November 10, 2023
Report on recent US international tax developments — 10 November 2023
Treasury on 9 November released highly anticipated proposed regulations (REG-132422-17) under Section 987 (the Proposed Regulations) with guidance on determining income and currency gain or loss with respect to a qualified business unit (a Section 987 QBU). The Proposed Regulations maintain the structure of final regulations published in 2016 (the 2016 Final Regulations) and 2019 (the 2019 Final Regulations), which generally adopted the foreign exchange exposure pool (FEEP) method. The FEEP method generally uses a balance-sheet approach to determine Section 987 gain or loss. The Proposed Regulations retain the FEEP method of the 2016 Final Regulations, with certain modifications, as the default rule for determining Section 987 taxable income or loss and net unrecognized Section 987 gain or loss.
The Proposed Regulations include "an election to treat all items of a qualified business unit as marked items (subject to a loss suspension rule), an election to recognize all foreign currency gain or loss with respect to a qualified business unit on an annual basis, and a new transition rule."
Once finalized, the Proposed Regulations (and the parts of the final regulations that are not replaced or modified by the Proposed Regulations) would apply to tax years beginning after 31 December 2024. The Proposed Regulations would also apply currently to certain Section 987 QBUs that terminate on or after 9 November 2023 (including as a result of an entity classification election that is made on or after 9 November 2023, and effective before that date). A taxpayer and each member of its consolidated group may choose to apply the Proposed Regulations in their entirety to the tax year and all subsequent tax years beginning on or before 31 December 2024. Taxpayers may choose to apply the 2016 and 2019 Final Regulations to tax years beginning after 7 December 2016, and before 31 December 2024, in certain circumstances. A Global Tax Alert is pending.
A US District Court in US v. Liberty Global denied a company's dividends-received deduction under Section 245A after applying the codified economic substance doctrine (the Codified ESD) under Section 7701(o). In the 31 October decision, the court took a broad view of the Codified ESD, rejecting the company's argument that the doctrine was limited to transactions to which it is "relevant." The decision represents a timely reminder to taxpayers about the role and importance of the common law ESD, including its application to multi-step transactions.
The Hungarian government reportedly has authorized the signing of a new Hungary-US competent authority agreement for the automatic exchange of country-by-country reports, according to a Hungarian Decree published in the Official Gazette on 2 November. A prior 2018 agreement was terminated effective on 8 January 2023, the same day that the Hungary-US income tax treaty was terminated.
OECD and senior government officials from various countries met at a recent Washington conference to discuss BEPS 2.0 Pillars One and Two, as well as other OECD work. The discussion at the conference underscored the strong political momentum with respect to Pillar Two global minimum taxes and continuing political interest in all aspects of Pillar One. It also reinforced that there continue to be divergent views among Inclusive Framework jurisdictions on aspects of both pillars.
Addressing Pillar One, Assistant Treasury Secretary for Tax Policy Lily Batchelder said that Congress ultimately will need to approve the Pillar One Amount A multilateral convention (MLC), underscoring the critical need for input from business stakeholders during Treasury's MLC consultation, given the novel and complex design for new taxing rights in Amount A. The Treasury official said developing a consensus text is critical, with the objective being to create stability in the global tax system, eliminate digital services taxes and promote certainty.
Batchelder reiterated the Biden Administration's support for Pillar Two and noted the simplification that she believes will result for US business, pointing to how Pillar Two taxes will be collected and the fact that other countries' Pillar Two taxes would be turned off if the US is in compliance. She added that the US government is continuing to work with Inclusive Framework partners on additional administrative guidance, with an important US priority continuing to be the treatment of the US research and development (R&D) tax credit. The US continues to raise this issue in multilateral negotiations. Batchelder said she is hopeful there will be progress.
Another senior US Treasury official said that Amount B in Pillar One is also of major importance for the US government. He cited the significant rise in cross-border tax disputes, noting that many disputes relate to baseline marketing and distribution activities. He said that Amount B is a way to deal with this through a simplified and streamlined approach. The Treasury official stated that Amount A and Amount B are linked for the US, explaining that a robust Amount B is essential for the US to sign on to Amount A.
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