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September 9, 2022
2022-5863

Report on recent US international tax developments 9 September 2022

The United States (US) Congress returned to Washington this week for a pre-midterm election session with one must-pass piece of legislation: an extension of government funding beyond 30 September, likely through a continuing resolution into December. Any additional tax legislation, following passage of the Inflation Reduction Act tax-climate-health bill in August, is expected to wait until a post-election lame-duck session toward the end of the year. A lame-duck bill could address Tax Cuts and Jobs Act (TCJA) tax cliffs, e.g., on the Internal Revenue Code1 Section 163(j) interest deduction calculation, and expired/expiring provisions, possibly in combination with a retirement security package. The outcome of the midterm elections may affect whether Congress will consider legislation at the end of the year. 

Long-awaited and long-delayed proposed regulations on previously taxed earnings and profits (PTEP) will likely not be released in 2022 as had been hoped. A senior Treasury official this week said the coming PTEP regulations – over 200 pages -- are now expected to be released in the first quarter of 2023. The official was quoted as saying the proposed rules would address the application of Section 959(b) in situations in which there are multiple shareholders that do not have pro rata shares of existing PTEP accounts. 

The Treasury official further noted that it is possible the Government will release regulations under Section 367(d) in 2022 that deal with the situation when intangible property is transferred from the US and then repatriated. Treasury also reportedly is looking to quickly finalize proposed regulations under Section 1256 that were issued in July 2022.

High on the list of priorities coming out of Treasury will be guidance on the Inflation Reduction Act’s new corporate alternative minimum tax (CAMT). The official said there are myriad outstanding issues related to the provision and that guidance will be released in tranches. He noted that while the CAMT provision is domestic, it has numerous international tax implications that will need to be addressed. Treasury has broad regulatory authority and will initially address basic questions, the official said, including: the scope of the CAMT, i.e., those that are covered by the provision, what is an applicable corporation, issues in the foreign-owned context, and what income should be included in the base.

The US Government is set to begin negotiations with Israel and Switzerland to update the existing bilateral tax treaties with those countries. A Treasury official was quoted as saying that those discussions will begin very soon; the Swiss treaty was signed in 1996, the Israeli accord in 1975 and will require a full revision. 

The official said the proposed treaties with Vietnam and Poland, signed in 2015 and 2013, respectively, require updates to reflect the TCJA. Negotiations are taking place with Vietnam for targeted reservations, and tax treaty negotiations with Romania and Norway reportedly are near completion. Neither the Romanian nor Norwegian treaties have been signed and will require targeted reservations to reflect the TCJA. 

The Treasury official further indicated he was optimistic the Senate would give its advice and consent to the proposed US-Chile tax treaty before the end of the year, noting that targeted reservations to that accord have been drafted and are with the Chileans for approval. 

The Sixth Circuit Court of Appeals in late August held in Eaton Corp. & Subs. v. Commissioner that the Internal Revenue Service (IRS) had the burden of proving that there were grounds to cancel the advance pricing agreements under generally applicable contract-law principles and the IRS failed to meet that burden. The Sixth Circuit also held the IRS could not impose Section 6662 penalties on Eaton Corporation’s self-reported adjustments. Eaton was thus eligible to claim relief from double taxation under IRS Revenue Procedure 99-32. See EY Global Tax Alert, US Sixth Circuit rules in favor of Eaton in appeal from Tax Court regarding APA cancellation, dated 6 September 2022 for details.

Organisation for Economic Co-operation and Development (OECD) official this week was quoted as saying the organization is considering two permanent safe harbors with respect to the BEPS2 2.0 Pillar Two global minimum tax rules. The OECD reportedly is considering simplified calculations of the income tax base and effective tax rate, respectively. 

And Pascal Saint-Amans, Director for the OECD Centre for Tax Policy and Administration, announced on 5 September that he will be leaving his position at the end of October after 15 years in the post.

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

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

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Endnotes

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

  2. Base Erosion and Profit Shifting.

 
 

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