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September 23, 2022
2022-5910

Report on recent US international tax developments – 23 September 2022

House Republican leaders today (23 September) are unveiling their “Commitment to America’” platform, a blueprint of post-election Republican priorities if Republicans take control of the House in January following the November mid-term election. In regard to taxation, the plan is expected to be anchored in ensuring that the Tax Cuts and Jobs Act (TCJA) tax rates (i.e., individuals and small business) remain permanent. Preview documents call for continuing “proven pro-growth tax policies that increase take-home pay, reduce the cost of living, boost local businesses, and encourage innovation.” In a related action, Representative Vern Buchanan, one of three members vying for the Ways and Means chairmanship in the next Congress should Republicans take control of the House, introduced the TCJA Permanency Act (H.R. 8913) to make permanent the 2017 tax cuts for individuals and small businesses.

The Internal Revenue Service (IRS) has provided guidance on applying noncompulsory payment rules in the foreign tax credit regulations published in January 2022 to amended tax decrees between multinational enterprises and the Puerto Rico Tax Authority. Notice 2022-42 "assures taxpayers" that the IRS will not view a change to an existing decree made before 31 December 2022 that results in the imposition of lower Puerto Rico taxes than would apply without the decree "as resulting in noncompulsory payments." The goal of the notice is to provide certainty and "aid Puerto Rico's transition away from the excise tax and modified [effectively connected income] tax, which will no longer be creditable" beginning in 2023.

IRS officials this week fanned out to offer the United States (US) Government’s position on a number of issues and future regulations.

An IRS official said the Government will soon begin publishing notices related to the Inflation Reduction Act, with the new corporate alternative minimum tax, one percent stock buy-back and green energy provisions at the top of the list of priorities. The official added that guidance related to the TCJA is no longer a focus, except for that related to Internal Revenue Code1 Section 174 research and experimentation expense amortization regarding changes in accounting methods and ad hoc guidance as issues are identified.

Taxpayers should also expect the release of proposed regulations under Section 367(d) before year-end that would limit a royalty inclusion for intellectual property that left the US and was subsequently repatriated. An IRS official said the proposed regulations "would provide high-level situations where you could turn off that royalty after [the IP] has been repatriated.”

And taxpayers reportedly should expect additional transfer pricing penalties, with the goal to get taxpayers to provide better documentation reports. A government official said, “We’re not doing enough of asserting penalties where the documentation reports just are not sufficient and not reasonable.” While penalties will only be asserted in a limited number of cases, the official indicated the IRS would look at the “reasonableness of the selection of the method and the reasonableness of the application” in deciding whether to impose a penalty.

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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.
 
 

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