The Internal Revenue Service and the Treasury Department plan to issue regulations on the interplay between foreign tax credits, dual consolidated losses and global minimum tax rules from the Organization for Economic Cooperation and Development.
Last December, the IRS and the Treasury announced in
The notice also extends temporary relief provided last July in
The OECD's Pillar Two rules for a global minimum tax include a so-called "top-up tax" that is supposed to keep multinationals from using their country's tax breaks, such as foreign tax credits, to avoid paying at least a minimum level of taxes.
Under Notice 2023-80, according to Crowe, a U.S. taxpayer generally can't 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 figuring the final top-up tax. The notice addresses potential workarounds in calculating the creditable amount of a taxpayer's foreign taxes by excluding top-up taxes that take into account the taxpayer's U.S. income tax liability. But, depending on the circumstances, minority stakeholders might still be able to claim the credit.
The OECD's Pillar Two rules are already provoking a backlash in Congress,
"It's really going to depend on the next election as to how the U.S. moves forward with respect to Pillar Two," said John Kelleher, a global tax services partner at Crowe. "There's a lot of things that are in our Tax Code currently that are similar, but don't meet some of the Pillar Two standards. The current administration is in favor of it. The Treasury Secretary is in favor of it. But Congress is basically not, so I think it's going to depend on how the next election comes out as to what the U.S. will do."
The Inflation Reduction Act of 2022 created the U.S. version of a corporate alternative minimum tax by imposing at least a 15% levy on the adjusted financial statement income of large corporations for taxable years beginning after Dec. 31, 2022. However, that's not the same as the Pillar Two rules from the OECD.
The rules are affecting the tax planning of multinationals abroad as well as some U.S.-based companies that do business overseas, though it's mostly the larger companies.
Pillar Two includes three rules that apply to companies with over €750 million ($991.9 million) in revenues, according to the
"Our client base isn't probably as susceptible to these rules as maybe some of the others," said Kelleher. "A lot of our clients are just above or just below that 750 million threshold. Maybe their foreign operations meet one of the de minimis thresholds that are out there for the first couple of years. They're sort of looking at [the rules], but I don't know that they're necessarily doing anything proactive."
He noted that the first tax return for the GloBE (Global anti-Base Erosion) minimum tax rules isn't due until June 2026.
"People feel like they've got some time," said Kelleher. "Public companies are a little bit different. They've got to put something in their first-quarter financial statements, so they're probably taking a little bit more of a refined look, but I don't know that they're necessarily doing anything per se to structure transactions. I think time will tell."
He has some advice for what clients should do in the meanwhile.
"Look at making sure you know who's in your group for purposes of determining how you might have to file your GloBE return," he said. "That's going to be key. We do a lot of work with private equity clients, so there are some special rules under ASC 946 [the Financial Accounting Standards Board's financial services standard for investment companies] that allowed them to exclude the fund level from the reporting and operate at a portfolio company level. The first thing is understanding who's in your group. And then the next thing is making sure that you understand where you're able to take advantage of the transitional safe harbors, which really, at least through 2026, gets you out of reporting for GloBE in each jurisdiction in which you're qualified."
The IRS and the Treasury will need to decide on exactly how foreign tax credits will work with the OECD rules.
"The IRS really hasn't hasn't ruled on how these taxes will be creditable," said Kelleher. "They sort of said, in general, they think that the Qualified Domestic Minimum Top-up tax should be a creditable tax, which makes sense. It's just basically an additional tax on a foreign entity in its jurisdiction. There is some uncertainty as to whether or not the income inclusion rule, which is the CFC [controlled foreign corporation] tax, will be considered a creditable tax. There's a lot more that needs to be figured out. The IRS is looking, in general, at how or what taxes are considered to be foreign income taxes. The regulations that came out in 2023 have been put on hold. There's a lot more to be said from the IRS as to how they're going to approach what's a creditable tax."
Companies will also want to better understand how the dual consolidated loss rules are affected by Pillar Two. Those rules from the IRS aim to prevent double-dipping on claiming tax losses by different parts of a company.
"What those dual consolidated loss rules are designed to do is prevent taking advantage of an NOL [net operating loss] in two separate jurisdictions," said Kelleher. "What taxpayers have to do is they have to make an election when they incur a dual consolidated loss. If they want it deducted in the U.S., they've got to basically certify that they're not going to use it in another jurisdiction. However, for Pillar Two, you're vetting across or within your jurisdictions all of your activities, so that sort of forces you to add up your winners and losers to figure out what your income is in that jurisdiction. Technically it's forcing you to apply that loss in that particular jurisdiction. The question is, are you now having a foreign use of your dual consolidated loss, which would therefore make it nondeductible in the U.S.? The IRS has come out and said for now, at least for 2024 losses that are carried forward, they're not going to apply the dual consolidated loss rules for purposes of Pillar Two. It's maybe a break for taxpayers, maybe not."
The mechanism for how the tax credits figure into the calculation of your global income is also important, especially when it comes to tax breaks for research and development.
"If you have a tax that you can't transfer, or that's not refundable, it affects your tax rate," said Kelleher. "The big one for the U.S. is not the investment tax credit but the R&D tax credit. Currently that reduces your tax rate in the U.S., and so potentially if you get an R&D credit, it brings your rate below 15%. You're potentially subject to a top-up tax in another jurisdiction and you lose the benefit of the R&D credit. That's probably one of the biggest reasons why the U.S. hasn't signed on to Pillar Two. I think they're working with the OECD on some adjustments or arrangements with respect to how the R&D credit will be considered. But to me, that's probably the biggest issue that large multinationals are going to face."
