021
slowly than consumer prices

YoY change in private sector, wages and salaries Employment Cost Index YoY change in Producer Price Index for final demand
12% 25%
Employment Cost Index PPI
10% 20%

8% 15%

10%
6%
5%
4%
0%
2%
-5%
0% -10%
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: US Bureau of Labor Statistics.

Page 22 Tax in the time of COVID-19

CPI by category
► Overall, US consumer prices increased by 0.8% in November and by 6.8% over the past 12 months
► The core inflation rate, which excludes volatile energy and food prices, increased by 0.5% in November
and 4.9% over the past 12 months
Percent change in the November Consumer Price Index, by expenditure category
60% 60.0%
Overall Core
Yearly change (%) Monthly change (%)
50% 50.0%

40% 40.0%

30% 30.0%

20% 20.0%

10% 10.0%
5.9%
1.3% 2.5%
0.8% 0.5% 0.8% 0.6% 0.3% 1.1% 0.1% 0.5% 0.3% 0.7%
0% 0.0%

-10% -10.0%
All items All items Food Food away Energy Energy Apparel New Used cars Medical care Shelter Medical Transportation
less food at home from home commodities services vehicles and trucks commodities care services services
and energy

Note: Seasonally adjusted. Next update on January 12.

Source: US Bureau of Labor Statistics.
Page 23 Tax in the time of COVID-19
Federal Open Market Committee (FOMC) Review
FOMC held its final meeting of 2021 on December 14-15 to discuss changes to monetary policy.
Meeting results: The FOMC maintained its current target range for the federal funds rate at 0 to 0.25% but announced it would accelerate tapering its asset
purchases in January by another $15 billion per month, and thus be done in February, with interest rate hikes therefore possible for March.

Accelerated tapering in response to inflation pressures

► Chairman Powell on tapering: “We’re, basically, two $100 $90
Announced Expected
meetings away now from finishing the taper, and we

Asset purchases ($ billions)

$75 Mortgage-backed securities
thought that was the appropriate way to go so we $80
$30 Treasury securities
announced it and that’s what will happen” $60 $60
$60 Previous expectations
$45
► Chairman Powell on inflation: “I think that the data that we $20
got toward the end of the fall was a really strong signal that $40 $30 $30
inflation is more persistent and higher, and that the risk of it $60 $15
$10
$20 $40
remaining higher for longer has grown” $0
$20 $0
► The median FOMC participant projects three rate hikes in $0
2022, up from one in September and none in June Current Jan Feb Mar Apr May Jun
Source: FOMC Statement.

FOMC Projections (December 2021) Median Range

2021 2022 2023 2024 2021 2022 2023 2024
Change in real GDP (%) 5.5 4.0 2.2 2.0 5.3 – 5.8 3.2 – 4.6 1.8 – 2.8 1.7 – 2.3
Change from September projection -0.4 +0.2 -0.3 -- -0.2 - -0.5 +0.1 - +0.3 +0.0 - -0.2 -0.1 - -0.2
Unemployment Rate (%) 4.3 3.5 3.5 3.5 4.0 – 4.4 3.0 – 4.0 2.8 – 4.0 3.1 – 4.0
Change from September projection -0.5 -0.3 -- -- -0.5 - -0.6 -- -- -0.1 – +0.0
PCE Inflation (%) 5.3 2.6 2.3 2.1 5.3 – 5.5 2.0 – 3.2 2.0 – 2.5 2.0 – 2.3
Change from September projection +0.9 +0.4 +0.1 -- +1.9 - +1.1 +0.3 - +0.2 +0.1 - +0.1 +0.0 - +0.1
Core PCE Inflation (%) 4.4 2.7 2.3 2.1 4.4 – 4.5 2.4 – 3.2 2.0 – 2.5 2.0 – 2.3
Change from September projection +1.0 +0.4 +0.1 -- +0.9 - +0.3 +0.5 – +0.4 +0.0 - +0.2 +0.0 - -0.1
Source: FOMC, Summary of Economic Projections, December 15, 2021. The projections for real GDP, PCE inflation, and core PCE inflation are percent changes from the fourth quarter of the previous year. The
unemployment rate is the average of the fourth quarter of the year referenced.
Page 24 Tax in the time of COVID-19
Acceleration of inflation in the US and abroad
► Most countries are expecting higher post-pandemic inflation
► The rise in US consumer prices is more than double the pre-pandemic forecast
► China is the only country shown below with lower inflation expectations
Comparison of pre- and post-pandemic CPI forecasts for 2021, by country
6% 5.7% 6%
Forecasted Consumer Price Dec 2021 Jan 2020
5% 5%
4.6%

4% 4%
3.3%
3.1%
3% 3%
2.5% 2.5%

1.9%
2% 2%

1.0%
1% 1%

0% 0%
US Euro Area China Germany United Kingdom France Canada Mexico

Sources: Blue Chip Economic Indicators, December 10, 2021, and January 2020.

Page 25 Tax in the time of COVID-19

Economic growth around the globe, 2020-2022
Percent change in real GDP

United States Euro Area China Japan

7.9%
5.6% 4.9%
4.0% 5.1% 4.1%
2.3% 3.0%
1.9%

-3.4%
-4.5%
-6.5%

Mexico Brazil India Australia

8.3% 8.0%
5.8%
4.9%
2.9% 4.0% 3.5%
1.1%

-2.2%
-3.9%
-7.0%
-8.2%

Source: Blue Chip Economic Indicators, December 10, 2021.

Page 26 Tax in the time of COVID-19

Polling question 2

A Before December 25

When do you think Congress will B After December 25, but by January 1
pass the Build Back Better Act
(BBBA)? C Early January

D Later in 2022
[Select one]
E Will not pass

F Does not apply (EY, faculty, other)

Page 27 Tax in the time of COVID-19

Global trade flows well above pre-COVID levels

► COVID-19 led to the largest decline in global trade flows in two decades as lockdowns disrupted supply
chains, restricted travel, and sharply depressed consumer demand
► Global trade flows had reached their pre-COVID-19 (February 2020) level by August 2020 and continue to
remain above
Global Trade Volume (Index 2010-100)
140

131.0
130
121.4
120

110

100

Source: CPB World Trade Monitor, next update on December 24, 2021.

Page 28 Tax in the time of COVID-19

 Global shipping costs have surged

World Container Index

A weighted freight rate assessment of eight major east-west trades Baltic Dry Index
Mar 31, 2016 – Sep 2, 2021 Jan 2012 – Jul 2021

$10k 5,000
9,726 4235
$9k
Freight rate (US $ 40ft Containers)

$8k 4,000

$7k

$6k 3,000

$5k

$4k 2,000

$3k
1,876
$2k 1,000

$1k 631
$0k 0
Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jul-21

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jul-21
Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21
Source: Drewry; Bloomberg

Page 29 Tax in the time of COVID-19

Oxford Economics Global Risk Survey
Baseline forecast weighted to the downside Consumer spending hopes
Looking ahead to the next two years, risks to Top upside global economic risks over the next
baseline forecast for global growth two years
50% Consumer spending booms as households
46%
unleash accumulated savings

30% Mass vacination roll-out allows early return to

20%
normal

11% Productivity picks up globally 10%

7%

Oil prices fall and support Advanced economy

Risks heavily weighted Risks slightly to the Risks balanced Risks slightly to the 10%
upturn
to the downside downside upside

Supply chain concerns Concerns over climate change and high debt levels
Looking ahead to the next five years, how serious
Top three downside global economic risks over are the following medium-term global economic
the next two years risks?
50%
41%
Climate change 34%
21%
15% High debt levels weigh on growth (eg as
34%
property market corrects)
Asset prices plunge (eg as inflation leads to
28%
market turmoil)
Central banks tighten Supply-chain Higher inflation China slowdown (eg
policy prematurely disruption persists triggers market turmoil amid property sector Geopolitical risks (eg US/Iran conflict, cyber
28%
weakness) attacks)

Note: Charts only display top four survey responses (in terms of % of respondents).
Source: Oxford Economics Global Risk Survey.
Page 30 Tax in the time of COVID-19
What’s happening
at the IRS

Page 31 Tax in the time of COVID-19

IRS update

► Processing update
► Disaster relief in 2021
► Build Back Better funding for IRS
► Automated Collection System and technology
► International Compliance Assurance Process
Program
► Transition tax audits
► Top 10 priority civil enforcement areas

Page 32 Tax in the time of COVID-19

IRS update – processing

Inventory as reported at
Unprocessed forms Inventory as of
last webcast

1040 6.7m (Dec 4) 5.9m (Nov 12)

1040-X 2.6m (Dec 4) 2.7m (Nov 13)

941 3m (Dec 1) 2.4m (Nov 17)

941-X 421,000 (Dec 8) 402,000 (Nov 17)

Page 33 Tax in the time of COVID-19

IRS update – disaster relief in 2021

► Tornadoes in parts of Kentucky – new deadline of May 16

► Livestock replacement for drought-stricken farmers and ranchers in parts of 35 states
► Hurricane Ida (January 2, 2022 deadline):
► All of Mississippi and Louisiana
► Parts of Connecticut, Pennsylvania, New York, New Jersey
► Extended dyed diesel fuel penalty relief in Louisiana
► Tropical Storm Fred in parts of North Carolina
► Wildfires in parts of California
► Relief for victims of severe storms and flooding in parts of Michigan, Louisiana, West Virginia,
Tennessee, Alabama, and Kentucky
► Relief due to severe winter storms in parts of Louisiana, Oklahoma, and Texas
► Also dyed diesel penalty relief for Texas
► Hurricane Zeta in parts of Louisiana, Mississippi

