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December 11, 2023

BREAKING TAX NEWS | New guidance addresses interaction of FTC and DCL rules with taxes imposed under GloBE rules

Today, the Treasury Department (Treasury) released a notice (Notice 2023-80; Notice) with guidance on the interaction of the foreign tax credit (FTC) rules and dual consolidated loss (DCL) rules with top-up taxes imposed via an Income Inclusion Rule (IIR) or a Qualified Domestic Minimum Top-Up Tax (QDMTT) under the OECD's Global Anti-Base Erosion Model Rules (GloBE Rules). Treasury 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 are studying the issue.

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 IRC Sections 901 and 903, which identify foreign taxes for which taxpayers may claim a credit (FTC Creditability Regulations) described in Notice 2023-55. Highlights of Notice 2023-80 include the following:

  • The Notice indicates that a QDMTT is generally creditable, whereas an IIR is classified as a "final top-up tax" that may or may not be creditable depending on whether the taxpayer's US federal income tax may be taken into account for purposes of the IIR.
    • The Notice defines through examples a "final top-up tax" to include an IIR because, unlike a QDMTT, an IIR is computed by taking into account the pushdown of taxes imposed on direct or indirect owners that are located in other countries.
    • Final top-up taxes are not considered in determining the application of the high-tax exception or high-tax exclusion from subpart F or tested income, respectively.
    • Final top-up taxes are not deductible for US shareholders that elect to take the benefit of FTCs, regardless of whether an FTC is allowed for the specific final top-up tax.
    • In general, each tax imposed by a foreign country with respect to an IIR, UTPR or QDMTT is treated as a separate levy under Treas. Reg. Section 1.901-2(d).
    • Treasury intends to revise the IRC Section 903 regulations to clarify that an in lieu of tax is not required to be imposed in substitution of all net income taxes imposed by the foreign country to meet the non-duplication requirement.
    • A QDMTT imposed on the income of two or more persons is determined based on each person's "QDMTT Allocation Key" (as described in the Notice), rather than the rules under Treas. Reg. Section 1.901-2(f)(3).
  • 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 GloBE Rules will not cause a foreign use of any "legacy DCL," meaning generally a DCL that 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.
  • The Notice clarifies Notice 2023-55's application of the temporary relief from the FTC Creditability Regulations to partnerships.

On the application of the GloBE Rules to FTCs, the Notice provides that the forthcoming proposed regulations are anticipated to apply to tax years ending after December 11, 2023. Taxpayers may rely on the guidance in the Notice for tax years ending after December 11, 2023, and on or before the proposed regulations are published, as long as they apply the guidance consistently to all applicable tax years. For tax years that begin on or after December 28, 2021, and end on or before December 11, 2023, a taxpayer may rely on the guidance on the non-duplication requirement. Regarding the application of the GloBE Rules to DCLs, taxpayers may rely on the guidance in the Notice until proposed regulations are published.

A detailed Tax Alert is forthcoming.

Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor