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December 15, 2023

US Treasury provides guidance on the creditability of Pillar Two taxes, grants relief for pre-GloBE DCLs and extends temporary relief from FTC regulations

  • The Notice indicates that a QDMTT is generally creditable, whereas an IIR may or may not be creditable depending on whether the taxpayer's US federal income tax liability may be included in its computation.
  • The Notice provides that the GloBE Rules will not cause the foreign use of a DCL incurred in a pre-GloBE tax year, subject to an anti-abuse provision.
  • The Notice extends the relief period from the FTC Creditability Regulations described in Notice 2023-55 until further guidance is issued.
  • Taxpayers may generally rely on this guidance for applicable tax years until proposed regulations are published.

In Notice 2023-80 (Notice), issued December 11, 2023, the United States (US) Treasury Department (Treasury) and the Internal Revenue Service (IRS) outlined guidance on the interaction of the foreign tax credit (FTC) rules and dual consolidated loss (DCL) rules with top-up taxes imposed via the Income Inclusion Rule (IIR) or a Qualified Domestic Minimum Top-Up Tax (QDMTT) under the OECD's Global Anti-Base Erosion Model Rules (GloBE Rules). Treasury also announced its intent to issue proposed regulations that will align with this new guidance. The Notice generally does not provide guidance on the FTC implications of the UTPR (commonly referred to as the "Undertaxed Profits Rule"); however, Treasury and the IRS are analyzing these issues and plan to release additional guidance.

The Notice also extends, through tax years "ending before the date that a notice or other guidance withdrawing or modifying the temporary relief is issued (or any later date specified in such notice or other guidance)," the temporary relief from the application of regulations under IRC Sections 901 and 903, which identify foreign taxes for which taxpayers may claim a credit (FTC Creditability Regulations) described in Notice 2023-55.

Detailed discussion


Overview of GloBE Rules

The GloBE Rules are designed to ensure large multinational enterprises (MNEs) pay a minimum level of tax on the income arising in each jurisdiction where they operate. The minimum taxes imposed under the GloBE Rules (collectively, Pillar Two taxes) include those under an IIR and a UTPR. If applicable, those taxes would be levied by implementing jurisdictions on one or more entities of an MNE group that are located within that jurisdiction on low-taxed profits of other entities (generally located outside of that jurisdiction) within the same MNE group.1 In addition, the GloBE Rules recognize that countries can implement a QDMTT that is designed, implemented, and administered in a way that produces outcomes consistent with the GloBE Rules.

The Notice

GloBE Rules and FTCs

Creditability of top-up taxes imposed under GloBE Rules

Under the Notice, the creditability of a Pillar Two tax generally depends on whether it is a "final top-up tax," and if so, how it is computed. The Notice treats a foreign income tax as a final top-up tax if the foreign tax law "takes into account (a) the amount of tax imposed on the direct or indirect owners of the entity subject to the tested tax by other countries (including the United States) with respect to the income subject to the tested tax, or (b) in the case of an entity subject to the tested tax on income attributable to its branch in the foreign country imposing the tested tax, the amount of tax imposed on the entity by its country of residence with respect to such income." The Notice defines through examples a "final top-up tax" to include an IIR because an IIR is computed by taking into account the pushdown of taxes imposed on direct or indirect owners that are located in other countries. The rule on final top-up tax only applies to taxes that meet the definition of a "foreign income tax" (as defined under Treas. Reg Section 1.901-2) and the examples assume that an IIR and QDMTT meet that definition.

A final top-up tax is not creditable (including for corporate alternative minimum tax purposes) if, under the foreign tax law, any amount of the taxpayer's US federal income tax liability (US tax liability) would be considered in computing the final top-up tax, regardless of whether the taxpayer has a US tax liability that is, in fact, included in the computation of the final top-up tax. Final top-up taxes paid by controlled foreign corporations (CFCs) and partnerships are treated as creditable at the level of the CFC or partnership, with any FTC disallowance applied at the level of the US shareholder or partner. According to the Notice, this treatment is intended to allow for the appropriate result when a final top-up tax should be creditable to one US shareholder or partner but not to another.

