December 15, 2023
Report on recent US international tax developments - 15 December 2023
Treasury and the IRS on 11 December issued Notice 2023-80, providing guidance on the interaction of the US foreign tax credit (FTC) and dual consolidated loss (DCL) rules with the top-up taxes imposed under the BEPS Pillar Two global anti-base erosion (GloBE) model rules, i.e., the Income Inclusion Rule (IIR) and the Qualified Domestic Minimum Top-Up Tax (QDMTT). The government also announced its intent to issue proposed regulations that will align with this new guidance.
The Notice does not provide guidance on the FTC implications of a UTPR, as Treasury and the IRS continue to study the issue.
Among other things, the Notice indicates that a QDMTT may be creditable if it is otherwise treated as a "foreign income tax," whereas an IIR is classified as a "final top-up tax" that is not creditable if a taxpayer's US federal income tax is taken into account for purposes of the IIR.
The Notice also extends, through tax years "ending before the date that a notice or other guidance withdrawing or modifying the temporary relief is issued (or any later date specified in such notice or other guidance)," the temporary relief from the application of regulations under Sections 901 and 903, which identify foreign taxes for which taxpayers may claim a credit (FTC Creditability Regulations) described in Notice 2023-55.
The Notice further clarifies Notice 2023-55's application of the temporary relief from the FTC Creditability Regulations to partnerships.
On the application of the BEPS GloBE Rules to FTCs, the Notice provides that the forthcoming proposed regulations are anticipated to apply to tax years ending after 11 December 2023. Taxpayers may rely on the guidance in the Notice for tax years ending after 11 December 2023, and on or before the proposed regulations are published, as long as they apply the guidance consistently to all applicable tax years.
In the DCL area, Treasury is studying how the DCL rules should interact with the GloBE Rules, including whether the GloBE Rules' jurisdictional-blending approach should result in a "foreign use" of a DCL such that a taxpayer cannot reflect any item of the DCL in its US taxable income. The Notice explains that the GloBE Rules will not cause a foreign use of any "legacy DCL," meaning generally a DCL the taxpayer incurred in a pre-GloBE tax year, unless the DCL was incurred or increased with a view to reducing the jurisdictional top-up tax or qualifying for the relief in the Notice.
Regarding the application of the GloBE Rules to DCLs, taxpayers may rely on the guidance in the Notice until proposed regulations are published.
A Global Tax Alert is pending.
Treasury and IRS officials this week also provided updates on a number of highly anticipated international regulatory projects.
First, a Treasury official disclosed that proposed regulations on the Section 55 Corporate Alternative Minimum Tax (CAMT) will not be issued before the end of the year, as previously expected. But today (15 December), the IRS released Notice 2024-10, providing "additional interim guidance regarding the application of the CAMT to shareholders of controlled foreign corporations that taxpayers may rely on for Covered CFC Distributions received on or before the date forthcoming proposed regulations are published … and, regardless of when forthcoming proposed regulations are published in the Federal Register, for Covered CFC Distributions received before January 1, 2024." Notice 2024-10 modifies and clarifies Notice 2023-64 interim guidance on the application of the CAMT to an affiliated group of corporations filing a consolidated return for any taxable year.
Separately, the IRS Large Business and International Division (LB&I) now has an active compliance campaign on the CAMT, according to the LB&I's list of active campaigns. The goal of the campaign is to promote voluntary compliance and will focus on the "highest risk" CAMT issues.
A Treasury official this week said a regulatory package on the 1% stock buyback excise tax may still be released before the end of 2023, although publication in the Federal Register may not take place until early 2024. The government reportedly is considering ways to narrow the per se aspect of the funding rule for certain foreign stock repurchases and acquisitions, with the possibility of introducing a "rebuttable presumption."
On the previously taxed earnings and profits (PTEP) front, an IRS official was quoted as saying a PTEP notice will be issued soon, apart from the PTEP proposed regulations that are now expected for release in 2024. The targeted notice reportedly will focus on basis issues associated with liquidations or inbound reorganizations of top-tier controlled foreign corporations.
The government also reportedly plans to finalize proposed regulations under Section 892 in 2024 that address the foreign government exemption on qualified US investments. The coming regulations reportedly will finalize both 2011 and 2022 proposed regulations as a single regulatory package.
Finally, a Treasury official provided an update on the OECD's crypto asset reporting framework (CARF) and confirmed the US is working on regulations to implement the CARF.
The Financial Accounting Standards Board (FASB) on 14 December issued Accounting Standards Update 2023-09 (ASU), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). The ASU also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes.
The amendments apply to public business entities for annual periods beginning after 15 December 2024. For other entities, the amendments apply to annual periods beginning after 15 December 2025.
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