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March 10, 2023
2023-5297

Report on recent US international tax developments 10 March 2023

United States (US) President Joe Biden on 9 March released the Administration’s FY 2024 Budget and accompanying Treasury Greenbook, calling for US$3 trillionin deficit reduction including through tax increases on corporations and wealthy individuals. The proposals include a previously outlined quadrupling of the Inflation Reduction Act (IRA) stock buyback excise tax in Internal Revenue Code2 Section 4501 from 1% to 4% and a billionaire’s tax that would impose a 25% minimum tax – higher than the previously proposed 20% – on total income, inclusive of unrealized capital gains, for taxpayers with wealth of greater than $100 million. Many of the Budget’s tax proposals are taken from the President’s first Budget (FY 2022), the House-passed Build Back Better Act that did not pass the Senate and last year’s Budget (FY 2023).

The President’s FY 2024 Budget proposes to increase the tax rate for C corporations from 21% to 28%.

Other corporate tax proposals would amend the Code in several ways to ensure that a transfer of property by a corporation to its shareholder(s) cannot be made through transactions that avoid dividend treatment for the corporation’s shareholders. Other corporate measures would limit tax avoidance through inappropriate leveraging of parties to divisive reorganizations, limit losses recognized in liquidation transactions, and prevent basis shifting by related parties through partnerships, among other proposals.

The President announced a number of international tax proposals. The Budget would make several changes to the GILTI regime, including:

  • Repealing the reduction in GILTI for a 10% return on qualified business asset investment (QBAI).

  • Reducing the Section 250 deduction from 50% to 25%, so generally increasing the effective tax rate to 21% (combined with the above-described corporate tax rate increase).

  • Replacing “global averaging” for calculating a US shareholder’s GILTI with a jurisdiction-by-jurisdiction calculation and creating a separate foreign tax credit (FTC) limitation for each jurisdiction.

  • Reducing the 20% “haircut” on GILTI FTCs to 5%, allowing net operating losses to be carried forward within a single jurisdiction, and allowing FTCs to be carried forward 10 years within a single jurisdiction, and allowing FTCs to be carried forward 10 years within a single jurisdiction.

  • Repealing the high-tax exemption to subpart f and effectively repealing the GILTI high-tax election.

  • Since GILTI would be deemed to be a compliant global minimum tax due to other proposals in the Budget, taxes paid under an Income Inclusion Rule by a foreign parented group would be creditable against any GILTI tax paid by a US domestic corporation that is a member of that group.

Another proposed international tax change would repeal the base erosion and anti-avoidance tax (BEAT) and replace it with an undertaxed profits rule (UTPR) that is consistent with the UTPR described in the Organisation for Economic Co-operation and Development Pillar Two Model Rules, including a global annual revenue threshold, de minimis exclusions and allocation among jurisdictions. A US domestic minimum top-up tax would be part of the UTPR proposal to protect the US Treasury from the imposition of UTPR by other countries.

The Budget would also repeal the foreign derived intangibles income (FDII) tax benefit and utilize the revenue to provide other unspecified incentives to encourage research and development.

Other international tax proposals in the Budget would limit the full Section 245A dividends received deduction to only those dividends remitted either by controlled foreign corporations or by qualified foreign corporations, expand the application of Section 265 to disallow deductions allocable to a class of foreign gross income that is exempt from tax or taxed at a preferential rate through a deduction, and broaden the definition of an inversion transaction, among numerous other changes.

Treasury Secretary Janet Yellen will testify before the House Ways and Means Committee regarding the Administration’s proposed FY 2024 Budget on 10 March.

US government officials this week fanned out to provide some insights on major pending regulatory projects.

A senior Treasury official was quoted as saying that the Government is mulling whether to issue further notices on the new corporate alternative minimum tax (CAMT). While additional interim guidance is possible, it would likely have to address issues that cannot be resolved in the absence of a comprehensive set of rules. The official said it is too early to predict when proposed regulations on the CAMT will be released and added that the Government needs detailed comments on the CAMT to flesh out proposed rules.

Regarding the stock buyback excise tax, an Internal Revenue Service (IRS) official this week said the Government is willing to consider carveouts, but only if those carveouts are clearly defined and consistent with current bright line tests. Another government official indicated there is a first draft of proposed regulations on the stock buyback provision, but said the Government now wants to compare what they have with expected comment letters,

And a Treasury official indicated that the Administration apparently is not inclined to expand the current foreign tax credit regulations’ single-country royalty withholding exception to include a services withholding carve out, saying the two areas are distinct and do not lend themselves to comparison. In the meantime, however, another Treasury official said additional foreign tax credit guidance is expected to include rule order and the treatment of qualified domestic minimum top-up taxes (QDMTTs). The official was quoted as saying the Government is continuing to work on foreign tax credit guidance in the context of the BEPS Pillar Two global minimum tax.

The Senate on 9 March confirmed Daniel Werfel to be the next IRS Commissioner for a five-year term. The 54-42 vote was closer than expected.

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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. Currency references in this Alert are to the US$.

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

 
 

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