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July 15, 2022

Report on recent US international tax developments 15 July 2022

The United States (US) Congress returned to Washington this week to a critical stretch of pre-August recess legislating that is traditionally viewed as a last chance to move controversial items before the midterm elections. While there was some progress reported over the Fourth of July recess among Democrats negotiating a slimmed down budget reconciliation bill, this week’s high US inflation numbers derailed much of that momentum.

It is being widely reported that Senator Joe Manchin told Democratic leaders on 14 July that he will not support climate provisions or tax hikes on corporations or wealthy individuals in a smaller budget reconciliation bill. This likely leaves Medicare prescription drug negotiation and the extension of expanded Affordable Care Act (ACA) health insurance premium tax credits as the centerpiece of any reconciliation bill. (On 6 July, Senate Democrats submitted text for the Medicare drug pricing component of a proposed budget reconciliation bill to the Senate Parliamentarian, beginning the so-called “Byrd bath” process to determine if the proposed legislation meets budget reconciliation rules.)

Up until the release of this week’s inflation report, there appeared to be agreement to include expansion of the Net Investment Income Tax (NIIT) to passthrough income in a spending bill, as well as discussions of including the 15% corporate alternative minimum tax (CAMT), perhaps in modified form, and proposals to align Global Intangible Low-Taxed Income with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 minimum tax (through a 15% rate and country-by-country calculation). Senator Manchin reportedly had expressed resistance to the international proposals, however.

Treasury and the Internal Revenue Service (IRS) on 5 July issued proposed regulations that confirm that over-the-counter foreign currency options are not subject to mark-to-market treatment under Internal Revenue Code1 Section 1256. The proposed rules explicitly overrule the Sixth Circuit’s 2016 decision in Wright v. Commissioner and directly affect taxpayers relying on that decision to mark foreign currency options to market under Section 1256. In Wright, the Sixth Circuit reversed the Tax Court and held that a foreign currency option could be a foreign currency contract because the plain language of Section 1256(g)(2) does not explicitly require the contract to be settled. The Sixth Circuit noted that Treasury and the IRS had express authority to change this result for future taxpayers by regulation. Taxpayers that have relied on Wright to include foreign currency options in the definition of foreign currency contracts should consider the regulations’ effects on systems changes, book-tax differences and their accounting methods.

The proposed regulations would not affect foreign currency options that would otherwise qualify as Section 1256 contracts, such as foreign currency options that qualify as nonequity options (e.g., FX options that are listed on certain exchanges).

The proposed regulations would apply to contracts entered into on or after the date 30 days after the regulations are published as final in the Federal Register. The delayed applicability date is apparently intended to give taxpayers in the Sixth Circuit time to transition. A taxpayer can generally rely on the proposed rules before the applicability date for tax years ending on or after 6 July 2022; however, taxpayers and their related parties must consistently follow the proposed regulations for all contracts entered into during the tax year ending on or after 6 July 2022, through the proposed applicability date of the final regulations. For taxpayers in other circuits besides the 6th, the IRS continues to adhere to its position that foreign currency options are not foreign currency contracts under Section 1256(g)(2). 

The US Government on 8 July reportedly began the formal process of terminating the 1979 US-Hungary income tax treaty. Under Article 26 of the convention, either country may terminate the treaty provided at least six-months’ prior notice of termination is communicated through diplomatic channels. Pursuant to Article 26, the Hungarian treaty would cease to have effect: (i) in respect of taxes withheld at source, to amounts paid or credited on or after the first day of January next following the expiration of the six-month notice period; and (ii) with respect to other taxes, to taxable periods beginning on or after the first day of January next following the expiration of the six-month notice period. Assuming notice was provided on 8 July 2022, the treaty would cease to have effect with respect to taxes withheld at source for amounts paid or credited beginning on or after 1 January 2024. With respect to other taxes, the termination would be effective with respect to taxable periods beginning on or after 1 January 2024.

Various media sources quoted a Treasury spokesperson as saying there have been “long-held concerns” with Hungary’s tax system referring, for example, to a reduction in the corporate tax rate to 9%. Hungary’s current opposition to the proposed 15% global minimum tax proposal in BEPS 2.0 Pillar Two may have also played into the US termination. Some media outlets reporting on the termination linked the US action to the resistance by Hungary to adopt the minimum tax. A Treasury spokesperson was quoted as saying that “Hungary made the U.S. government’s long-standing concerns with the 1979 tax treaty worse by blocking the EU directive to implement a global minimum tax,” and that “if Hungary implemented a global minimum tax, this treaty would be less one-sided; refusing to do so could exacerbate Hungary’s status as a treaty-shopping jurisdiction, further disadvantaging the United States.”

A new tax treaty with Hungary was negotiated and signed in 2010 though it never entered into force. It remains to be seen whether further negotiations could take place impacting the status of treaty relations between the two countries. However, assuming the six-month notice period continues to run without any revocation of the notice, the existing treaty would generally cease to have effect in 2024.

The OECD on 11 July released a Progress Report on Amount A of Pillar One (Progress Report) in connection with the ongoing OECD/G20 BEPS 2.0 project. The Progress Report is a consultation document released by the OECD Secretariat that covers many of the building blocks with respect to Amount A and is presented in the form of domestic model rules. It does not yet include the rules on the administration of the new taxing right, including the tax certainty-related provisions.

Together with the Progress Report, the OECD released a Cover Note by the OECD/G20 Inclusive Framework on BEPS providing a revised schedule for the work on Amount A. The OECD also released a Frequently Asked Questions document on Amount A and a Fact Sheet providing an overview of the structure of the Amount A rules. In addition, the OECD Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors for their 15-16 July 2022 meeting was released at the same time.

The documents make clear that the Amount A rules will not come into force in 2023 as had been reflected in the timeline agreed by the Inclusive Framework in October 2021. The Inclusive Framework is seeking written comments from stakeholders on the overall design of the Amount A rules reflected in the Progress Report by 19 August 2022, with plans to review the input received and seek to stabilize the rules at its October 2022 meeting.

When the Amount A rules are stabilized, they will be translated into provisions for inclusion in a Multilateral Convention (MLC), to be signed and ratified by Inclusive Framework members. The agreed schedule reflects the expectation that this work will be completed so that a signing ceremony for the MLC can be held in the first half of 2023, with the objective of enabling it to enter into force in 2024 once a critical mass of jurisdictions has ratified it.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC



  1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.

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