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August 26, 2022

Report on recent US international tax developments 26 August 2022

The Internal Revenue Service (IRS) this week announced plans to delay the effective date for aspects of the Internal Revenue Code1 Section 871(m) regulations and further extend transition relief. More specifically, the IRS in Notice 2022-37 indicated that it plans to delay the effective/applicability date for certain rules in final regulations under Section 871(m) and to extend for two more years the phase-in period provided in Notice 2020-2 for certain provisions of the regulations.

The United States (US) Government in December 2019 issued final regulations (TD 9887) under Section 871(m) with guidance for entities that hold certain US equities and financial products referencing US-source dividends. Notice 2020-2 was issued concurrently with the 2019 final regulations. It announced that the IRS was extending the transition relief provided in Notice 2018-72 for two additional years and that it planned to amend the Section 871(m) regulations to reflect the delayed effective/applicability dates. These final Section 871(m) regulations are relevant for entities making payments to non-US entities on derivatives and other financial instruments referencing US equity securities.

The further extension of the phase-in period for certain provisions of the Section 871(m) regulations provide financial industry participants yet more time to implement the complex systems and processes necessary to comply with the rules of the Section 871(m) regulations.

In welcome news, the IRS this week issued Notice 2022-36, automatically extending until 30 September 2022, deadlines for most individual and business taxpayers that did not file tax returns for tax years 2019 and 2020. The notice also provides penalty relief to taxpayers for certain failure-to-file penalties for tax returns for 2019 and 2020. The notice applies to certain information return penalties for: (i) tax year 2019 returns filed on or before 1 August 2020; and (2) tax year 2020 returns filed on or before 1 August 2021.

The US Tax Court on 18 August issued its second opinion in Medtronic, Inc. and Consolidated Subsidiaries v. Commissioner (Medtronic III). In this opinion, the Tax Court rejected the principal transfer pricing analysis of both the IRS and Medtronic Inc. (Medtronic US), instead applying an unspecified method proposed in the alternative by Medtronic to determine the royalty rate for license agreements between Medtronic US and its Puerto Rican subsidiary. Using this method, the Tax Court increased the wholesale royalty rate to 48.8% for devices and leads for years 2005 and 2006.

This decision comes after the Eighth Circuit Court of Appeals vacated the Tax Court's first opinion in Medtronic, Inc. and Consolidated Subsidiaries v. Commissioner (Medtronic I). The Eighth Circuit, in Medtronic II, had concluded that the Tax Court failed to provide sufficient factual findings to enable the appeals court to evaluate the Tax Court's determination of the best transfer pricing method. As a result, the Eighth Circuit remanded the case to the Tax Court to make those findings. EY Global Tax Alert, US Tax Court increases Medtronic royalty rate under unspecified method, dated 25 August 2022 provides details.


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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