November 20, 2022
U.S. International Tax This Week for November 18
Ernst & Young's U.S. Tax This Week newsletter for the week ending November 18 is now available. Prepared by Ernst & Young's National Tax Department in Washington, D.C., this weekly update summarizes important news, cases, and other developments in U.S. taxation.
House Republicans this week won the minimum 218 seats needed to secure a majority in the 118th Congress when it convenes in January 2023; House Republicans are expected to hold a slim majority when the final outstanding elections are called. Democrats will control the Senate; whether the ratio is 51-49 or 50-50 depends on the outcome of the 6 December Georgia runoff election, with a divided government expected to damper legislative activity for the next two years, although bipartisan legislation is possible.
Congress is back in session following the election, but the outlook for the lame-duck session remains unclear. While there appears to be bipartisan support for addressing the Tax Cuts and Jobs Act (TCJA) IRC Section 174 amortization requirement, Democrats are insistent that a Child Tax Credit expansion be part of any tax package, which could also address the IRC Section 163(j) interest deductibility calculation, expensing, and the nonitemizer charitable deduction that was in effect for 2021
There is no indication yet if the full Senate will take up the proposed US-Chile income tax treaty during the lame-duck session. The Senate Foreign Relations Committee approved the proposed accord on 29 March.
Treasury on 18 November released proposed regulations (REG-112096-22; Proposed Regulations) on foreign tax credits. The Proposed Regulations would amend the final foreign tax credit regulations published on 4 January (TD 9959; Final Regulations, as amended by technical corrections to those regulations published on 27 July). Highlights of the Proposed Regulations include the following:
- The Proposed Regulations would significantly relax the cost recovery requirement by providing that a foreign tax law need only allow for recovery of "substantially all" of each item of significant cost or expense, regardless of what the principles underlying any disallowances are. This "substantially all" determination would apply based on the foreign tax law (not a particular taxpayer's individual facts).
- For purposes of applying the "substantially all" test, the Proposed Regulations introduce two safe harbors. The first would treat the foreign tax as not failing the "substantially all" test if the underlying foreign tax law disallows no more than 25% of one or multiple cost items. The second safe harbor would treat the foreign tax as not failing the "substantially all" test if the underlying foreign tax law limits recovery of a single item of significant cost or expense or multiple items within a single category of per se significant costs or expenses based on a "qualifying cap." A qualifying cap is defined as a foreign tax law that caps cost recovery based on no less than 15% of gross receipts, gross income, or a "similar measure." A qualifying cap also includes a foreign tax law that caps cost recovery based on no less than 30% of taxable income or a similar measure.
- The Proposed Regulations introduce an example concluding that a foreign tax does not fail the cost recovery requirement even though the underlying foreign tax law disallows deductions for stock-based compensation.
- A new prong to the source-based attribution requirement for royalties would allow a taxpayer to satisfy the requirement if it has a licensing agreement expressly limiting use of intangible property to the country imposing the tax (the single-country rule). The single-country rule would further permit a licensing agreement to bifurcate a license payment between payment for use within versus outside the country imposing the tax. Taxpayers would not satisfy the single-country rule if they know, or have reason to know, that the licensing agreement misstates the territory in which the intangible property is used or overstates the royalties otherwise eligible for the single-country rule. The Proposed Regulations would require the licensing agreement to be executed no later than the date of the royalty; an exception exists for certain agreements executed no later than 17 May 2023.
- The Proposed Regulations would revise the rules on disregarded reallocation transactions under Reg. Section 1.861-20 by providing that disregarded payments received in exchange for property do not constitute reattribution assets for purposes of allocating and apportioning taxes upon a disregarded remittance.
- The rules on the cost recovery and attribution requirements would apply to foreign taxes paid in tax years ending on or after 18 November 2022. In contrast, the rules on disregarded payments would apply to tax years ending on or after the date that final regulations are filed with the Federal Register. In both cases, taxpayers may choose to apply the rules contained in the Proposed Regulations to earlier tax years if they do so consistently. Taxpayers may also rely on the Proposed Regulations before their finalization, subject to certain requirements.
A senior Internal Revenue Service (IRS) official said this week that proposed regulations under IRC Section 367(d) will be released early next year, rather than by year-end. The regulations will limit a royalty inclusion for intellectual property that left the US and was subsequently repatriated. Earlier this fall, a government official said the proposed regulations "would provide high-level situations where you could turn off that royalty after [the IP] has been repatriated." The official indicated that the upcoming IRC Section 367(d) proposed regulations are separate and apart from a project on the 2023 priority guidance plan that would address changes to IRC Section 367(d) and IRC Section 482 regarding aggregation and the definition of intangible property
The acting commissioner of the IRS Large Business and International Division this week said the IRS is considering using the economic substance doctrine in transfer pricing audits, even where the taxpayer has transfer pricing documentation. "We are thinking about economic substance, of sham transactions, and also assertion of penalties" in transfer pricing cases, according to the official. The IRS also reportedly plans to increase its transfer pricing staff.
New proposed foreign tax credit regulations: what changed, what didn’t, and what could it all mean for your company? (December 1)
During this EY Webcast, Ernst & Young professionals will give an update on the newly released proposed foreign tax credit regulations. The proposed regulations make several changes to address issues identified in the December 2021 final foreign tax credit regulations. Those final foreign tax credit regulations significantly changed the rules on determining what is a creditable foreign income tax; some of these changes had the potential to render many long-standing creditable taxes noncreditable.
How to navigate information requests in transfer pricing audits (December 6)
During this EY Webcast, Ernst & Young professionals will address various cross-border controversy topics and feature insights from professionals around the globe.
Global Treasury: Key tax trends and topics to consider for 2023 (December 8)
During this EY Webcast, Ernst & Young professionals will discuss key tax trends and topics that will affect global treasury activity in 2023. This session will cover, in particular, multinationals’ cash management and risk management activities, as well as the potential effect of Pillar Two and the trends in financial transaction transfer pricing controversy.
Omnishoring: Recent trends in supply chain, tax and global trade (December 13)
During this EY Webcast, Ernst & Young professionals will discuss the current factors that affect supply chain. This session will cover the macroeconomic, geopolitical and operational trends driving multinationals to reconsider the resilience of their supply chain across the manufacturing, logistics, distribution and sales functions.
Recent Tax Alerts
— Nov 17: Global Tax Policy and Controversy Watch | November 2022 edition (Tax Alert 2022-1726)
— Nov 15: China Mainland relaxes COVID-19-related travel restrictions (Tax Alert 2022-1711)
Canada & Latin America
— Nov 15: Government of Canada announces withdrawal of Most-Favored-Nation tariff benefit on goods originating in Russia and Belarus (Tax Alert 2022-1714)
— Nov 14: Argentine Lower House of Congress approves Budget bill for 2023 (Tax Alert 2022-1710)
— Nov 11: Canada's revised EIFEL proposals discussed (Tax Alert 2022-1699)
— Nov 11: Argentine Commission on Foreign Affairs approves bill to ratify MLI (Tax Alert 2022-1697)
— Nov 17: UK Chancellor delivers Autumn Statement (Tax Alert 2022-1727)
— Nov 16: Malta launches new “Startup Residence Programme” for business founders and core employees (Tax Alert 2022-1718)
— Nov 16: UAE issues resolution on tax residency (Tax Alert 2022-1723)
— Nov 16: Israeli court rules IP value is six times higher (Tax Alert 2022-1721)
— Nov 11: Australia announces reshaping skilled migration and resetting processing priorities (Tax Alert 2022-1702)
— Nov 11: New Zealand's minimum wage threshold to increase while reform remains a work in progress (Tax Alert 2022-1701)
— Nov 15: The Latest on BEPS and Beyond | November 2022 (Tax Alert 2022-1713)
IRS Weekly Wrap-Up
Internal Revenue Bulletin
| ||2022-47||Internal Revenue Bulletin of November 21, 2022|
EY’s Tax News Update, the leading source for news, analysis, and reference materials for corporate tax professionals, has a variety of content of interest to international tax practitioners, including:
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Because the matters covered herein are complicated, U.S. International Tax This Week should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor.