Treasury releases guidance on the GloBE rules and foreign tax credit: PwC

In brief

Treasury and the IRS on December 11 released Notice 2023-80, announcing their intention to issue proposed regulations to address application of the foreign tax credit (FTC) and related rules and the dual consolidated loss (DCL) rules to certain types of taxes described in the GloBE Model Rules. The Notice also extends and modifies the temporary relief described in Notice 2023-55 for determining whether a foreign tax is eligible for an FTC under Sections 901 and 903. The Notice addresses application of the temporary relief with respect to partnerships and their partners.

Comments on the guidance provided on the GloBE Model Rules and the FTC and the GloBE Model Rules and DCLs should be submitted by February 9, 2024.

Action item: Taxpayers should consider submitting comments. PwC will publish additional analysis of the Notice within the coming days.

In detail

Notice 2023-80 describes rules that would address the treatment of certain taxes, including Income Inclusion Rules (IIRs), Undertaxed Profit Rules (UTPRs), and Qualified Domestic Minimum Top-up Taxes (QDMTTs).

GloBE Model Rules and the FTC

Treasury and the IRS intend to issue proposed regulations consistent with the guidance regarding the following:

Creditability and deductibility of GloBE Top-up Taxes that, in computing the amount of tax, consider the amount of tax that other countries (including the United States) impose on the direct or indirect owners of an entity or branch with respect to the entity’s or branch’s GloBE Income (defined as ‘final Top-up Taxes’);
How the separate levy rules of Reg. 1.901-2(d) apply with respect to an IIR, UTPR, and QDMTT;
Rules for determining the person by whom a QDMTT is considered paid under Reg. 1.901-2(f) when a QDMTT is computed by reference to the income of two or more persons.

Additionally, Treasury and the IRS intend to amend the nonduplication requirement in Reg. 1.903-1(c)(1)(ii) to ensure that the application of a QDMTT does not cause an in-lieu-of tax to become non-creditable.

Forthcoming proposed regulations are expected to provide rules consistent with the rules described in Notice 2023-80 that will apply to taxable years ending after December 11, 2023.

A taxpayer may rely on the guidance described in the Notice related to the GloBE Model Rules and the FTC for taxable years that end after December 11, 2023, and on or before the date proposed regulations are published in the Federal Register, provided that the taxpayer consistently follows the guidance in its entirety for all those taxable years. Additionally, for taxable years that begin on or after December 28, 2021, and end on or before December 11, 2023, a taxpayer may rely on the guidance related to the non-duplication requirement for in-lieu-of taxes.

Observation: The Notice announces that future regulations will treat each of an IIR, UTPR, and QDMTT imposed by a foreign country as a separate levy under Reg. 1.901-2(d) for purposes of applying the various FTC rules.

Observation: Notice 2023-80 provides that a taxpayer may neither claim an FTC nor a deduction for a ‘final Top-Up Tax’ if that taxpayer’s US federal tax liability would figure into the determination of the final Top-Up Tax liability. This rule was apparently motivated by a desire to avoid recursive calculations under the Pillar Two and US FTC rules, but raises questions about its statutory origins that are unanswered in the Notice.

Observation: The definition of final Top-Up Taxes appears intended to exclude QDMTTs, but not domestic minimum taxes that take into account shareholder level taxes imposed on the income of the entity (e.g., a so-called ‘DMTT’ or ‘Domestic IIR’).

Observation: The rules for allocating QDMTTs replace the existing rules dealing with taxes imposed on the combined income of multiple persons and adopt an approach that will disproportionately allocate QDMTT tax liability to persons with a low effective tax rate prior to the application of the QDMTT.

GloBE Model Rules and dual consolidated losses

Treasury and the IRS are studying the extent to which the DCL rules should apply with respect to the GloBE Model Rules, including the extent to which aggregation should result in a foreign use of a DCL, and the extent to which the GloBE Model Rules should cause an entity that is not otherwise subject to an income tax of a foreign jurisdiction to be a dual resident corporation or a hybrid entity under Reg. 1.1503(d)-1(b)(2) or (3), or should prevent such an entity from being a transparent entity under Reg. 1.1503(d)-1(b)(16). Treasury and the IRS are also studying similar issues in the context of other provisions (e.g., the interaction of the anti-hybrid rules under Sections 245A(e) and 267A with the GloBE Model Rules).

Treasury and the IRS intend to issue proposed regulations with respect to DCLs incurred in (i) taxable years ending on or before December 31, 2023, or (ii) provided the taxpayer’s taxable year begins and ends on the same dates as the fiscal year of the multinational group that could take into account as an expense any portion of a deduction or loss comprising such a DCL, taxable years beginning before January 1, 2024, and ending after December 31, 2023 (collectively, legacy DCLs).

Under the proposed rule, a foreign use would not be considered to occur with respect to a legacy DCL solely because all or a portion of the deductions or losses that comprise the legacy DCL are taken into account in determining the Net GloBE Income for a particular jurisdiction. However, this proposed rule would not apply to any DCL that was incurred or increased with a view to reducing the Jurisdictional Top-Up Tax or qualifying for the proposed rule described in Notice 2023-80.

Taxpayers may rely on the guidance for the GloBE Model Rules and DCLs until proposed regulations are published in the Federal Register.

Observation: The Notice only addresses ‘legacy’ DCLs and does not provide guidance as to whether and how foreign use should be assessed in the context of Pillar Two for DCLs generated in future years. For taxpayers with calendar years, therefore, the DCL provisions with respect to foreign use could potentially be relevant in January 2024 when certain countries’ Pillar Two legislation becomes applicable.

Extension and modification of temporary relief in Notice 2023-55

Notice 2023-55 provides temporary relief in determining whether a foreign tax meets the definition of a foreign income tax under Sections 901 and 903 for foreign taxes paid in any taxable year beginning on or after December 28, 2021, and ending on or before December 31, 2023, provided that the taxpayer satisfies certain requirements. Notice 2023-80 modifies the relief period to mean taxable years beginning on or after December 28, 2021, and 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).

Notice 2023-80 also addresses questions regarding the application of the temporary relief provided in Notice 2023-55 to partnerships, including whether the partnership or its partners would apply the temporary relief with respect to foreign taxes paid or otherwise required to be reported by such partnership.

Observation: Notice 2023-80 makes the relief period to which Notice 2023-55 applies indefinite, as the relief period includes taxable years ending before future guidance is issued. Such future guidance could therefore exclude the year in which it is issued from the relief period. Accordingly, taxpayers will not be certain whether a taxable year is included within the relief prior until after the taxable year ends.