July 1, 2022
Report on recent US international tax developments – 1 July 2022
Democratic leadership reportedly have come to some agreement on reducing the cost of prescription drugs for the elderly, leaving Senate Majority Leader Chuck Schumer and Senator Joe Manchin positioned to negotiate the tax and climate change portions of a limited budget reconciliation bill. The press reported this week that the Majority Leader’s and Senator Manchin’s staff have continued to negotiate a reconciliation package over the Fourth of July recess. While Senator Schumer has indicated some progress in the discussions, he declined to say whether a bill will be brought to the Senate floor before the August recess.
Senate Minority Leader Mitch McConnell meanwhile this week made clear that if Democrats pursue a slimmed down budget reconciliation bill, Republicans will not vote to support the so-called “China competition” bill. Senator McConnell said in a 30 June tweet: “Let me be perfectly clear: there will be no bipartisan USICA as long as Democrats are pursuing a partisan reconciliation bill.”
The Organisation for Economic Co-operation and Development (OECD) held its annual tax conference in Washington, DC, on 27-28 June 2022, following a pandemic-related hiatus since the June 2019 conference. OECD and various government officials at the conference generally focused on developments with respect to the Base Erosion and Profit Shifting (BEPS) 2.0 Pillars One and Two project, offering a number of insights.
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, acknowledged that the Multilateral Convention on Pillar One will not be ready for signature in July as was the target in the agreed timeline, although he said much work has been completed. He also announced that a package with key building blocks of Pillar One will be released in July in the form of a consultation document for stakeholder comment.
The public consultation document will address key aspects of Pillar One, such as:
The OECD and government officials made clear that the Model Rules and related Commentary that have been released on the Pillar Two global minimum tax provide countries with what they need to begin to implement these rules into their domestic tax laws. John Peterson, Head of the Aggressive Tax Planning Unit in the OECD Centre for Tax Policy and Administration, commented on the development of the implementation framework for the Pillar Two Global Anti-Base Erosion (GloBE) rules. He noted that a peer review and tax certainty process will be set up to determine whether jurisdictions’ GloBE and Domestic Minimum Tax rules are “qualified,” as well as to address rule order and coordination. Additional work is ongoing to identify other areas where similar processes are required (e.g., Covered Taxes and Qualified Refundable Tax Credits).
Work is also ongoing on development of administrative guidance, with priority given to guidance that is needed for countries to be able to legislate to implement the Pillar Two rules. In addition, a process for identification and timely, consistent resolution of interpretation issues is being developed. The OECD expects to release administrative guidance on a piecemeal basis as soon as each item of guidance is finalized.
Peterson further discussed the work on preparing a standardized template for the GloBE information return, with exchange mechanisms between tax authorities, and the work on dispute resolution mechanisms to address overlapping imposition of GloBE taxes. He indicated that work has begun on safe harbors and simplification mechanisms, noting that countries that have started their legislative process with respect to implementation may want to include these mechanisms into such legislation. Finally, he stressed the importance of building capacity and the need to provide technical assistance to countries implementing the GloBE rules and/or a Domestic Minimum Tax.
Treasury officials at the conference also offered the United States (US) Government’s position on a number of BEPS issues. A Treasury official reiterated the opinion that modification of the global intangible low-taxed income regime (GILTI) to include a country-by-country approach with a 15% rate would make the regime a Pillar Two qualifying income inclusion rule, referring to Article 51 of the draft European Union Directive to substantiate this position. She added that there could be no doubt that if the GILTI regime is not modified, it would be a controlled foreign corporation (CFC) regime for GloBE purposes.
Another Treasury official touched on the subject of tax credits and their treatment under the GloBE rules. He noted that certain direct pay credits that have been proposed in the US would be Qualified Refundable Tax Credits and further indicated that US tax credits that are recorded through the equity method (such as the low-income housing tax credit) should not trigger any issues for GloBE purposes. He nevertheless noted that additional work would be needed in some areas, such as clarification of whether a transferable tax credit would be equivalent to a refundable tax credit.
Addressing the allocation of CFC taxes – which is an issue under the current US GILTI regime as well as the US subpart F rules and also under CFC regimes in other jurisdictions – the Treasury official said various approaches are being considered, including a highly complex “tracing” approach, under which local rules would be used to determine whether income is attributable to a specific Constituent Entity. A so-called “mechanical” approach, under which the total CFC liability would be reallocated using allocation keys based on data identified during the GloBE exercise, is also under consideration.
He indicated the Government is seeking business input on the topic, including on how US domestic losses should be accounted for under both approaches.
Finally, in regard to simplification, the official said that ideally any safe harbor mechanism would only apply where no top-up tax would have been due. If a safe harbor mechanism applies, then no GloBE calculation would be required. He indicated the US supports transitional safe harbors, which he noted benefit both tax administrators and the taxpayer.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC