EU Foreign Subsidies Regulation will apply to US and multinational companies active in the EU as of July 2023

The EU Foreign Subsidies Regulation will apply to US and multinational companies active in the EU beginning July 12, 2023. The European Commission (Commission) may begin “ex officio” investigations of financial contributions that companies receive from non-EU governments. The Commission may request information and conduct inspections within and outside the EU in order to determine if the financial contribution is a foreign subsidy that distorts the EU market.

Beginning October 12, 2023, companies anticipating EU M&A or bidding on EU public procurement (government) contracts above a certain amount will be required to notify the Commission of financial contributions received in the prior three years. The potentially broad definition of “financial contribution” may implicate a number of ordinary course transactions, including disclosure of certain tax agreements and incentives.

For more information about the EU Foreign Subsidies Regulation, see our legal alert here.

IRS releases three practice units focused on CFC indebtedness

On May 16, 2023, the IRS released three practice units (IPUs), each of which focuses on issues relevant to CFC indebtedness. Specifically, the IPUs examine the deductibility of interest expense under section 267(a)(3), whether intercompany debt should be treated as debt for US federal income tax purposes, and the interest expense limitation under section 163(j) for CFCs following the Tax Cuts and Jobs Act of 2017 (the TCJA). Although not binding, each IPU provides the IRS’ view of the treatment of issues related to CFC debt.

The IPU that examines the deductibility of interest expense under section 267(a)(3) includes a discussion of the interaction of section 267(a)(3) with cash pooling arrangements, which many multinational groups use in the ordinary course. In addition, the IPU highlights the section 958(b)(4) downward attribution issue created by the TCJA and states that an amount that is income of a related foreign person is exempt from the application of section 267(a)(3)(B)(i), provided that the related foreign person is a CFC that does not have any section 958(a) US shareholders. Notably, the IRS released an IPU in August 2022, addressing the section 958 stock ownership rules, including the repeal of section 958(b)(4).

IRS releases memo regarding APA requests

On May 1, 2023, the IRS’ Large Business and International Division’s (LB&I) Treaty and Transfer Pricing Operations practice area publicly released a memorandum that provided additional instructions to its staff on handling Unilateral and Bilateral Advance Pricing Agreements (APAs).

The IRS indicated the guidance is to identify potential roadblocks to proposed APAs and provide feedback on other opportunities for taxpayers to obtain certainty on covered transactions. The memorandum seems to indicate that all new and renewal APAs will need to be screened on certain criteria through a prefile memorandum review process. To the extent a taxpayer submits an APA without screening, they risk rejection based on such criteria. IRS LB&I officials indicated that this new process is not intended to limit the number of APAs, however, that may depend on how the process is implemented.

Guernsey, Jersey, Isle of Man announce intention to implement Pillar Two framework

In a joint statement issued May 19, 2023, Guernsey, Jersey, and Isle of Man confirmed their intention to implement OECD Pillar Two rules beginning in 2025. The statement notes that the intention of the three crown dependencies is to implement an “income inclusion rule” and a domestic minimum tax to provide for a 15% effective tax rate for certain multinational corporations. Notably, the joint statement does not indicate plans to implement Pillar Two's undertaxed profits rule. Isle of Man Treasury Minister Dr. Alex Allinson MHK and Jersey Minister for Treasury and Resources Ian Gorst both noted that the so-called zero/ten corporation tax regime will continue to apply to companies that are out of scope of the new rules, under which most Jersey businesses are subject to the standard zero rate of income tax and financial services companies must pay a 10 percent rate.

The statement asserts that the three island jurisdictions will “continue to engage with diverse and widespread stakeholders – across a very broad range of sectors and geographies – to gather further information and to provide appropriate notice to allow businesses to prepare for these changes.” Upon implementation, the islands would be among 138 jurisdictions of the 142-member OECD inclusive framework on base erosion and profit shifting to implement the plan.