March 12, 2023
U.S. International Tax This Week for March 10
Ernst & Young's U.S. International Tax This Week newsletter for the week ending March 10 is now available. Prepared by Ernst & Young's International Tax Services group, this weekly update summarizes important news, cases, and other developments in international taxation.
President Biden on 9 March released the Administration's FY 2024 Budget and accompanying Treasury Greenbook, calling for $3 trillion in deficit reduction including through tax increases on corporations and wealthy individuals. The proposals include a previously outlined quadrupling of the Inflation Reduction Act (IRA) stock buyback excise tax in IRC Section 4501 from 1% to 4% and a billionaire's tax that would impose a 25% minimum tax — higher than the previously proposed 20% — on total income, inclusive of unrealized capital gains, for taxpayers with wealth of greater than $100 million. Many of the Budget's tax proposals are taken from the President's first Budget (FY 2022), the House-passed Build Back Better Act that did not pass the Senate and last year's Budget (FY 2023).
The President's FY 2024 Budget proposes to increase the tax rate for C corporations from 21% to 28%.
Other corporate tax proposals would amend the Code in several ways to ensure that a transfer of property by a corporation to its shareholder(s) cannot be made through transactions that avoid dividend treatment for the corporation's shareholders. Other corporate measures would limit tax avoidance through inappropriate leveraging of parties to divisive reorganizations, limit losses recognized in liquidation transactions, and prevent basis shifting by related parties through partnerships, among other proposals.
The President announced a number of international tax proposals. The Budget would make several changes to the GILTI regime, including:
- Repealing the reduction in GILTI for a 10% return on qualified business asset investment (QBAI).
- Reducing the IRC Section 250 deduction from 50% to 25%, so generally increasing the effective tax rate to 21% (combined with the above-described corporate tax rate increase).
- Replacing "global averaging" for calculating a US shareholder's GILTI with a jurisdiction-by-jurisdiction calculation and creating a separate foreign tax credit (FTC) limitation for each jurisdiction.
- Reducing the 20% "haircut" on GILTI FTCs to 5%, allowing net operating losses to be carried forward within a single jurisdiction, and allowing FTCs to be carried forward 10 years within a single jurisdiction, and allowing FTCs to be carried forward 10 years within a single jurisdiction.
- Repealing the high-tax exemption to subpart f and effectively repealing the GILTI high-tax election.
- Since GILTI would be deemed to be a compliant global minimum tax due to other proposals in the Budget, taxes paid under an Income Inclusion Rule by a foreign parented group would be creditable against any GILTI tax paid by a US domestic corporation that is a member of that group.
Another proposed international tax change would repeal the base erosion and anti-avoidance tax (BEAT) and replace it with an undertaxed profits rule (UTPR) that is consistent with the UTPR described in the Organisation for Economic Co-operation and Development Pillar Two Model Rules, including a global annual revenue threshold, de minimis exclusions and allocation among jurisdictions. A US domestic minimum top-up tax would be part of the UTPR proposal to protect the US Treasury from the imposition of UTPR by other countries.
The Budget would also repeal the foreign derived intangibles income (FDII) tax benefit and utilize the revenue to provide other unspecified incentives to encourage research and development.
Other international tax proposals in the Budget would limit the full IRC Section 245A dividends received deduction to only those dividends remitted either by controlled foreign corporations or by qualified foreign corporations, expand the application of IRC Section 265 to disallow deductions allocable to a class of foreign gross income that is exempt from tax or taxed at a preferential rate through a deduction, and broaden the definition of an inversion transaction, among numerous other changes.
Treasury Secretary Janet Yellen will testify before the House Ways and Means Committee regarding the Administration's proposed FY 2024 Budget on 10 March.
US government officials this week fanned out to provide some insights on major pending regulatory projects.
A senior Treasury official was quoted as saying that the US is mulling whether to issue further notices on the new corporate alternative minimum tax (CAMT). While additional interim guidance is possible, it would likely have to address issues that cannot be resolved in the absence of a comprehensive set of rules. The official said it is too early to predict when proposed regulations on the CAMT will be released and added that Treasury needs detailed comments on the CAMT to flesh out proposed rules.
Regarding the stock buyback excise tax, an Internal Revenue Service (IRS) official this week said it is willing to consider carveouts, but only if those carveouts are clearly defined and consistent with current bright line tests. Another government official indicated there is a first draft of proposed regulations on the stock buyback provision, but said it now wants to compare what they have with expected comment letters,
And a Treasury official indicated that the Administration apparently is not inclined to expand the current foreign tax credit regulations' single-country royalty withholding exception to include a services withholding carve out, saying the two areas are distinct and do not lend themselves to comparison. In the meantime, however, another Treasury official said additional foreign tax credit guidance is expected to include rule order and the treatment of qualified domestic minimum top-up taxes (QDMTTs). The official was quoted as saying Treasury is continuing to work on foreign tax credit guidance in the context of the BEPS Pillar Two global minimum tax.
