Notice 2023-80, published on Dec. 11, 2023, announced that Treasury and the IRS intend to issue proposed regulations to address, among other things, the interaction of the FTC and DCL rules with the Pillar 2 global minimum tax model rules. In the meantime, the notice provides interim guidance on how these rules interact with Pillar 2. Notice 2023-80 also extends the temporary relief in Notice 2023-55 by further delaying application of the final FTC regulations published in January 2022 and providing guidance on the application of the relief to partnerships and their partners.
Background
Pillar 2 is a framework of global anti-base erosion (GloBE) minimum tax rules for multinational entities (MNEs) with an agreed-upon effective tax rate of 15%. The GloBE rules generally apply to MNEs with a consolidated annual revenue of 750 million euros or more. The rules operate with three top-up tax rules: an income inclusion rule (IIR), an undertaxed profits rule, and a qualified domestic minimum top-up tax (QDMTT).
FTC rules for top-up taxes
Under Notice 2023-80, a U.S. taxpayer generally cannot claim a credit for a final top-up tax that takes into account that U.S. taxpayer’s U.S. federal income tax liability when computing the final top-up tax. In the indirect ownership context, a final top-up tax is treated as if it were a creditable tax at the partnership or controlled foreign corporation level, but the determination of the amount of the foreign tax credit is made at the partner or U.S. shareholder level as applicable. In addition, a top-up tax is not taken into account for purposes of the high-tax exception to Subpart F or global intangible low-taxed income.
Crowe observation
Notice 2023-80 addresses potential circularity in computing a taxpayer’s creditable amount of foreign tax by excluding top-up taxes that take into account that taxpayer’s U.S. income tax liability. However, depending on the circumstances, minority stakeholders might still be able to claim the credit.
The gross-up rule under IRC Section 78 and the deduction disallowance rule under IRC Section 275(a)(4) apply to a top-up tax irrespective of the creditability of the top-up tax. In other words, the IRC Section 78 gross-up amount of a top-up tax must be included in a taxpayer’s taxable income even when the top-up tax is ineligible for a foreign tax credit. Furthermore, the taxpayer is not permitted to take a deduction for any top-up tax paid.
Notice 2023-80 expressly defines each top-up tax as a separate levy for purposes of Treasury Regulation Section 1.901-2(d), even if the country imposes the top-up tax by adjusting the base of any other levy. Therefore, a top-up tax that is not eligible for an FTC under the rules of Notice 2023-80 does not affect the FTC eligibility of other taxes imposed by the same country.
The notice also provides rules for determining the amount of a QDMTT attributable to a taxpayer when it is computed by reference to the income of two or more persons.
To make sure that a QDMTT that qualifies as an in-lieu-of tax is creditable, the notice provides that Treasury and the IRS also intend to amend the nonduplication requirement in Treasury Regulation Section 1.903-1(c)(1)(ii).
Notice 2023-80 provides that proposed regulations consistent with the notice will apply to taxable years ending after Dec. 11, 2023. Taxpayers also can rely on these rules for taxable years ending after Dec. 11, 2023, and on or before the date the proposed regulations are published in the Federal Register, provided that the taxpayer consistently follows the guidance in its entirety for all taxable years. Additionally, taxpayers can rely on the notice’s rules regarding Treasury Regulation Section 1.903-1(c)(1)(ii) for taxable years that begin on or after Dec. 28, 2021, and end on or before Dec. 11, 2023.
DCL rules
The DCL rules prevent double-dipping with respect to the use of losses. Double-dipping arises when the same economic loss reduces both income subject to U.S. income tax and, potentially, income of a foreign corporation subject to non-U.S. tax. The DCL rules generally disallow the loss for U.S. tax purposes unless the taxpayer meets certain requirements to establish that the losses cannot or will not be used to offset income of a foreign corporation.
Questions have arisen about the interplay of the DCL rules and the top-up tax rules. Notice 2023-80 does not provide detailed rules on this issue but does expressly indicate that until proposed regulations are published, taking legacy DCLs into account under a particular jurisdiction’s Pillar 2 rules generally will not be treated as foreign use of the loss.
Extension and modification of temporary relief under Notice 2023-55
Notice 2023-55 provided temporary relief from the application of the final FTC regulations published on Jan. 4, 2022, permitting taxpayers to rely, in large part, on the prior FTC regulations for tax years beginning on or after Dec. 28, 2021, and ending on or before Dec. 31, 2023. Notice 2023-80 extends this relief period until other guidance withdrawing or modifying the temporary relief is issued (or a later date specified in other guidance).
Notice 2023-80 also clarifies how the temporary relief of Notice 2023-55 applies to partnerships and their partners. Under Notice 2023-80, a consistency requirement contained in Notice 2023-55 applies to partnerships and their controlling partners (as determined by the partnership) as well as other taxes paid by or attributed to the controlling partners.
Looking ahead
IIRs and QDMTTs have been implemented in many countries beginning in 2024. Given the guidance provided in Notice 2023-80, taxpayers will need to conduct a thorough analysis of their global tax footprint to determine whether each relevant component of regular income tax, IIR tax, and QDMTT in a foreign country is a creditable foreign tax for U.S. tax purposes. Separately, in light of the extension of the temporary relief under Notice 2023-55, taxpayers that applied the former FTC regulations should work with their tax advisers to evaluate whether to continue applying those regulations going forward. Meanwhile, partnerships and partners should be mindful of the consistent application requirement and the single benefit requirement to comply and avoid potential complications.
