NYSBA releases report to the Treasury addressing FTC considerations

On May 31, 2023, the New York State Bar Association (NYSBA) released a report also sent to the Treasury that addresses foreign tax credit considerations with respect to taxes imposed under Pillar Two. The NYSBA notes that under existing rules, the application of the foreign tax credit provisions to taxes imposed under Pillar Two is unclear, given certain taxes have features of income taxes, which generally are creditable, as well as features of excise and anti-avoidance taxes, which generally are not creditable. Among other recommendations, the report suggests that Treasury issue regulations clarifying that taxes imposed under Pillar Two are creditable taxes for purposes of the foreign tax credit provisions. In addition, the report recommends that Treasury implement regulations clarifying the application of sections 861, 901, 904, and 960 to such taxes.

Corporate Alternative Minimum Tax guidance generally expected to be broadly applicable rather than industry specific

A Treasury official recently commented on the nature of the forthcoming corporate alternative minimum tax (CAMT) guidance. Speaking to members of the insurance industry, the Treasury official stated that “there are some industry-specific things [in the forthcoming guidance], but on the whole, we do prefer to find more general answers.”

The Treasury official also addressed concerns regarding the hierarchy of a company’s financial statements in the context of computing income for purposes of the CAMT, as well as concerns regarding hedging transactions, stating that Treasury is “considering all of [comments] carefully and formulating guidance . . . ”, and that Treasury is “trying to consider all of the different scenarios that [they have] been informed about but also to see if [Treasury] can integrate that into more broadly applicable rules.”

IRS APMA Program meets with Indian Tax Authority regarding APA resolution

The week of May 22, 2023, the IRS’s Advance Pricing and Mutual Agreement (APMA) Program met with the Indian Tax Authority in Washington, D.C. to discuss the resolution of various US–India Bilateral Advance Pricing Agreements (APAs). The two governments plan to meet three times a year in person in an effort to resolve the more than 100 US–India Bilateral APA requests that are pending.

The last in-person meeting between the two governments was in December 2022, in Delhi, India, where the two governments agreed to resolve over 20 US–India Bilateral APAs or Renewal APAs. This was significant, as there had only been approximately 20 prior APAs agreed to over the past five years. A few companies indicated concerns that the mark-ups in certain cases were higher than expected and as a result are considering withdrawing their APA requests.

We understand that the IRS and Indian Tax Authority discussed several pending cases during this recent meeting; however, agreement was reached on approximately five APAs. The key issues addressed were the cost plus mark-up or return for the Indian operations and the cost basis to which the mark-up should be applied (as opposed to a passed-through reimbursement at cost).

It is expected that the two governments will meet again later this year in India.

US-Chile Income Tax Treaty passes Senate Foreign Relations Committee

The Senate Foreign Relations Committee voted to move the US-Chile Income Tax Treaty (Treaty) forward with a vote of 20-1, with Senator Rand Paul casting the sole “no” vote. The Treaty heads to the full Senate for a vote to consent to ratification by resolution. If ratified, the Treaty would reduce double taxation and withholding tax rates and is generally consistent with the US model tax treaty. The Treaty would be the third US tax treaty with a Latin American country.

Senator Bob Menendez, Senate Foreign Relations Committee chair, celebrated the approval and said, “I believe this treaty is vital to strengthening US competitiveness and growing US foreign direct investment in Chile . . . . [T]his treaty is especially critical to diversifying [mineral] supply chains.” Chile is one of the world’s largest lithium producers, an element vital to manufacturing semiconductor chips.

New Zealand considers digital tax and plans to implement GloBE Rules

New Zealand proposed a global minimum tax in a draft law released on May 19, 2023, in line with Pillar Two. The global minimum tax includes an income inclusion rule and an under-taxed profits rule (UTPR), so that income is taxed at 15%. The rules as drafted will automatically conform to the OECD model rules, as the OECD makes changes. If passed, the measures will go into effect on January 1, 2024.

Although New Zealand has committed to Pillar One, the country is considering enacting its own digital services tax if Pillar One is not implemented. “The international tax framework needs to adapt to shifts in the global economy, including increased cross-border activity and digitalization…we need to be prepared to put in place our own rules to ensure multinationals pay a fair share of tax,” the government explained in its 2023 budget report. Pillar One, if implemented, would subject multinational companies’ profits to tax in countries in which they do business without a significant physical presence. Pending agreement on Pillar One, many countries have agreed to withdraw their digital services taxes and to refrain from implementing new ones. However, some countries continue to signal that they may enact individual digital taxes if Pillar One is not finalized.