The Senate on 9 March confirmed Daniel Werfel to be the next IRS Commissioner for a five-year term. The 54-42 vote was closer than expected.
Latest clean-energy and manufacturing incentives and grants from the US and Europe (March 14)
During this EY Webcast, Ernst & Young professionals will take a deeper dive into next steps of realizing unprecedented government subsidies under the IRA (including Section 48C), IIJA and the EU.
Tax in a time of transition: legislative, economic, regulatory and IRS developments (March 17)
During this EY Webcast, Ernst & Young professionals will provide updates on:(i) the US economy and tax policy; (ii) what’s happening at the IRS; (iii) breaking developments.
Recent Tax Alerts
— Mar 07: Kenya introduces Common Reporting Standards Regulations, 2023 (Tax Alert 2023-0427)
— Mar 07: Malaysia's indirect tax measures in Budget 2023 discussed (Tax Alert 2023-0423)
— Mar 03: Hong Kong requires declaration of prior criminal convictions for Talent Admission Scheme applicants (Tax Alert 2023-0406)
— Mar 03: Singapore implements stricter verification requirements for Employment Pass applicants under the COMPASS framework (Tax Alert 2023-0405)
Canada & Latin America
— Mar 09: Peruvian Tax Court holds international migration into Double Tax Treaty country does not prevent per se application of Double Tax Treaty benefits (Tax Alert 2023-0446)
— Mar 09: Canada's Underused Housing Tax Act may require Canadian entities to file new tax returns (Tax Alert 2023-0444)
— Mar 09: Costa Rican General Customs Directorate issues procedures for scanning of containers and goods at entry into the country (Tax Alert 2023-0443)
— Mar 09: Costa Rican Customs Authorities adjust Customs Information System (TICA) to eliminate 10% tax on imported beers (Tax Alert 2023-0442)
— Mar 09: Peru amends regulations temporary capital gain tax exemption for securities transferred through the Lima Stock Exchange by individuals (Tax Alert 2023-0441)
— Mar 08: Brazil's Federal Revenue Office publishes Normative Instruction on early adoption of new Brazilian transfer pricing rules (Tax Alert 2023-0437)
— Mar 08: Manitoba's budget 2023-24 discussed (Tax Alert 2023-0434)
— Mar 08: Uruguay removes COVID-19-related travel restrictions for all individuals (Tax Alert 2023-0433)
— Mar 07: Brazil modifies taxation of fuels and crude oil (Tax Alert 2023-0429)
— Mar 07: Costa Rican Tax Authority modifies requirements for transportation services of goods destined for export to qualify for VAT exemption (Tax Alert 2023-0426)
— Mar 03: Nunavut's budget 2023-24 discussed (Tax Alert 2023-0414)
— Mar 03: British Columbia's budget 2023-24 discussed (Tax Alert 2023-0413)
— Mar 03: Yukon's budget 2023-24 discussed (Tax Alert 2023-0412)
— Mar 03: Alberta's budget 2023-24 discussed (Tax Alert 2023-0411)
— Mar 09: Belgium extends single permit scheme and “search year” permit to eligible researchers (Tax Alert 2023-0447)
— Mar 09: European Union postpones ETIAS launch to 2024 (Tax Alert 2023-0445)
— Mar 07: Belgian Finance Minister launches proposal for tax reform (Tax Alert 2023-0428)
— Mar 07: UK and EU amend Northern Ireland Protocol with Windsor Framework (Tax Alert 2023-0424)
— Mar 06: Danish parliament debates bill proposing major immigration changes (Tax Alert 2023-0418)
— Mar 03: German Federal Parliament approves Single-Use Plastics levy, Federal Council approval is next step (Tax Alert 2023-0410)
Highlights of this edition include:
- President Biden delivers State of the Union address, proposes fourfold increase in stock buyback excise tax, ‘billionaire surtax’
- House Ways and Means Committee Chairman calls BEPS Undertaxed Profits Rule ‘fundamentally flawed’
Treasury and IRS news
- Proposed PTEP regulations to be released in latter half of 2023
- IRS addresses deductions involving cryptocurrency in two Chief Counsel Advice memos
- US Tax Court approves IRS/Eaton Corporation agreement resolving APA cancellation case
- OECD releases additional administrative guidance on BEPS 2.0 Pillar Two
- OECD’s Pillar Two administrative guidance raises implications for US multinationals
- OECD releases revised methodology for BEPS Action 14 peer reviews, updates on reporting of MAP and APA statistics
IRS Weekly Wrap-Up
Internal Revenue Bulletin
| ||2023-11||Internal Revenue Bulletin of March 13, 2023|
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:
— EY’s Tax and Law Guides. Tax and Law Guides | EY - Global is your guide to planning ventures in the global economy, offering a wealth of tax and business knowledge on more than 150 countries.
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.