July 21, 2023
Report on recent US international tax developments — 21 July 2023
The OECD on 17 July released several technical documents on BEPS 2.0 Pillars One and Two, as well as additional documents covering a range of international tax topics, including developments with respect to tax transparency. The package was prepared for a meeting of the G20 Finance Ministers and Central Bank Governors in Gandhinagar, India on 17-18 July. The documents released on Pillar Two have been approved by the Inclusive Framework on BEPS and build upon prior guidance. The latest release follows the issuance of an OECD Outcome Statement on 12 July that detailed progress on the BEPS project, including new timelines.
Among the newly released documents is Administrative Guidance on the Global Anti-Base Erosion (GloBE) Model Rules, which provides additional information on a series of technical issues and includes two new safe harbors. This is the second set of Administrative Guidance items released by the Inclusive Framework, following release of the first set in February 2023.
The July Administrative Guidance includes details on currency conversion rules for GloBE calculations, tax credits and the application of the Substance-based Income Exclusion (SBIE). The treatment of tax credits under the GloBE Rules is important because whether credits are treated as GloBE Income or a reduction to Covered Taxes can have a significant impact on the jurisdictional effective tax rate calculation.
The July Guidance also includes further details on the design of a Qualified Domestic Minimum Top-up Tax (QDMTT) and provides a QDMTT Safe Harbour and Transitional Undertaxed Profits Rule (UTPR) Safe Harbour. The July Guidance will be incorporated into a revised version of the Commentary that will be released later this year.
The Inclusive Framework will consider Administrative Guidance priorities on an ongoing basis where more clarity is required, with the aim of releasing guidance as soon as it is agreed upon so that the Inclusive Framework member jurisdictions can meet their implementation schedule.
The GloBE Information Return was also finalized and includes a transitional framework for simplified reporting on a jurisdictional, rather than entity, basis, in addition to specifying how the information is to be shared among jurisdictions that implement the GloBE Rules.
A report on the Subject to Tax Rule (STTR) provides model tax treaty provisions and related commentary that jurisdictions can use to incorporate the STTR in their bilateral tax treaties.
In regard to Pillar One, the OECD released a public consultation document on Amount B, reflecting further developments since the earlier consultation on this topic and seeking input from stakeholders. It provides for fixed returns for certain baseline marketing and distribution activities. The consultation document does not reflect consensus, as there are remaining open issues.
A Global Tax Alert provides an overview of the latest OECD guidance; detailed alerts on each of the released OECD documents will follow soon.
Senate Finance Committee Ranking Member Mike Crapo (R-ID) and House Ways and Means Committee Chairman Jason Smith (R-MI) were not satisfied with the OECD's 17 July Administrative Guidance on Pillar Two. Senator Crapo and Chairman Smith said in a joint statement: "Once again, the Biden Administration neglected to consult Congress before cheerleading the OECD's latest global tax code rewrite. Today's [17 July] 'administrative guidance' acknowledges what Republicans have warned for more than two years: the UTPR surtax is unworkable and unlawful. … Moreover, the OECD's nonsensical treatment of investment incentives remains, which will send U.S. R&D jobs and tax revenues overseas."
Also this week, the House Ways & Means Tax Subcommittee held a hearing on 19 July that centered on the BEPS 2.0 project. Republicans challenged the Treasury witness, Michael Plowgian, Deputy Assistant Treasury Secretary for International Tax Affairs, specifically questioning the constitutionality of allowing other nations a potential share of US taxes through the UTPR. They also criticized a global legal system under which they claimed the US research and development (R&D) credit is not treated the same way as refundable R&D credits provided by other countries. Democrats on the committee in most cases sought to defend the BEPS project and the Administration.
Plowgian testified that Treasury in the future would work with Congress, saying: "We hope to have a complete Pillar One package soon and intend to continue to seek input. Similarly, with respect to Pillar Two, we stand ready to work with Congress to enact the reforms proposed in the President's Budget to implement Pillar Two, which would increase U.S. revenue and strengthen our tax system. We will also continue to work with Congress to prioritize issues for interpretive guidance."
An IRS official this week confirmed that proposed previously taxed earnings and profits (PTEP) regulations remain on track for release later this year. The official was quoted as saying that the first tranche of regulations would address foreign exchange rules in the PTEP context — specifically, when a controlled foreign corporation (CFC) receives a PTEP distribution from a lower-tier CFC in a different functional currency. The official also reportedly said the coming rules would address guidance regarding basis and mid-year distributions from CFCs.
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