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October 21, 2022
Report on recent US international tax developments – 21 October 2022
A senior Internal Revenue Service (IRS) official this week said at the American Bar Association (ABA) Taxation Section meeting that the release of proposed foreign tax credit (FTC) regulations is “weeks, not months” away. Final FTC regulations were released in December 2021 and technical corrections to those rules were issued in July 2022. The coming proposed regulations reportedly will address major issues of concern to taxpayers, according to the official, including the cost recovery rule, royalty payments, and country-specific issues. In regard to royalties, Treasury officials over the summer indicated the Government was considering a safe harbor for certain royalty payments that taxpayers have suggested would not be eligible for a foreign tax credit under the final rules.
The official also reportedly said that proposed previously taxed earnings and profits (PTEP) regulations would be issued in the first half of 2023. On 20 October, the IRS announced the withdrawal of the 2006 proposed PTEP regulations under Internal Revenue Code1 Section 959 and related basis adjustments under Section 961. The preamble indicates that the “proposed regulations were never finalized, never went into effect, and did not indicate that taxpayers could rely on them. Withdrawing the proposed regulations at this point will help prevent possible abuse or other misuse of them—such as inappropriate basis adjustments in certain stock acquisitions to which section 304(a)(1) applies—while the Treasury Department and the IRS continue to develop the new proposed regulations. The IRS may, where appropriate, challenge taxpayer positions giving rise to inappropriate results.”
In regard to the recently enacted Inflation Reduction Act’s corporate alternative minimum tax (CAMT), another IRS official at the 14 October ABA meeting was quoted as saying the Government has not yet decided whether there will be a large package of guidance released or multiple smaller packages, or what form the guidance will take. He indicated that the IRS is finalizing its list of priorities that it needs to address in regard to the CAMT, noting there are many sub-issues that will require guidance. The official did not offer a timeline but acknowledged taxpayers will need guidance by Q1 2023 to determine whether they are subject to the CAMT.
Another official said that the IRS Office of Chief Counsel has organized a group of subject matter experts across multiple associate offices in the IRS National Office who will craft the CAMT guidance.
And the IRS reportedly plans to reconsider its Advance Pricing Agreement (APA) revenue procedure guidance in light of the recent Sixth Circuit Court of Appeals decision in Eaton Corp. & Subs. v. Commissioner, which upheld the Tax Court’s opinion. In August 2022, the Sixth Circuit ruled that the IRS had the burden of proving that there were grounds to cancel the APAs at issue under generally applicable contract-law principles and that 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.
According to an IRS official: “The Tax Court in its decision basically invited us to rewrite the revenue procedure if we want to achieve the result we want.”
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC