May 20, 2022
Report on recent US international tax developments – 20 May 2022
United States (US) House Speaker Nancy Pelosi on 18 May was quoted as saying she hopes to pass a competitiveness bill before the Fourth of July holiday. The day before, House Majority Leader Steny Hoyer said the goal is to reach the “essence of an agreement moving forward before the end of May and to pass a bill by the end of June.” One impediment to including tax provisions in the competitiveness conference agreement -- such as a delay in the 2017 Tax Cuts and Jobs Act’s Section 174 five-year amortization requirement to preserve research and development expensing that was in effect prior to this year – is concern over addressing business tax relief without also including social spending, such as the expanded Child Tax Credit.
On 12 May, Senate Finance Committee Chairman Ron Wyden and Senate Finance Committee Member Rob Portman released proposed legislation (S. 4218) that would disallow foreign tax credits for taxes paid to Russia or Belarus, and further disallow certain other US tax benefits. The Support Ukraine Through Our Tax Code Act closely follows the discussion draft released on 7 April 2022, with some important clarifications that center on the definition of persons in scope.
The US Government is considering changes to the foreign tax credit regulations that could be a combination of new rules, clarifications to the existing final regulations that Treasury issued in December 2021 as well as other guidance that includes examples to illustrate how the regulations are intended to apply to certain taxes, according to a senior Treasury official this week.
A senior Internal Revenue Service (IRS) official also recently was quoted as saying that proposed Internal Revenue Code1 Section 1256 regulations on foreign currency contracts will be released in the coming weeks. The new rules will “address clarifications of [Section] 1256 and the definition of a [Section] 1256 contract.” Rules on Section 987, disposition of investment in US real property, will follow those proposed regulations.
Another IRS official said the IRS plans to issue new Section 382 proposed regulations on computing built-in gains and losses following an ownership change, instead of finalizing the 2019 proposed regulations. The official was quoted as saying that the IRS would issue a notice and review the comments before issuing another regulation package, adding “the re-proposal gives us a little bit more flexibility to be a little broader in what we want to approach.”
The IRS has issued an interesting generic legal advice memorandum (GLAM) that addresses the allocation and apportionment of deferred compensation expense (DCE) for foreign derived intangible income (FDII) deductions. More specifically, the GLAM (AM 2022-001) addressed how to properly allocate and apportion DCE under the Section 861 regulations for calculating a taxpayer's FDII deduction. Reversing previous guidance, the IRS concluded that DCE deductions should be allocated to FDII for the tax years in which the deferred compensation vests and is delivered, even if the deferred compensation is based on employees’ service in years before FDII was in effect.
The IRS stated that the GLAM reflects “the reconsidered advice” of the Office of Associate Chief Counsel (International) and that GLAM 2009-001 is obsolete. The IRS also went further and said the analysis not only applied to the fact pattern in the memo but “may apply to deductions other than compensation that may be seen as relating to an earlier period, such as a warranty payment resulting in a deduction allowable in 2018 that was incurred in respect of a product sold in an earlier year.”
A US Treasury official this week acknowledged that there is taxpayer interest in the development of dispute resolution mechanisms in the BEPS2 2.0 global anti-base-erosion (GloBE) context, but that negotiations are not yet taking place. Instead, the official said, “We are exploring what can be done with existing tools — bilateral treaties, competent authority agreements — as well as whether other tools are needed.”
An OECD3 official this week also provided an update on the BEPS 2.0 project, saying the organization is working on various areas of the GloBE implementation framework, including rule coordination, a new peer review process to determine compliance with Pillar Two, tax administration coordination mechanisms and safe harbors.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC