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April 7, 2023
Report on recent US international tax developments — 7 April 2023
The Internal Revenue Service (IRS) on 3 April announced in Notice 2023-31 that it will provide a 180-day transition period for meeting the documentation requirements in Reg. Section 1.903-1(c)(2)(iv)(D) for the foreign tax credit "single-country exception" under Prop. Reg. Section 1.903-1(c)(2)(iii)(B)) after the regulations are finalized.
Previously, in November 2022, the IRS published proposed regulations (REG-112096-22) that addressed the definition of a foreign income tax and provided a limited exception to the source-based "attribution requirement" for certain withholding taxes imposed on certain royalty payments. The proposed regulations would provide certain relief from the cost recovery requirement and the source-based attribution requirement on royalty income for purposes of determining the creditability of foreign taxes under Internal Revenue Code1 (IRC) Sections 901 and 903. The proposed regulations would modify the final foreign tax credit regulations published in January 2022 (TD 9959), as amended by technical corrections (87 FR 45018 & 87 FR 45021) published in July 2022.
The U.S. Tax Court this week held in Farhy v. Commissioner that the IRS does not have authority to assess penalties under IRC Section 6038(b) on a taxpayer who willfully failed to report foreign income on IRS Form 5471, Information Return of U.S Persons With Respect to Certain Foreign Corporations. As a result, the IRS cannot collect the penalties it assessed through a levy notice, though it may collect the penalties through a civil action. The Tax Court concluded that "Congress has explicitly authorized assessment with respect to myriad penalty provisions in the Code, but not for section 6038(b) penalties."
The US and Germany on 24 March 2023 signed a competent authority arrangement on the automatic exchange of country-by-country (CbC) reports. The IRS CbC Reporting Jurisdiction Status Table states that the arrangement's operative date is "To be determined."
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
1 All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.