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January 5, 2024

Report on recent US international tax developments - 5 January 2024

In Announcement 2024-5, issued on 29 December 2023, the IRS announced that the US-Hungary income tax treaty ceased to have effect in regard to withholding "at source" for amounts paid or credited on or after 1 January 2024. The treaty also ceased to have effect in regard to taxable periods beginning on or after 1 January 2024. The US government notified Hungary on 8 July 2022 that it planned to terminate the treaty. In accordance with Article 26 of the agreement, the treaty termination was effective on 8 January 2023.

Also, the US and Hungary issued a joint statement on 22 December 2023, indicating there will be spontaneous exchange of country-by-country (CbC) reports for fiscal years of multinational enterprise groups beginning on or after 1 January 2022 and before 1 January 2023.

The IRS issued Notice 2024-16 on 28 December, providing interim guidance on the treatment of basis adjustments under Section 961(c) on an inbound liquidation or asset reorganization. The Notice allows domestic acquiring corporations in certain inbound liquidations and asset reorganizations (inbound transactions) to determine basis in the stock of a controlled foreign corporation (CFC) acquired in the transaction (an acquired CFC) as if the transferor CFC's basis from subpart F and GILTI inclusions (Section 961(c) basis) were adjusted basis in the acquired CFC and carries over under Sections 334(b) and 362(b).

Section 961(c) basis applies, by statute, solely for purposes of Section 951(a). Absent the new rule in Notice 2024-16, many advisors were concerned that Section 961(c) did not convert into adjusted basis. This has complicated inbound transactions for CFCs with significant previously taxed earnings and profits in lower-tier CFCs, potentially resulting in non-economic gain when those earnings and profits are distributed or stock of those lower-tier CFCs is sold.

Taxpayers may rely on the interim guidance in the Notice for transactions completed before the date of the forthcoming regulations, provided the taxpayer and all related parties consistently apply all the rules in the Notice.

The IRS issued Notice 2024-11 on 28 December, providing an updated list of treaty partner countries that is relevant in determining whether a corporation is a "qualified foreign corporation" for purposes of applying Section 1(h)(11). Since this list was updated in 2011, a new US income tax treaty with Chile entered into force, on 19 December 2023, so the Notice adds Chile to the list. Additionally, the Notice provides that US income tax treaties with Russia and Hungary no longer meet the requirements of Section 1(h)(11)(C)(i)(II) and thus those countries are removed from the list.

The IRS this week issued Revenue Procedure 2024-1 and Revenue Procedure 2024-3, significantly broadening the scope of available "comfort letter" rulings relating to certain issues under Sections 332, 351, 355, 368 and 1036. Revenue Procedure 2024-1 also provides that issues involving the Section 4501 stock buyback excise tax fall within the jurisdiction of the Associate Chief Counsel (Corporate).

The new IRS Associate Chief Counsel (Corporate) last fall had indicated the office would expand the scope of available letter rulings.

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Contact Information

For additional information concerning this Alert, please contact:

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