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December 3, 2021
Report on recent US international tax developments – 3 December 2021
The United States (US) Congress returned from the Thanksgiving recess this week to face looming government funding and debt limit deadlines (a deal averting a government shutdown was reached on 2 December) and Democratic hopes to pass a Build Back Better budget reconciliation bill before the end of the year. The House last week passed the Build Back Better Act (H.R. 5376), which Senate Democrats will now work to amend in order to be able to garner the 50 votes necessary for passage. Senate Majority Leader Chuck Schumer this week said he wants to bring a Build Back Better bill to the Senate floor for consideration the week of 13 December. The Majority leader also said: “my goal is to have the Senate take action to debate and pass the President’s Build Back Better legislation before we hit Christmas day. As soon as the necessary technical and procedural work with the Senate Parliamentarian has been completed … the Senate will take up this legislation … .”
The first set of eagerly anticipated final foreign tax credit regulations was sent to the Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA) for review on 29 November, according to the OIRA website. A Treasury official this week was quoted as saying the Government hopes to release the regulatory package before the end of the year. The same official earlier said the final rules were expected to come in at around 400 pages. Treasury and the Internal Revenue Service issued proposed foreign tax credit regulations in November 2020. The official again confirmed that the final regulations will include the jurisdictional nexus requirement, albeit with simplified application, as well as the core foreign tax credit provisions that were included in the proposed rules. A second set of final foreign tax credit regulations are expected to be released sometime in 2022.
On 24 November, the Government of India issued a Press Release stating that India and the US have agreed on a transitional approach to the treatment of the current Indian e-commerce Equalization Levy (EL) during the interim period before the new Base Erosion and Profit Shifting (BEPS) Pillar One rules come into effect. The transitional treatment includes the continuation of the 2% EL charge by India, subject to a partial future credit to the multinational enterprise (MNE) against that MNE’s future “Pillar One Amount A” tax liability. The US Government agreed to terminate its proposed trade actions against India with respect to the current 2% EL. The Indian-US agreement follows on the heels of recent similar agreements with Turkey and five European countries related to their unilateral digital taxes and US trade actions, with the same terms applying to India as to the other six nations. For additional details, see EY Global Tax Alert, India and US agree on transitional approach for India’s 2% Equalization Levy prior to implementation of Pillar One rules, dated 1 December 2021.
India introduced the 2% EL on e-commerce supplies or services undertaken by nonresident e-commerce operators without a permanent establishment in India, beginning 1 April 2020.
The technical aspects of the model rules for OECD BEPS Pillar Two are complete and will be released soon, according to Pascal Saint-Amans, Director of the Organisation for Economic Co-operation and Development (OECD) Centre for Tax Policy and Administration, but “formal processes” must still be completed before their publication. Saint-Amans, who spoke at a 29 November virtual conference, added that while the technical work is done with regard to Pillar Two, discussions are continuing. He said the model rules “reflect the balance between the countries and the clarification and the need for as simple a solution as possible.” The commentary to the model rules, the official said, will take more time to complete.
The OECD is also looking to squeeze in a public consultation on the BEPS 2.0 Pillars and is considering how to include a comment period in the implementation timeline. Saint-Amans noted that the OECD has received certain negative comments from business stakeholders suggesting that implementation of the BEPS Pillars will be extremely complex. The OECD official said the future consultation will not be held in a traditional format. Saint-Amans may have been referring to a recent 16 November letter by Business at OECD that expressed their “significant concern with the lack of interaction between business and the Inclusive Framework (IF) since the release of the Blueprints and the subsequent consultations in January 2021,” as well as businesses “inability to informally engage with … the OECD Secretariat on the Project.”
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC