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The US Congress has now adjourned for the August recess and will reconvene in September after Labor Day.

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Treasury and the IRS on 6 August released proposed regulations (REG-10512 8-23) addressing the interaction of the dual consolidated loss (DCL) rules with the BEPS Pillar Two Global Anti-Base Erosion Model Rules. The proposed regulations would also revisit several other important aspects of the DCL rules.

In IRS Notice 2023-80, the government announced that it was studying the impact of the Pillar 2 rules (including a Qualified Domestic Minimum Top-up Tax (QDMTT), the Income Inclusion Rule (IIR) and Transitional CbCR Safe Harbors (TCSHs)) on the DCL rules.

The Proposed Regulations provide that a QDMTT or an IIR may be an income tax for purposes of the DCL rules. As a result, a foreign use of a DCL may result from a DCL being taken into account in (i) computing a taxpayer's QDMTT or IIR liability, or (ii) qualifying for the TCSHs. No guidance is provided, however, on interactions between the DCL rules and the UTPR (commonly referred to as the undertaxed profits rule), although Treasury indicated that it would continue to analyze issues surrounding the UTPR.

The regulations also address several other important issues under the DCL regulations, including proposing to:

• Eliminate the favorable "inclusions on stock" rule in the existing DCL regulations in all but very limited circumstances (the rule applies if a hybrid entity separate unit (HESU) owns an equity interest in a CFC or other corporation)
• Modify the intercompany transaction regulations under Treas. Reg. Section 1.1502-13
• "Clarify" that a disregarded payment that results in income or deductions to a HESU is disregarded for DCL purposes
• Include a new "disregarded payment loss" rule that would, in certain circumstances, require a domestic owner of certain disregarded entities and foreign branches to include in income an amount equal to the "disregarded payment loss"
• Add a new anti-avoidance rule that would apply to transactions that create double deduction outcomes that avoid the purposes of the DCL rules

The proposed regulations are generally proposed to apply immediately (i.e., when filed with the Federal Register). The proposed change to the intercompany-transactions rules would apply when final regulations are filed with the Federal Register.

A Tax Alert on the proposed regulations is forthcoming.