October 27, 2023
Report on recent US international tax developments — 27 October 2023
The US House of Representatives on 25 October elected Rep. Mike Johnson (R-LA) to be the next Speaker, with members voting 220 to 209 along strictly party-lines. The vote came over three weeks after the ouster of House Speaker Kevin McCarthy (R-CA) from the leadership post on 3 October. The new Speaker has already set an ambitious schedule for regular-order consideration of appropriations bills and said a continuing resolution (CR) after the expiration of the existing CR on 17 November should end on 15 January or 15 April so the Senate can't "jam" the House with a year-end omnibus spending bill. Speaker Johnson also said he would create a bipartisan debt commission.
A Treasury official this week said that US reservations to the new US-Chile tax treaty, which were also integrated into the language of the US-Croatia Treaty signed in 2022, reflect current policy and are included in the working model of the US Model Treaty. The reservations in the Chilean accord address the Section 59A base erosion and anti-abuse tax and the application of foreign tax credits. The official was quoted as saying there are no plans to release the next iteration of the US Model Treaty, but that the proposed 2022 US-Croatia tax treaty can serve as a good indication of positions in the new US Model Treaty.
In regard to the US-Chile treaty, the Chilean government on 25 October submitted the proposed convention with US reservations to the Chilean Congress for approval.
The US and Uruguay signed a tax information exchange agreement (TIEA) on 24 October. TIEAs allow the US competent authority and their bilateral counterpart to exchange information on tax matters in regard to the administration and enforcement of domestic tax laws.
The IRS announced (IR-2023-194) on 20 October that it plans to send compliance alerts to approximately 150 US-based subsidiaries of foreign-owned corporations that distribute goods in the United States. The alerts stem from the companies' alleged use of certain transfer pricing strategies, which the IRS deems improper. The IRS also said in the news release that it plans to expand the Large Corporate Compliance program in 2024 to audit 60 additional large corporate taxpayers, which will be selected with the help of artificial intelligence.
And an IRS official this week was quoted as saying that proposed previously taxed earnings and profits (PTEP) regulations now are expected to be released in early 2024, acknowledging the long delays in releasing the regulatory package. IRS officials in the past have said PTEP regulations would be released in tranches, with the official this week confirming that the regulations would address the timing of basis adjustments related to mid-year share transfers or distributions.
The Cypriot Tax Department has publicly announced that the bilateral Cyprus-US Competent Authority Agreement (CAA) for the exchange of Country-by-Country (CbC) reports, which is still under negotiation, is expected to be effective for Reporting Fiscal Years (RFYs) starting on or after 1 January 2023. A Global Tax Alert provides details of the implications for reporting fiscal years starting on or after 1 January 2022.
An OECD official this week was quoted as saying that the Inclusive Framework on BEPS is considering issuing Pillar Two guidance on the treatment of deferred tax assets in jurisdictions with federal and subnational taxes. The official said the GloBE rules on which Pillar Two is based create a deferred tax asset in the jurisdiction in which the entity records a loss, instead of using a loss carryforward mechanism. Upon the suggestion that it may be possible to recast the deferred tax asset at 15% accounting for both the federal and subnational level, because GLOBE rules do not distinguish between the two, he said, "We are working on this issue … . The result has to be equivalent to a 15 percent [rate]." He also reportedly said the Inclusive Framework is working on additional guidance on the treatment of deferred losses in countries that have multiple levels of taxation.
And the director of the OECD Centre for Tax Policy and Administration this week defended the recently released BEPS Pillar One Multilateral Convention saying it is much preferable to the alternative, which would be the enactment of hundreds of digital services taxes around the globe. Manal Corwin conceded that "simplification is not always simple," adding that without the OECD two-Pillar project, taxpayers would see the "the proliferation of multiple different measures, each with different standards and entry points and enforcement mechanisms that lead to double tax."
For additional information with respect to this Alert, please contact the following:
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