Page 34 Tax in the time of COVID-19

Polling question 3

The largest chunk of BBBA

A True
funding for IRS would go toward
Business Systems Modernization. B False

C Does not apply (EY, faculty, other)

[Select one]

Page 35 Tax in the time of COVID-19

IRS update – Build Back Better funding

► $4b to administer the Green Energy provisions

► $3.1b for Taxpayer Service
► $45.6b for Enforcement
► $25.3b for Operations Support
► $4.75b for Business Systems Modernization
► TOTAL of $82.75b through 2031

► Plus $4b to administer the Child Tax Credit and Advance Child Tax Credit
(through 2026)

► Reminder that average appropriation is around $12b

Page 36 Tax in the time of COVID-19

IRS update

► Processing update
► Disaster relief in 2021
► Build Back Better funding for IRS
► Automated Collection System and technology
► International Compliance Assurance Process
Program
► Transition tax audits
► Top 10 priority civil enforcement areas

Page 37 Tax in the time of COVID-19

 IRS update – Priority Civil Enforcement Areas for FY2022

► High-net-worth/high-income nonfilers
► Global high wealth
► Large pass-through entities
► Large corporate compliance
► Employment tax
► Transfer pricing
► Virtual currency
► Bank Secrecy Act/Title 31
► Abusive transaction promoters
► Special enforcement programs

Page
Page 38
38 Tax in the time of COVID-19
 Tax policy
developments

Page 39 Tax in the time of COVID-19

The Long and Winding Road 3 main BBBA questions
of the reconciliation bill (and other deadlines) 1) Will this happen???
2) If so, when?
November 3 -
3) What will be in it?
September 15 - October 28 -
Ways & Means House Democrats, House revised
reported bill with President Biden reconciliation
rate increases, revised the bill again, adding Reconciliation perspectives
other tax reconciliation back some
‘Must pass in 2021 to address Child Tax Credit (CTC) expiration’
increases bill omitted
parts • Senate Leader Schumer and others
• Ways & Means member DelBene and others
‘Consideration should go/likely goes into 2022’
• Ways & Means Chairman Neal
Week of • Senator Sinema
November 5 -
House passed December • Senator Manchin
November 19 - 13 or later -
infrastructure ‘House bill needs to be significantly changed before Senate
House approved Potential Senate
bill, moderates gave vote’
reconciliation consideration
reconciliation
bill of reconciliation • Senator Manchin
commitment
bill • Cut: paid leave, electric vehicle (EV) credit bonus for
unionized shops, methane fee, Medicare hearing aid costs,
‘budget gimmicks’ such as one-year child tax credit
• Senate Finance Chair Wyden
• Add billionaire’s tax, change energy provisions

December 31 - Mid-January - February 18 -

December 15 -
CTC monthly 4% PAYGO cuts Expiration
Must-act date on
payments expire, that impact of government
Federal debt
2% Medicare Medicare take funding
limit set by
sequester cut effect
Treasury
effective
Page 40 Tax in the time of COVID-19
 Can’t Buy Me Love
Main categories of House Build Back Better spending provisions
Paid leave
► 4 weeks of universal
Energy/climate paid family and medical
► $320b in green energy tax incentives
leave - $205b
► $235b for clean energy, climate resilience Health care
► Medicare coverage expansion for
hearing only (no dental, vision) - $35b
► Affordable Care Act (ACA) subsidy
Education expansion and subsidies for Medicaid
► Universal pre-K - $110b “gap” population - $120b
► Childcare costs - $270b ► Healthcare workforce - $25b

Caregiving
► Home-based services for
seniors and disabled -
SALT cap
$150b
► Increase in state & local
tax (SALT) deduction cap
to $80,000 through 2030
- $15b

Low-income tax credits - $198b

► Expanded Child Tax Credit for
2022
► Expanded Earned Income Tax
Housing - $165b Corporate
► Rental assistance ► R&D amortization requirement
Credit for 2022
► First-time homebuyer delayed from after 2021 to after
assistance 2025 - $5b
Sources: CBO, JCT, Committee for a Responsible Federal Budget ► Low-income tax credit increase

Page 41 Tax in the time of COVID-19

Money (That’s What I Want)
Main categories of House BBBA revenue-raising provisions with $s
Retirement & exec. comp. $19b
Corporate + Superfund $540b ► Mega-IRA provision; rollovers to Roths; Foreign Sales Corporation (FSC) or

► Corporate alternative minimum tax (AMT) ($319b) domestic international sales corporation (DISC) IRA limits; new minimum
► Excise tax on repurchase of corporate stock ($124b) distribution requirements on high incomes ($12b)
► Reinstatement of Superfund petroleum taxes (in ► 162(m) changes (but not acceleration of American Rescue Plan Act (ARPA))

addition to Superfund taxes reinstated in IIJA) ($25b) “next five” highest-paid) ($7b)

High-income individuals $640b

Prescription drug negotiation $262b ► Net Investment Income Tax (NIIT) expanded to

► Addresses top 10 drugs (estimate provided High-income business income of those w/income >$400k ($252b)
by CBO) individuals ► 5% surcharge on income >$10m, additional 3%
$640b surtax on income >$25m (originally 3% modified AGI
Corporate
Tax gap $127b $515b >$5m) ($228b)
► Limitation on excess business losses made
► IRS enforcement funding net revenue
increase (estimate provided by CBO; won’t permanent ($160b)
► Expand wash, constructive sales rules for digital
be included in official bill score per budget
rules) International assets
$315b

Inbound international $95b

Outbound international $220b
► Base erosion and anti-abuse tax (BEAT): rate of 18% in 2025
► Global intangible low-taxed income (GILTI): 15% rate, country-by-country, 5%
and later; in interim years, BEAT rate increased to 12.5% in
Qualified business asset investment (QBAI) (except for US possessions) –
2023 and 15% in 2024 ($67b)
changes effective to tax years beginning after (TYBA) 2022
► 163(n) limitation on deduction for interest expense for
► Foreign-derived intangible income (FDII): 15.8% rate
multinational enterprises that average at least $12 million a year
► Modifications to foreign tax credit limitations
over three years in net interest expense; indefinite carryforward
Sources: JCX-46-21, CBO.gov of disallowed interest ($28b)
Page 42 Tax in the time of COVID-19
Polling question 4
Do you think concern about
inflation will affect tax policy
generally and the legislative
prospects for the BBBA?
[Select one]
Page 43
A Yes – but only in the short term
Yes – it may derail the legislative progress altogether
B
No – inflation has no bearing on the legislation or
C broader tax policy
D Don’t know
E Does not apply (EY, faculty, other)
Tax in the time of COVID-19
Fixing a Hole or The Ballad of Joe and Kyrsten
What’s going to change in the reconciliation bill?
Paid leave
► Four weeks paid leave
► Senator Manchin wants program
removed, addressed in separate bill
► Program costs $205b/10 years
Energy
► Senators Manchin, Tester want
methane fee on emissions from
energy producers cut
► Senator Manchin opposes electric
vehicles (EV) credit bonus for
unionized shops
► Senate Finance Chairman Wyden
may want energy changes
Page 44
SALT relief
► House bill would increase cap from $10,000 to $80,000
through 2025; would impose cap at $80,000 through
2030 (because current cap expires after 2025, that raises
$14.8b/10 years)
► Some Senate Democrats don’t like House approach,
want income limit of $400,000-$550,000
► Senate Finance Committee (SFC) release would:
► Loosen corporate alternative minimum tax (AMT)
Tax regarding pension plan gains
Loosen corporate interest deduction limits
►
► Remove vaping products tax
► Remove private prison REIT limit
► Tighten corporate inversion provisions
► Tweak international provisions
► Chairman Wyden still pushing for billionaire’s tax
► Senator Manchin concerned about “major change in our
tax structure” and ‘budget gimmicks’
► Corporate AMT controversial and continues to evolve
(e.g., pension fix in Wyden release); changes that lose
revenue may increase chances that tax rate increases
return, if Senator Sinema will agree
Tax in the time of COVID-19
 Getting Better?
How does the Senate Finance release differ from the House-passed bill?

► In general, small modifications, technical corrections

► GILTI
► BEAT
► Foreign Tax Credit (FTC) rules
► 163(n)
► 245A
► Corporate AMT

► Plus – new anti-inversion rules

► Lowers the continuing ownership thresholds
► 60% to 50%
► 80% to 65%
► Expands the definition of “domestic entity acquisition”

► SALT cap relief specifics not provided

Page
Page 45
45 Tax in the time of COVID-19
While My Accountant Gently Weeps
Concerns with House corporate alternative minimum tax
Manufacturers
► Accelerated depreciation/expensing
for capital investments would not
apply
► Encouraging capital
investments was central to
TCJA
Renewable energy
► Energy credits are protected but
depreciation is not, possibly
increasing costs and slowing
renewable energy deployment
because projects rely on deductions
for capital investments
Page 46
Pension plans
► Pension investment gains would be
taxed (changed in SFC version)
► Trade associations want treatment
of defined benefit pension plans
and other post-retirement benefit
plans (such as retiree health plans)
to follow current income tax rules
Revenue
► Congress wary of helping some
industries and not others
► Raises $319b/10 years
► BUT provision not effective until
2023, leaving time for changes
Tax in the time of COVID-19
The End
Expiration/change dates of various tax provisions

Provision 2020 2021 2022 2023 2024 2025 2026 2027

Five-year NOL carryback, no 80% NOL limitation

Employee Retention Tax Credit

EBIT
Interest deduction based on EBITDA 50% 30%
hereafter
Five-year amortization
R&D expensing
starting in 2022

> dozen tax extenders

Phased down in 20%

100% expensing
increments hereafter
37.%5
GILTI deduction at 50%
hereafter
21.875%
FDII deduction at 37.5%
hereafter
12.5%/13.5%
BEAT rate: 10%/11% for banks/dealers
hereafter

TCJA individual rate cuts, other provisions

20% pass-through deduction

Tax extenders including CFC look-through rule, Work

Opportunity Tax Credit (WOTC)
Expansion of the scope of IRC Section 162(m) deduction
limits
ARPA extra
TCJA disallowance of excess business loss disallowance
year

In effect Not in effect

Page 47 Tax in the time of COVID-19

Year-end overview

Page 48 Tax in the time of COVID-19

It’s All Too Much
2021 legislation in review
March 11 – President Biden signed American Rescue Plan Act Tax provisions

$1.9t for
► Direct payments
► State & local governments
► Unemployment benefits
► Health care, Medicaid, CHIP
► ACA premium tax credits
► COBRA School funding
► FEMA
► Farm assistance Payments $1,400 for each eligible taxpayer and dependent
► Small business assistance UI Extension through September 6
► Child tax credit expansion (with monthly ERC Extended through the end of 2021
payments Executive Deny deduction for compensation >$1 million for 8 highest paid
► Earned income tax credit (EITC), compensation employees, plus CEO & CFO after 2026
dependent care credit expansions 864(f) Repeal of worldwide interest expense allocation election
► Multiemployer pensions Excess bus. loss Disallowance extended through 2026
Reporting Reduction in 6050W third-party network transactions reporting threshold
from $20,000 to $600

Tax provisions
Nov. 15 – Biden signed Infrastructure Investment & Jobs Act (IIJA)
$1.2t for Cryptocurrency Apply information reporting requirements to digital assets; update
► Roads and bridges ► Power definition of broker to reflect how assets acquired, traded
► Ports ► Water
► Rail ► Broadband Superfund Reinstate chemical production and importation excise taxes effective
► Transit ► EVs, electric buses July 1, 2022
► Airports ► Climate resilience: flood, wildfire
► Safety mitigation, drought resiliency ERC Terminated after September 30, 2021

Nov. 19 – Build Back Better Act passed by House Tax provisions

$1.6t+ for Corporate Corporate minimum tax, stock buyback tax

► Energy tax incentives
► Combatting climate change
► Medicare hearing aid expansion
► ACA subsidies
► Caregiving
Page 49
► Paid leave International GILTI rate increase, interest limitation, BEAT changes
► Education – universal pre-K Individual High-income surcharge, NIIT expansion, permanently disallow excess
► Extension of expanded low-income tax business losses for non-corporate taxpayers
credits Retirement Mega-IRA provision, new minimum distribution requirements on high
► SALT cap relief incomes, 162(m) changes but not acceleration of ARPA expansion to
more employees
ERC = Employee Retention Tax Credit
Tax in the time of COVID-19
Get Back
Retroactive repeal of ERC

► Section 2301 of the CARES Act allowed eligible employers a refundable ERC against the
employer share of Social Security taxes based on qualified wages
► Eligible employers are employers experiencing a full or partial suspension of operations, or those
experiencing a specified decline in gross receipts as compared to the same quarter in 2019
► Qualified wages:
► For larger employers: wages paid to employees not providing services due to circumstances that caused
employer to be eligible; for smaller employers: wages paid to employees while the employer is an eligible
employer
► The Consolidated Appropriations Act (CAA) made certain modifications to ERC and extended
it to the first two quarters of 2021
► ARPA made further changes and extended ERC through 2021
► The IIJA repealed ERC as of September 30, 2021
► Wages paid after September 30, 2021, are not qualified wages

Page 50 Tax in the time of COVID-19

Get Back II
Retroactive repeal of ERC

► Retroactive repeal raises concerns for employers that already reduced their
employment tax deposits in the fourth quarter in anticipation of claiming the ERC
► The statute instructs IRS to waive Section 6656 penalties for failure to deposit “applicable
employment taxes” if the failure was due to “reasonable anticipation” of the credit
► “Applicable employment taxes” means:
► For 2020 and the first two quarters of 2021: Employer Social Security taxes (CARES and CAA)
► For Q3 and Q4 of 2021: Employer Medicare taxes (IRC Section 3134, as added by ARPA)
► Notice 2020-22 and later Notice 2021-24 waived deposit penalties not just for applicable
employment taxes but for all deposits in anticipation of ERC. However, employer must have
paid “qualified wages” in the quarter and the reduced deposits must be in anticipation of
credits

Page 51 Tax in the time of COVID-19

Get Back III
Retroactive repeal of ERC

► Notice 2021-65
► Rules of prior Notices continue to apply, as still applicable (e.g., to
recovery startup businesses)
► If an employer that is NOT a recovery start up business requested and
received an advance payment of the ERC, the business must treat the
advance as an erroneous refund
► Payment due by the due date of the applicable employment tax return
► Employers may have reduced deposits of employment taxes by the
amount of the ERC anticipated for the 4th quarter
► Failure to deposit penalties will not be waived after December 20, 2021
► For deposits due on or before December 20, 2021, employers must deposit
by December 31 to avoid penalty

Page 52 Tax in the time of COVID-19

Help!
Remember for 2021 filing!

► Section 274(n)(2)(D) provides a temporary exception to the 50%-limitation for expenses that
are paid or incurred after December 31, 2020, and before January 1, 2023, for food or
beverages provided by a restaurant.
► Notice 2021-63 – sets forth a special rule that allows a taxpayer to treat the meal portion of a per
diem rate or allowance as being attributable to food or beverages provided by a restaurant
► Notice 2021-25 – “what is a restaurant”
► Guidance deferred:
► Notice 2021-59 – notice of intent to amend the regulations under Section 987 to defer the applicability
date of the final regulations under Section 987 to tax years beginning after December 7, 2022
► Notice 2021-51 – notice of intent to amend certain regulations under Sections 1446(a) and 1446(f) to
defer the applicability date to January 1, 2023 for certain provisions relating to the following: (i)
withholding under Section 1446(f) on transfers of interests in publicly traded partnerships (PTP
interests); (ii) withholding under Section 1446(a) on distributions made with respect to PTP interests;
and (iii) withholding under Section 1446(f)(4) by partnerships on distributions to transferees.
► Notice 2021-36 – notice of intent to amend the regulations under Sections 59A and 6038A to defer
the applicability date of certain provisions of the regulations relating to the reporting of Section 59A
qualified derivative payments until tax years beginning on or after January 1, 2023.
Page 53 Tax in the time of COVID-19
Polling question 5

What level of impact will the A High

latest COVID-19 variant
have on your business B Medium

operations? Low
C

[Select one] D None

E Does not apply (EY, faculty, other)

Page 54 Tax in the time of COVID-19

 Help!!
Remember for 2021 filing!

► Final regulations
► Section 451(b) regulations – timing of income recognition
► Applicable for years beginning on or after January 1, 2021
► Section 163(j) – application of interest limitation to controlled foreign
corporations and partnerships
► The 2021 Final Regulations apply to calendar-year taxpayers starting in 2022
► Taxpayers may apply the Final 2021 Regulations to a tax year beginning after
December 31, 2017, provided that they consistently apply the 2021 Final Regulations
and the 2020 Final Regulations to that tax year and each subsequent tax year
► For tax years for which the 2021 Final Regulations do not apply, taxpayers may rely
on the rules in the 2020 Proposed Regulations to the extent provided in the 2020
Proposed Regulations

Page
Page 55
55 Tax in the time of COVID-19
Polythene Pam
Superfund chemical taxes

► Notice 2021-66 – relating to Section 80201 of the IIJA – reinstating

Superfund chemical taxes
► The notice provides the initial list of taxable substances under Section 4672(a)
required to be published by the Secretary of the Treasury no later than January
1, 2022
► Also addresses the registration requirements imposed by Section
4662(b)(10)(C) and (c)(2)(B) to exempt certain sales and uses of taxable
chemicals from tax