As an IIR's creditability at the US shareholder or partner level depends on whether foreign tax law would take that shareholder or partner's US tax liability into account in computing the IIR, the Notice provides two examples to illustrate when an IIR is creditable and when it is not. In the first example, USP, a domestic corporation, owns all the stock of CFCX (a CFC in Country X), which owns all the stock of CFCY (a CFC in Country Y); USP, CFCX, and CFCY form an MNE group (as defined under Country X tax law, which implements an IIR). Country X imposes an IIR on CFCX for low-tax profits of CFCY. Country X's IIR computation takes into account the tax liability of the direct and indirect owners of the Country X taxpayer. In this example, CFCX and CFCY have a US shareholder (USP) that is considered part of the same MNE group. Accordingly, USP's US tax liability is considered in the computation of the Country X IIR, and no credit is allowed for the amount deemed paid by USP.

The facts are the same in the second example, except CFCX has two domestic shareholders, USP and USM, that own 70% and 30% of CFCX stock, respectively. USM is not considered part of CFCX's MNE group, so Country X tax law does not take into account USM's US tax liability in computing the Country X IIR. Accordingly, USM may claim a credit for the Country X IIR it is deemed to pay because none of its US tax liability would be taken into account in the computation of the Country X IIR (however, as in the first example, a credit is disallowed for the Country X IIR deemed paid by USP).

In computing a taxpayer's effective tax rate (ETR) for the high-tax exception or high-tax exclusion from subpart F or tested income, respectively, final top-up taxes are excluded from foreign income taxes paid (i.e., the numerator) but increase the net item of income or net tested income item (i.e., the denominator), as applicable.

Final top-up taxes are not deductible under IRC Section 275(a)(4) and are included in gross income under IRC Section 78 for US shareholders that elect to take the benefit of FTCs, regardless of whether an FTC is allowed for the specific final top-up tax.

A third example in the Notice illustrates that a QDMTT, unlike an IIR, is not a final top-up tax because it does not take into account the tax imposed by other countries on the direct and indirect owners of the entity subject to the QDMTT. Accordingly, a QDMTT may be creditable as long as it is a foreign income tax under Treas. Reg. Section 1.901-2.

Separate levy treatment

The Notice generally treats each tax imposed by a foreign country with respect to an IIR, UTPR, or QDMTT as a separate levy under Treas. Reg. Section 1.901-2(d) from any other levy imposed by the foreign country, regardless of whether the IIR, UTPR or QDMTT is computed via adjustments to the base of another levy (e.g., by additions to income or denials of deductions).

Determining the QDMTT taxpayer

The Notice determines the legal liability of a QDMTT imposed on the income of two or more persons in proportion to each person's "QDMTT Allocation Key" rather than under the rules of Treas. Reg. Section 1.901-2(f)(3). A person's QDMTT Allocation Key is calculated as follows:

(QDMTT Rate — Separate Pre-QDMTT ETR2) x Separate QDMTT Income

The Notice defines a "person" as an individual or entity (including a disregarded entity (DRE)) that is subject to a foreign country's QDMTT. For a QDMTT paid by an owner of a partnership or DRE, the QDMTT is first determined at the partnership or DRE level, then the allocated to the owner under the rules of Treas. Reg. Section 1.901-2(f)(4).

A person's QDMTT Rate is the minimum ETR under foreign tax law to which the person's actual ETR is compared to calculate the QDMTT. A person's Separate Pre-QDMTT ETR equals the person's Separate Pre-QDMTT Taxes divided by its Separate QDMTT Income. Separate Pre-QDMTT Taxes are the taxes (positive or negative), and Separate QDMTT Income is the income or loss taken into account for the foreign country's QDMTT computation. If a person's Separate QDMTT Income is less than zero, its QDMTT Allocation Key is zero. The Notice provides several examples of how the QDMTT Allocation Key rules should apply in practice, including when the taxpayers have a Substance-based Income Exclusion (SBIE).

The QDMTT Allocation Key rules apply for US tax purposes, regardless of how foreign tax law allocates the QDMTT between two or more persons, which person is obligated to remit the tax, which person actually remits the tax, or which person a foreign country could litigate against if all or a portion of the foreign tax was unpaid.

Revision of non-duplication requirement for in lieu of taxes

The FTC Creditability Regulations provide a substitution requirement that a foreign tax (tested foreign tax) must satisfy to qualify as a tax "in lieu of" an income tax under IRC Section 903. The substitution requirement includes the non-duplication requirement under Treas. Reg. Section 1.903-1(c)(1)(ii), which stipulates that "[n]either the generally-imposed net income tax nor any other separate levy that is a net income tax is also imposed, in addition to the tested foreign tax, by the same foreign country on any persons with respect to any portion of the income to which the amounts … that form the base of the tested foreign tax relate … " [Emphasis added.] The language in the regulation suggests that a tested foreign tax may need to be imposed in substitution of all net income taxes imposed by the country in order to meet the substitution requirement. This language causes uncertainty as to the creditability of certain foreign taxes where foreign countries impose more than one net income tax.

The Notice states that a foreign tax need only be imposed in substitution for a net income tax, rather than in substitution of all net income taxes imposed by the foreign country, to meet the non-duplication requirement. Accordingly, Treasury intends to revise Treas. Reg. Section 1.903-1(c)(1)(ii) to reflect the change described in the Notice. Treasury also intends to revise the examples in Treas. Reg. Section 1.903-1(d) to conform to the revised language and will consider whether additional clarifications to Treas. Reg. Section 1.903-1 are needed, including whether additional guidance is needed on the definition of "a generally-imposed net income tax."

GloBE Rules and DCLs

Background on the DCL rules

IRC Section 1503(d) and its regulations (DCL rules) prevent a "double dip" of a single economic loss: once to offset income that was subject to US federal income tax, but not foreign tax, and a second time to offset income that was subject to foreign tax, but not US federal income tax (such as through a tax consolidation regime).

A DCL is generally either (i) a net operating loss of a dual resident corporation or (ii) a net loss attributable to a foreign branch or hybrid entity (each, a separate unit) owned by a domestic corporation (domestic owner), as computed according to US federal income tax principles. If there is a DCL, the dual resident corporation or domestic owner, or the consolidated group, must compute its US taxable income without taking into account any item of deduction or loss that composes the DCL (i.e., a "domestic use" of the DCL is not allowed).

One exception applies when the taxpayer makes a "domestic use election" certifying that there has not been, and will not be, a "foreign use" of the DCL. A foreign use of a DCL generally occurs when any portion of a deduction or loss included in the DCL is made available under a foreign country's income tax laws to offset or reduce, directly or indirectly, any item of income or gain of a foreign corporation, as determined according to US federal income tax principles. For example, where a domestic corporation owns both a disregarded entity and a foreign corporation that are resident in the same foreign jurisdiction, a DCL attributable to the disregarded entity (a separate unit) would have a foreign use to the extent that the disregarded entity and foreign corporation can form a tax consolidation group for purposes of the relevant foreign tax law. In that case, the domestic corporation could not make a domestic-use election, and would be prohibited from reflecting any portion of the DCL in its US taxable income.

Interaction of the DCL rules with the GloBE Rules

The GloBE top-up taxes apply on a jurisdictional basis by generally aggregating the income and loss of Constituent Entities (Net GloBE Income) in the same jurisdiction for purposes of determining the ETR, and ultimately the top-up tax for that jurisdiction. According to the Notice, Treasury and the IRS believe that this jurisdictional "blending" approach could create double-dipping concerns that the DCL rules were intended to address.

For example, consider again a domestic corporation that owns both a disregarded entity (separate unit) and a foreign corporation resident in the same jurisdiction, but assume that foreign jurisdiction has no tax consolidation, fiscal unity, loss-sharing, or other similar regime. Before the GloBE Rules, a DCL of the separate unit generally could not be put to a foreign use because no mechanism existed through which to make the DCL available to the foreign corporation (absent a merger, sale, or similar transaction). Under the GloBE Rules, however, items of deduction or loss that included in the DCL (and that are recorded in the disregarded entity's separate financial accounts) would be reflected in the jurisdiction's Net GloBE Income and thus would effectively offset or reduce any GloBE income of the foreign corporation.

A similar issue could arise where an item of deduction or loss included in a DCL in one year (including a pre-GloBE tax year) is reflected in the jurisdiction's Net GloBE Income in a subsequent year as a result of book-tax timing differences.

In Notice 2023-80, Treasury and the IRS indicated that they are studying the extent to which the DCL rules should apply to the GloBE Rules, including whether the GloBE Rules' jurisdictional blending should create a foreign use of a DCL. As explained in the Notice, Treasury and the IRS recognize that the GloBE Rules have some unique features as compared to traditional tax systems, including that blending or "aggregation" is effectively mandatory rather than elective and that a GloBE loss might never produce a top-up tax benefit if the ETR for the jurisdiction exceeds the 15% minimum rate. Future guidance or regulations might take these unique features into account. In addition, Treasury and the IRS are reviewing whether the GloBE Rules should cause an entity to be a dual resident corporation or hybrid entity, or to not be a transparent entity, as such terms are defined in the DCL rules. Lastly, Treasury and the IRS stated that they are considering similar issues in the context of other provisions, such as the anti-hybrid rules under IRC Sections 245A(e) and 267A.

Relief for "legacy DCLs"

Although the notice states that more comprehensive guidance is pending, Treasury and the IRS provide relief in the Notice for "legacy DCLs," meaning effectively pre-GloBE DCLs. Treasury and the IRS stated their intent to propose a regulation providing that a foreign use of a legacy DCL would not occur solely because all or a portion of a legacy DCL is taken into account in determining Net GloBE Income for a jurisdiction. Accordingly, taxpayers that have made (and file certifications for) domestic-use elections generally may rely on the relief in the Notice to mitigate concerns that a timing difference in the recognition of an item of deduction or loss could create a foreign use in a GloBE year. However, the proposed rule would not apply if the DCL was incurred or increased with a view to reducing jurisdictional top-up tax or qualifying for the relief described in the Notice.

A "legacy DCL" is a DCL incurred in either (i) a tax year ending on or before December 31, 2023, or (ii) a tax year beginning before January 1, 2024, and ending after December 31, 2023, provided that the taxpayer's tax year begins and ends on the same dates as the Fiscal Year3 of the MNE group that could take into account any portion of a DCL.

Extension and modification of temporary relief provided by Notice 2023-55

In addition to the guidance previously outlined, the Notice extends the temporary relief from the FTC Creditability Regulations provided by Notice 2023-55 to tax years "ending before the date that a notice or other guidance withdrawing or modifying the temporary relief is issued (or any later date specified in such notice or other guidance)."

The Notice also clarifies that the temporary relief provided by Notice 2023-55 applies (or does not apply) at the partnership level. However, if a partnership did not apply the temporary relief before December 11, 2023, for its 2022 tax year, a partner may apply the temporary relief to its share of the partnership's foreign taxes for that year. Notwithstanding, the IRS could "make adjustments" to the foreign tax credits claimed by the partner applying such temporary relief, if audited.

The Notice also confirms that partnerships and their partners are subject to the consistency and single-benefit requirements outlined in Notice 2023-55. Following the consistency requirement, a partnership must apply the temporary relief to all of its foreign taxes; for a partnership's tax year beginning after December 31, 2022, a partnership's application or non-application of the temporary relief will cause its partner to be required to apply or not apply the temporary relief to all other foreign taxes for which the partner would be eligible to take an FTC, unless the partner does not control whether the partnership applies the temporary relief. Under the single-benefit requirement, a partnership cannot apply the temporary relief to credit any foreign tax that it deducts in the relief year or another tax year.

Applicability dates

On the application of the GloBE Rules to FTCs, the Notice anticipates that the forthcoming proposed regulations will apply to tax years ending after December 11, 2023. Taxpayers may rely on the guidance in the Notice for tax years ending after December 11, 2023, and on or before the proposed regulations are published, as long as they apply the guidance consistently to all applicable tax years. Additionally, taxpayers may rely on the guidance on the non-duplication requirement for tax years that begin on or after December 28, 2021, and end on or before December 11, 2023.

Regarding the application of the GloBE Rules to DCLs, taxpayers may rely on the guidance in the Notice until proposed regulations are published.


Guidance on the GloBE Rules

The disallowance of an FTC with respect to an IIR where its computation takes US tax liability into account is consistent with the Commentary to the GloBE Rules, which states that domestic tax regimes should not provide an FTC for IIRs (or UTPRs) to avoid circularity issues.4 The Notice, however, does not expressly justify its proposed creditability approach and related treatment.

For situations where the push-down of US tax liability is not possible in computing an IIR, the Notice provides welcome relief. One example (as illustrated in the Notice) is where the taxpayer is a domestic corporation that is a US shareholder of a CFC and is not part of the MNE group that includes the CFC. In this case, the taxpayer's GILTI tax cannot be pushed down in computing an IIR with respect to the CFC's low-tax profits because the taxpayer is not part of the same MNE group. In another instance, if the ultimate parent entity of an MNE group is a flow-through entity (such as an S corporation or a partnership) that is owned by a US shareholder, any GILTI tax paid by the US shareholder on income of a CFC within the MNE group cannot be pushed down either. In those cases, the IIRs deemed paid are expected to be creditable.

The examples provided in the Notice on IIRs and QDMTTs appear to assume that those taxes are foreign income taxes under Treas. Reg. Section 1.901-2. This raises a question as to whether a taxpayer can simply assume that any enacted IIR or QDMTT is a foreign income tax, or must still determine whether it is a foreign income tax under Treas. Reg. Section 1.901-2 before applying the Notice's rules for final top-up taxes. It appears that the notice's intent is that taxpayers must still analyze the IIR or QDMTT under Treas. Reg. Section 1.901-2.

The Notice does not provide any guidance on UTPRs (including on creditability of these taxes), other than on separate levy and legacy DCL matters. The Notice states that "the Treasury Department and the IRS continue to analyze issues related to the UTPR and intend to issue additional guidance." Given the expectation that no jurisdiction will apply a UTPR before 2025, guidance on UTPRs may not be as immediate as that on IIRs and QDMTTs.

Guidance on DCLs

The relief for legacy DCLs should mitigate the burden on taxpayers of having to scrutinize historic DCLs for whether any book-tax timing differences could pose a risk of foreign use in a GloBE year. Nevertheless, taxpayers may want to review the circumstances of their legacy DCLs for which domestic-use elections are currently in place to understand whether, based on the taxpayer's organizational structure, the GloBE Rules would result in "aggregation" of income and loss between a separate unit of a foreign corporation. If a DCL arose in a GloBE year for similar reasons as the legacy DCL, the GloBE Rules would potentially create a foreign use of the new DCL that would not have been possible under the foreign jurisdiction's ordinary tax laws. They should also consider the US tax impact if, in the future, domestic-use elections are unavailable for certain jurisdictions.

Guidance on extended relief period

While the Notice extends the relief from the FTC Creditability Regulations provided by Notice 2023-55, it defines the relief period as "[tax] years beginning on or after December 28, 2021, and ending before the date that a notice or other guidance withdrawing or modifying the temporary relief is issued (or any later date specified in such notice or guidance)." As such, if Treasury issues guidance withdrawing or modifying the temporary relief before the end of a tax year, the applicability dates provided in the Notice indicate that the temporary relief may not apply for that entire tax year, as the tax year ending before the date the guidance is issued would be the prior tax year. In theory, these applicability dates could present challenges for taxpayers that could be subject to new guidance for tax years that began before new guidance is issued.


Contact Information
For additional information concerning this Alert, please contact:
Ernst & Young LLP (United States), International Tax and Transaction Services
   • Craig Hillier, Boston (
   • Colleen O’Neill, Washington, DC (
   • JD Hamilton, New York (
   • Martin Milner, Washington, DC (
   • Julia Tonkovich, Washington, DC (
   • Jason Yen, Washington, DC (
   • Jordan Pittman, Washington, DC (
   • Adam Becker, Washington, DC (
   • Bona Chung, Washington, DC (
   • Seth Gray, Washington, DC (

Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor


1 As in the Notice, the terms IIR and UTPR in this Alert refer to a tax imposed under an IIR and a UTPR, respectively, as well as to the rules themselves.

2 Separate Pre-QDMTT Taxes / Separate QDMTT Income

3 The "Fiscal Year" of an MNE Group is generally the accounting period for which the Ultimate Parent Entity of the MNE Group prepares its Consolidated Financial Statements. See GloBE Rules, Article 10.1.1 ("Fiscal Year").

4 OECD, Commentary to the GloBE Rules on Article 4.3.2, para. 45.


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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