May 12, 2023
Report on recent US international tax developments — 12 May 2023
President Biden and congressional leaders from both parties met earlier this week for a debt-limit meeting at the White House, but it did not result in any breakthrough, according to House Speaker Kevin McCarthy (R-CA). A second meeting planned for 12 May has been postponed until next week, with staff-level talks taking place in the interim.
The US Senate Finance Committee on 11 May held a hearing on "Cross-border Rx: Pharmaceutical Manufacturers and U.S. International Tax Policy." Democratic members and some witnesses criticized perceived profit shifting by the pharmaceutical industry even after enactment of the 2017 TCJA's guardrails. The Finance Committee Democratic majority released a report ahead of the hearing finding that large pharmaceutical companies report a collective 75% of taxable income in foreign subsidiaries, including for some drugs that are household names in the United States.
Republican committee members instead focused their concern on the effect of the OECD-led Pillar Two global minimum tax on US MNCs, particularly the undertaxed profits rule (UTPR) and treatment of US tax credits including the R&D tax credit. The UTPR "backstop" rule has been a particular target of Congressional Republicans in recent hearings, including during a 16 March Finance hearing with Secretary Yellen, during which minority committee members argued that the UTPR could have the impact of diminishing the value of US tax incentives like the R&D tax credit.
Treasury and IRS officials recently offered insights on several pressing topics at the American Bar Association's Section of Taxation meeting. In regard to the new corporate alternative minimum tax (CAMT), an IRS official said that there will be at least one more notice; there had been speculation whether taxpayers would next see proposed regulations or additional interim guidance. The official was quoted as saying the notice will address depreciation issues and the situation where the tax and financial accounting rules on dispositions diverge.
In regard to other CAMT issues that have cropped up, including in regard to consolidated groups, IRS officials suggested that taxpayers "do what's reasonable" during the period in which the government develops further guidance. An IRS official indicated the agency is currently working on proposed rules that would address treating a consolidated group as a single entity for purposes of the CAMT, as noted in Notice 2023-7. Another official highlighted the fact that Notice 2023-7 calls for single-entity treatment for status computations and computations of CAMT tax liability, adding "It does not say for all [CAMT] purposes."
The expected Joint Committee on Taxation's (JCT) Technical Explanation (Blue Book) to the Inflation Reduction Act, which enacted the CAMT, is not likely to provide many answers in regard to the provision, according to a senior Senate Finance Committee staffer. The official said the Blue Book will not provide much insight into the new tax given the broad legislative text and the expansive grant of regulatory authority. The official was quoted as saying that both the corporate AMT and the stock buyback excise tax provisions were relatively clear and likely will not require much in terms of technical corrections. Earlier this year, the JCT Chief of Staff was quoted as saying the Blue Book would be out before the end of June.
US and Israeli tax treaty negotiations are moving in the direction of a new tax treaty, rather than a protocol to the existing treaty, according to a Treasury official. The current US-Israel tax convention was signed in 1973 and amended in 1980 and 1993, and does not reflect current US tax treaty policy, the official said.
Tax treaty negotiations with Switzerland are ongoing, according to the official, and are expected to result in a new protocol, rather than a new treaty. Productive negotiations have been progressing over recent months although several issues reportedly remain outstanding.
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