Page 56 Tax in the time of COVID-19

I’m So Tired
TCJA regulations
Guidance Federal register publication
Section 965 transition tax (TD 9846) Final rules, February 5, 2019
Section 199A pass-through deduction (TD 9847) Final rules, February 8, 2019
Section 956 inclusions for corporate US shareholders (TD 9859) Final rules, May 23, 2019
Contributions in exchange for state or local tax credits (TD 9864) Final rules, June 13, 2019
Section 951A (Global Intangible Low-Taxed Income — GILTI) and Related to Foreign Tax Credits (TD 9866) Final rules, June 21, 2019
Bonus depreciation (TD 9874) Final rules, September 24, 2019
Removal of Section 385 Documentation Regulations (TD 9880) Final rules, November 4, 2019
Ownership Attribution for Purposes of Determining Whether a Person Is Related to a Controlled Foreign Corporation under Section 954(d)(3) (TD 9883) Final rules, November 19, 2019
Section 59A Base Erosion and Anti-Abuse Tax (TD 9885) Final rules, December 6, 2019
Foreign Tax Credit (TD 9882) Final rules, December 17, 2019
Investing in Qualified Opportunity Funds (TD 9889) Final rules, January 13, 2020
Rules Regarding Certain Hybrid Arrangements (TD 9896) Final rules, April 8, 2020
Treatment of Certain Interests in Corporations as Stock or Indebtedness (TD 9897) Final rules, May 14, 2020
Guidance Under Section 6033 on Reporting Requirements of Exempt Organizations (TD 9898) Final rules, May 28, 2020
Deduction for Foreign-Derived Intangible Income (FDII) and GILTI (TD 9901) Final rules, July 15, 2020
Guidance Under Sections 951A and 954 Regarding Income Subject to a High Rate of Foreign Tax (TD 9902) Final rules, July 23, 2020
Limitation on Deduction for Business Interest Expense (TD 9905) Final rules, September 14, 2020
Limitation on DRD from Certain Foreign Corporations, Amounts Eligible for Section 954 Look-Through Exception (TD 9909) Final rules, August 27, 2020
Additional Rules Regarding Base Erosion and Anti-Abuse Tax (TD 9910) Final rules, October 9, 2020
Gain or Loss of Foreign Persons from Sale or Exchange of Certain Partnership Interests (TD 9919) Final rules, November 6, 2020
Additional First Year Depreciation Deduction (TD 9916) Final rules, November 5, 2020
Ownership Attribution Under Section 958 (TD 9908) Final rules, September 22, 2020
Determining the foreign tax credit, etc. (TD 9922) Final rules, November 12, 2020
Meals and Entertainment Expenses (TD 9925) Final rules, October 9, 2020
Consolidated Net Operating Losses (TD 9927) Final rules, October 23, 2020
Coordination of Extraordinary Disposition and Disqualified Basis Rules (TD 9934) Final rules, December 1, 2020
Like-kind exchanges Final rules, December 2, 2020
Guidance on Passive Foreign Investment Companies (TD 9936) Final rules, January 15, 2021
Revenue recognition under IRC Section 451 (TD 9941) Final rules, January 6, 2021
Guidance on Hybrid Arrangements, Allocation of Deductions Attributable to Disqualified Payments, Section 951A (GILTI) (REG-106013-19) Proposed rules, April 8, 2020
Denial of Deduction for Certain Fines, Penalties, and Other Amounts (TD 9946) Final rules, January 19, 2021
Credit for carbon oxide sequestration under Section 45Q (TD 9944) Final rules, January 15, 2021
Guidance Under Section 954(b)(4) Regarding Income Subject to a High Rate of Foreign Tax (REG-127732-19) Proposed rules, July 23, 2020
Limitation on Deduction for Business Interest Expense (REG-107911-18) Proposed rules, September 14, 2020
Carried
Page 57 interest (TD 9945) Tax in the time of COVID-19 Final rules, January 19, 2021
Guidance related to the Foreign Tax Credit (REG-101657-20) Proposed rules, March 8, 2021
Back in the OECD
BEPS 2.0 timeline

June 12, 2020 — February 26, 2021 — July 1, 2021 — Most of the Pillar One Pillar Two
Then-Treasury Secretary Treasury Secretary Inclusive Framework endorses a
Mnuchin called for a Yellen abandoned safe high-level agreement on
Early 2022 — Text of a November 2021 — Model
pause in negotiations due harbor approach to Pillar allocating multinational multilateral Convention (MLC) rules to define scope and
to an impasse over Pillar One of prior enterprises (MNEs) their taxable and Explanatory Statement to mechanics for the Global
One (over whether it can administration, allowing profits to customer jurisdictions implement Amount A of Pillar Anti-Base Erosion
be optional/safe harbor) negotiations to move under Pillar One and a global One Proposal (GloBE) rules
forward minimum tax of at least 15%
Early 2022 — Model rules for November 2021 — Model
domestic legislation treaty provision to give effect
necessary for the to the subject-to-tax rule
2020 2021 2022 implementation of Pillar One (STTR)
Mid-2022 — High-level Mid-2022 — Multilateral
signing ceremony for the instrument (MLI) for
October 12, 2020 — April 7, 2021 — Biden October 13, 2021 — multilateral Convention implementation of the STTR
Detailed blueprint Administration presented to G20 G20 Finance Ministers in relevant bilateral treaties
released on each a scoping rule for Pillar One’s approved agreement End 2022 — Finalization of End 2022 — Implementation
pillar, with countries Amount A and affirmed announced following
work on Amount B for Pillar framework to facilitate
agreeing to aim for commitment to reach minimum October 8 Inclusive
consensus by mid- tax deal by pointing to tax plan Framework meeting, One coordinated implementation
2021 that would conform the BEAT to including 15% minimum of the GloBE rules
the undertaxed payments rule tax 2023 Implementation of the Two-Pillar Solution
(UTPR) and implement GILTI on
October 30, 2021 —
a CbC basis
G20 leaders approved
agreement in Rome

Page 58 Tax in the time of COVID-19

You Never Give Me Your Money
OECD BEPS 2.0 latest agreement – near final deal on details
Pillar One
Amount A Scoping
► G7 agreed to move forward with Treasury’s Amount A scoping
under Pillar One, replacing qualitative measures with quantitative
indicia
► Amount A will apply to MNEs with revenue above $20b and profit
margins above 10%
► 25% of profit above 10% threshold subject to reallocation to market
jurisdictions
► Regulated financial services and extractives carved out
► Further detail on safe harbor allocations, dispute resolution,
methods to avoid double taxation still to come
Pillar One
Removal of digital services taxes (DSTs)
► DSTs to be removed when P1 is implemented
► Enactment of new DSTs delayed until earlier of 2024 or coming
into force of Multilateral Convention (MLC)
Page 59
Pillar Two
Min tax rate, effective tax rate (ETR), backstop rules
► G7 agreed to a global minimum tax rate threshold of 15%, rather
than “at least 15%”
► Ireland, other EU countries support
► GILTI co-existence: US must adopt country-by-country (CbC)
► Substance carve out: 8% for tangible assets, 10% for payroll for a
10-year transition period (decreasing over the period to 5% for both)
► Agreed-upon timeline: release of model rules in late November,
income inclusion rule (IIR) effective in 2023, delayed effective date
of UTPR until 2024
► STTR: Min rate at 9% on payments and tax right limited to
difference between min rate and tax rate imposed on the payment;
model treaty language for the STTR at end of November 2021
Pillar Two
Open issues
► Use of deferred tax to determine ETR
► Addressing losses coming into regime and incurred during the
regime
► Allocation rules for UTPR
Tax in the time of COVID-19
Do You Want to Know a Secret?
EU initiatives beyond Pillar Two, particularly regarding transparency

Proposals Mechanisms

Securing a minimum level of taxation of MNE profits in the EU, while
seeking a level playing field between EU and non-EU businesses by:
► EU implementation of Pillar Two-type measures
► Initiative to “neutralize” the use of shell companies
(ATAD3/UNSHELL)
► Reviewing tax regimes within and outside the EU
► Using other EU specific competences
► EU tax directives, likely introducing:
► Pillar Two Directive: December 22, 2021?
► ETR publication requirement: Now expected in 2022
► ATAD3/UNSHELL: Most likely January 2022
► Blacklisting/expansion EU Code of Conduct
► EU first to update core criteria: Early 2022?
► May introduce new criteria later
► European Commission actions:
► Against Member States that facilitate tax planning
► Competition law actions / state aid investigations

What it means
► The introduction of a minimum tax will lead to significant changes to the international tax rules applying to businesses that operate on or trade
with the EU internal market, which can result in:
► An ETR increase and effective cancellation of tax incentives
► Increased controversy and double taxation

Page 60 Tax in the time of COVID-19

Upcoming EY Tax webcasts
https://www.ey.com/en_us/webcasts

► Monday, December 20: Understanding the Build Back Better Act: overview and insights on Senate Finance
Committee’s latest changes to the bill’s tax proposals
► Wednesday, January 12: BEPS 2.0: Focus on Pillar Two
► Tuesday, January 18: Private Equity and Private Capital – Navigating transformative global and US legislative change
► Friday, January 21: Tax in the time of COVID-19: update on legislative, economic, regulatory and IRS developments
(biweekly series)

► Replays of our most recent Tax in the time of COVID-19 webcasts in this series are available here:
Dec. 3, 2021 Nov. 19, 2021 Nov. 5, 2021 Oct. 22, 2021 Oct. 8, 2021 Sept. 24, 2021
Sept. 10, 2021 July 30, 2021 July 16, 2021 July 2, 2021 June 18, 2021 June 4, 2021

► Sign up to receive EY Tax Alerts on COVID-19 and other topics through the EY Tax News Update:
https://taxnews.ey.com/Register/Register.aspx

Page 61 Tax in the time of COVID-19

Thanks for participating.

Page 62 Tax in the time of COVID-19

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