May 26, 2022
Report on recent US international tax developments – 26 May 2022
Congressional Democrats are adjusting to a new “soft deadline” to reach agreement on a limited Build Back Better package as the first self-imposed target date of Memorial Day is poised to come and go without consensus. The press is quoting some Democrats as saying that an agreement before the August recess gives legislators all of August to put together a bill. One Democratic Senator was also quoted as saying recent discussions among Senate Majority Leader Chuck Schumer and Senator Joe Manchin have been useful, although no details are being made public.
Further details have emerged as to Treasury’s thinking in regard to additional United States (US) foreign tax credit guidance that would supplement final regulations issued in December 2021. A senior Treasury official said the Government is considering addressing royalty withholding tax and cost recovery and perhaps, at some point, more guidance on disregarded distributions in the foreign tax credit context. On royalty withholding tax, Treasury is not going to move away from the general rule that provides a legal test that compares foreign law to US domestic law, nor the existing royalty sourcing rule that looks to the place of use. To the extent the foreign jurisdiction has a different rule, then the reasonably similar standard will continue not to be met, the official said.
The Treasury official indicated, however, that sympathetic cases are being made and Treasury is considering a safe harbor for certain business models. He used the example in which a license is in place and the license only includes the right to use IP in a particular jurisdiction (which then occurs). Treasury could deem the attribution rule to be met in that fact pattern and the credit would be allowed. The official added that it is probably not possible for the safe harbor to provide benefits in all types of business models, but it would provide some relief. According to the official, this would be a new rule and probably would come out as a notice or proposed regulation that provides an opportunity for comment. In regard to a timeline, the official said the Government is still collecting feedback and the change – which would be narrowly drawn -- is months away, but expected to be released in 2022.
The official also was quoted as saying the Internal Revenue Service is considering a clarification to the foreign tax credit regulations’ cost recovery rule. The clarification would explain that the cost recovery rule does not require foreign law to be identical to US law, but rather viewed as a principle, whereby: “If the principle underlying the foreign limitation is consistent with the general limitations in the code — they are based on anti-base-erosion, profit-shifting, public policy concerns, [or] base-broadening concerns — they ought to be comparable.” This clarification can be expected before the proposed royalty withholding regulation.
More guidance is also being considered in respect to disregarded distributions, although not as soon as other forthcoming foreign tax credit guidance.
An Organisation for Economic Co-operation and Development (OECD) official this week was quoted as saying that finalization of the Base Erosion and Profit Shifting (BEPS) 2.0 Pillar One multilateral convention will be delayed, with “practical implementation” of the convention probably taking place “from 2024 onwards.” He said that the Task Force on the Digital Economy, which is developing the Pillar One Amount A model rules and multilateral convention, is now expected to finalize the rules and convention by the end of 2022, instead of mid-2022 as planned.
The OECD official also said the organization hopes to have a “principal agreement on all of the remaining technical aspects” of the BEPS 2.0 Pillar One elements when the G-20 Finance Ministers meet in Bali in July.
In regard to Pillar Two, the technical work is complete, another OECD official said, and it now falls to the various jurisdictions to implement the new rules. The official added the OECD has a list of Pillar Two guidance requests that it is prioritizing. The OECD plans to publish that guidance as soon as it is approved, but no later than the end of 2022. The OECD is also reportedly working on a standard return for Pillar Two’s global anti-base erosion (GloBE) rules.
The OECD on 20 May issued a report for the G7 Finance Ministers and Central Bank Governors that provides recommendations to strengthen tax administrations’ cooperation in the context of increasingly coordinated international rules, including the BEPS 2.0 project. The report considers the “need for a simple, collaborative, and digital administration of common rules,” including how tax information exchange could evolve as well as improve “timeliness through real-time data availability and incorporating compliance by design.”
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC