November 12, 2023
U.S. International Tax This Week for November 10
Ernst & Young's U.S. International Tax This Week newsletter for the week ending November 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.
Treasury on 9 November released highly anticipated proposed regulations (REG-132422-17) under IRC Section 987 (the Proposed Regulations) with guidance on determining income and currency gain or loss with respect to a qualified business unit (an IRC 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 IRC 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 IRC Section 987 taxable income or loss and net unrecognized IRC 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 IRC 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. An EY Tax Alert is pending.
A US District Court in US v. Liberty Global denied a company's dividends-received deduction under IRC Section 245A after applying the codified economic substance doctrine (the Codified ESD) under IRC 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 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 Treasury official said that Amount B in Pillar One is also of major importance for the US. 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.
International tax talk quarterly series with the EY Global Tax Desk Network (November 14)
During this EY Webcast, Ernst & Young professionals will provide you with information on major tax law changes in the countries and jurisdictions covered by our US-based Global Tax Desk Network.
Tax in a time of transition: Legislative, economic, regulatory and IRS developments (November 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; and (iii) breaking developments.
Recent Tax Alerts
— Nov 09: Uruguay and United States sign exchange-of-information agreement (Tax Alert 2023-1868)
— Nov 08: Double tax treaty with United States inches towards Chilean ratification (Tax Alert 2023-1858)
— Nov 08: US court denies Liberty Global's claim for the IRC Section 245A dividends-received deduction on economic substance doctrine grounds (Tax Alert 2023-1857)
— Nov 06: US IRS rules that a foreign limited partnership indirectly owned by a foreign government is not a per se corporation (Tax Alert 2023-1841)
Canada & Latin America
— Nov 07: Peru implements new residence regulations for nationals of Mercosur and Andean Community Member States (Tax Alert 2023-1852)
— Nov 07: Canada Revenue Agency publishes anticipated list of designated notifiable transactions (Tax Alert 2023-1851)
— Nov 07: OECD releases tax report to G20 Finance Ministers and seventh annual progress report of the Inclusive Framework (Tax Alert 2023-1849)
— Nov 07: Hungary's draft legislation on BEPS 2.0 Pillar Two introduced to Parliament (Tax Alert 2023-1846)
— Nov 07: Denmark announces new short-term work permit exemption for eligible third-country nationals (Tax Alert 2023-1845)
— Nov 07: UK government announces new visa scheme for businesses to attract AI talent (Tax Alert 2023-1844)
— Nov 06: OECD and country officials discuss BEPS 2.0 Pillars One and Two and other OECD tax work (Tax Alert 2023-1838)
— Nov 09: UAE Minister of Economy announces single unified visa for Gulf Cooperation Council countries (Tax Alert 2023-1860)
— Nov 06: Australia expands pathways to permanent residence (Tax Alert 2023-1835)
Highlights of this edition include:
- OECD releases text of Amount A Pillar One MLC, Treasury announces consultation
- House of representatives elects new Speaker
- US-Taiwan legislation moves forward
- IRS proposed regulations would amend Section 367(b) regulations applying to certain cross-border triangular reorgs, inbound nonrecognition transactions
- US officials offer update on pending guidance
- IRS informing taxpayers of Schedule UTP non-compliance
- IRS sending compliance alerts to US subs of foreign-owned corporations
- IRS to broaden scope of corporate PLRs
- US-Chile tax treaty’s US reservations reflect current policy
- IRS appeals Tax Court’s latest decision in Medtronic
- US, Israel sign CAA on exchange of CbC reports
- Cyprus issues clarification note on future CbC exchange agreement with US
- OECD/G20 Inclusive Framework launches Multilateral Convention to implement Pillar Two Subject to Tax Rule
- BEPS IF considering Pillar Two guidance on deferred tax assets
- OECD FTA agrees on action to support continued digital transformation, delivering Pillar Two and capacity building
- OECD releases outcomes of sixth peer review on BEPS Action 13 on CbCR
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.