December 22, 2023
Report on recent US international tax developments — 22 December 2023
The OECD/G20 Inclusive Framework on BEPS on 18 December released the third set of administrative guidance on the global minimum tax under Pillar Two and a statement on a new timeline for the Multilateral Convention (MLC) under Pillar One. The Agreed Administrative Guidance for the Pillar Two GloBE Rules (December) 2023 (December Guidance) follows earlier administrative guidance releases in February and July 2023.
The December Guidance addresses application of the Transitional Country-by-Country Reporting (CbCR) Safe Harbour and provides a Simplified Calculations Safe Harbour for non-material entities. It also addresses allocation of blended controlled foreign company (CFC) taxes, among other technical issues under the GloBE Rules. According to an OECD press release issued on the same day, the new Administrative Guidance will be included in a revised Commentary to the GloBE Rules to be released in 2024.
The December Guidance provides additional guidance on the Transitional CbCR Safe Harbour with respect to areas that tax administrations and Multinational Enterprise (MNE) Groups identified as requiring further clarification. The guidance also indicates that the Inclusive Framework has become aware of certain transactions that exploit differences in the source of financial information or differences between tax and financial accounting treatment to allow a Constituent Entity to qualify for the Transitional CbCR Safe Harbour.
It describes these transactions as typically involving the use of arrangements in which the parties are able to account for the income, expenses, gains, losses or taxes under that arrangement in an inconsistent or duplicative manner and in a way that purports to allow one of the Constituent Entities to qualify for the Transitional CbCR Safe Harbour and thereby avoid GloBE Top-up Taxes that would otherwise arise.
In this regard, the December Guidance provides that, for purposes of determining if a jurisdiction qualifies for the Transitional CbCR Safe Harbour, adjustments must be made to the jurisdiction's Profit (or Loss) before Tax (PBT) and income tax expense with respect to any Hybrid Arbitrage Arrangements entered into after 15 December 2022. For these purposes, a Hybrid Arbitrage Arrangement is: (i) a deduction/non-inclusion arrangement; (ii) a duplicate loss arrangement; or (iii) a duplicate tax recognition arrangement. Finally, the guidance indicates that further guidance will be provided to address hybrid arbitrage arrangements in the context of applying the GloBE Rules outside the safe harbor context.
In regard to the MLC on Amount A of Pillar One, the Inclusive Framework intends to finalize the MLC by the end of March 2024, with a view to a signing ceremony by the end of June 2024.
According to their press release, the OECD will release further administrative guidance on an ongoing basis in regard to various aspects of the GloBE Rules and "where necessary to address aggressive tax planning that may undermine the integrity of the rules or their application." The Inclusive Framework also plans to "develop simplifications on key compliance items," including on the application of deferred tax liability recapture rules and the allocation of deferred taxes such as CFC regimes. The guidance on simplifications is planned for the first half of 2024.
The long-delayed US-Chile income tax treaty entered into force on 19 December, following the exchange of instruments of ratification. This is the first US tax treaty with Chile. For taxes withheld at source, the treaty will have effect for amounts paid or credited on or after 1 February 2024. For all other taxes, the treaty will have effect for tax periods beginning on or after 1 January 2024.
The US Senate gave its advice and consent to ratify the treaty on 22 June 2023 and included two reservations concerning IRC Section 59A (the Base Erosion and Anti-abuse Tax) and Article 23 (Relief from Double Taxation). Provisions relating to the reservations were subsequently approved by the Chilean Congress.
The new treaty will provide reduced withholding tax rates on certain payments of dividends, interest and royalties and includes a permanent establishment (PE) provision that deems a PE to exist from the provision of services under certain circumstances. The treaty also has a limitation-on-benefits provision that includes a "headquarters company test" and a triangular provision.
The US Congress has adjourned and begun its winter break and will return in early January. Congress will need to enact appropriations bills when it returns in the new year, with two looming deadlines: 19 January and 2 February 2024. It remains unclear whether tax provisions can be added to the spending bills either in January or February, or possibly to other legislation.
The congressional Joint Committee on Taxation (JCT) on 21 December released the "General Explanation of Tax Legislation Enacted in the 117th Congress, also known as the Bluebook.
Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor