Proposed Rule2024-16665
Rules Regarding Dual Consolidated Losses and the Treatment of Certain Disregarded Payments
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Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 7, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations that address certain issues arising under the dual consolidated loss rules, including the effect of intercompany transactions and items arising from stock ownership in calculating a dual consolidated loss. The proposed regulations also address the application of the dual consolidated loss rules to certain foreign taxes that are intended to ensure that multinational enterprises pay a minimum level of tax, including exceptions to the application of the dual consolidated loss rules with respect to such foreign taxes. Finally, the proposed regulations include rules regarding certain disregarded payments that give rise to losses for foreign tax purposes.
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[Federal Register Volume 89, Number 152 (Wednesday, August 7, 2024)]
[Proposed Rules]
[Pages 64750-64778]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-16665]
[[Page 64749]]
Vol. 89
Wednesday,
No. 152
August 7, 2024
Part V
Department of the Treasury
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Internal Revenue Service
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26 CFR Parts 1 and 301
Rules Regarding Dual Consolidated Losses and the Treatment of Certain
Disregarded Payments; Proposed Rule
Federal Register / Vol. 89 , No. 152 / Wednesday, August 7, 2024 /
Proposed Rules
[[Page 64750]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG-105128-23]
RIN 1545-BQ72
Rules Regarding Dual Consolidated Losses and the Treatment of
Certain Disregarded Payments
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that address
certain issues arising under the dual consolidated loss rules,
including the effect of intercompany transactions and items arising
from stock ownership in calculating a dual consolidated loss. The
proposed regulations also address the application of the dual
consolidated loss rules to certain foreign taxes that are intended to
ensure that multinational enterprises pay a minimum level of tax,
including exceptions to the application of the dual consolidated loss
rules with respect to such foreign taxes. Finally, the proposed
regulations include rules regarding certain disregarded payments that
give rise to losses for foreign tax purposes.
DATES: Written or electronic comments and requests for a public hearing
must be received by October 7, 2024.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at <a href="https://www.regulations">https://www.regulations</a> (indicate IRS and REG-105128-23) by following the
online instructions for submitting comments. Requests for a public
hearing must be submitted as prescribed in the ``Comments and Requests
for a Public Hearing'' section. Once submitted to the Federal
eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comments submitted to the IRS's
public docket. Send paper submissions to: CC:PA:01:PR (REG-105128-23),
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations
generally, Andrew L. Wigmore at (202) 317-5443; concerning the proposed
regulations regarding intercompany transactions, Julie Wang at (202)
317-6975; concerning submissions of comments or requests for a public
hearing, Publications and Regulations Section at (202) 317-6901 (not
toll-free numbers) or by email at <a href="/cdn-cgi/l/email-protection#b8c8cddad4d1dbd0ddd9cad1d6dfcbf8d1cacb96dfd7ce"><span class="__cf_email__" data-cfemail="4c3c392e20252f24292d3e25222b3f0c253e3f622b233a">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
I. The Dual Consolidated Loss Rules
A. In General
Section 1503(d) was enacted in response to concerns that taxpayers
were isolating expenses in dual resident corporations to enable two
profitable companies, subject to tax in two different jurisdictions, to
use the dual resident corporation's losses. See S. Rep. No. 99-313,
99th Cong., 2nd Sess., at 419-421 (1986). Section 1503(d) and the
regulations thereunder are intended to prevent this result and to
neutralize other types of ``double-deduction outcomes,'' that is, where
the same economic loss could be used to offset or reduce both income
subject to U.S. tax (but not a foreign jurisdiction's tax) and income
subject to the foreign jurisdiction's tax (but not U.S. tax). See id.
and TD 9315 (72 FR 12902).
Section 1503(d)(1) generally provides that a dual consolidated loss
of a domestic corporation cannot reduce the taxable income of a
domestic affiliate (a ``domestic use''). See also Sec. Sec. 1.1503(d)-
2 and 1.1503(d)-4(b). Except as provided in regulations under section
1503(d)(2)(B), section 1503(d)(2)(A) defines a dual consolidated loss
as any net operating loss of a domestic corporation which is subject to
an income tax of a foreign country without regard to whether such
income is from sources in or outside of such foreign country, or is
subject to such a tax on a residence basis. Section 1503(d)(3) provides
regulatory authority to treat any loss of a separate unit of a domestic
corporation as a dual consolidated loss.\1\ Accordingly, Sec.
1.1503(d)-1(b)(5) defines a dual consolidated loss as a net operating
loss of a dual resident corporation or the net loss of a domestic
corporation attributable to a separate unit.
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\1\ Although the term ``separate unit'' is not defined in the
statute, the legislative history to section 1503(d)(3) provides one
example: a foreign branch the losses of which are, under foreign
law, able to offset income of an affiliated foreign corporation. See
H.R. Rep. No. 100-795, 100th Cong., 2d Sess., at 292-93 (1988).
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A dual resident corporation is generally defined as a domestic
corporation that is subject to an income tax of a foreign country on
its worldwide income or on a residence basis. See Sec. 1.1503(d)-
1(b)(2)(i). A separate unit is generally defined as either a foreign
branch (defined in Sec. 1.1503(d)-1(b)) or an interest in a hybrid
entity \2\ that is carried on or owned, as applicable, directly or
indirectly, by a domestic corporation (a ``domestic owner'' of the
separate unit). See Sec. 1.1503(d)-1(b)(4)(i). An affiliated dual
resident corporation and an affiliated domestic owner are defined as a
dual resident corporation and a domestic owner, respectively, that is a
member of a consolidated group. See Sec. 1.1503(d)-1(b)(10).
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\2\ Hybrid entity means an entity that is not taxable as an
association for U.S. tax purposes but is subject to an income tax of
a foreign country as a corporation (or otherwise at the entity
level) either on its worldwide income or on a residence basis. Sec.
1.1503(d)-1(b)(3).
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Pursuant to section 1503(d)(2)(B), the dual consolidated loss
regulations provide certain exceptions to the general prohibition
against the domestic use of a dual consolidated loss. For example, the
domestic use limitation does not apply if, pursuant to a ``domestic use
election,'' the taxpayer certifies that there has not been and will not
be a ``foreign use'' of the dual consolidated loss during a
certification period.\3\ See Sec. 1.1503(d)-6(d). If a foreign use or
other triggering event occurs during the certification period, the dual
consolidated loss must be recaptured, and an interest charge is imposed
on the recaptured amount. See Sec. 1.1503(d)-6(e)(1). In general, a
foreign use occurs when any portion of the dual consolidated loss is
made available under the income tax laws of a foreign country to offset
or reduce, directly or indirectly, the income of a foreign corporation
or the direct or indirect owner of a hybrid entity that is not a
separate unit. See Sec. 1.1503(d)-3(a)(1). Other triggering events
include certain transfers of the interests in or assets of a separate
unit, as well as the failure to satisfy various certification
requirements. See Sec. 1.1503(d)-6(e).
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\3\ Section 1.1503(d)-6(b) (involving certain elective
agreements between the United States and a foreign country) and
Sec. 1.1503(d)-6(c) (if it can be demonstrated that there is no
possibility of a foreign use) also provide exceptions to the
prohibition on domestic use.
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B. Computing Income or Dual Consolidated Loss
In general, the income or dual consolidated loss of a dual resident
corporation for a taxable year is computed based on the dual resident
corporation's items of income, gain, deduction, and loss for the
taxable year. See Sec. 1.1503(d)-5(b)(1). Similarly, the income or
dual consolidated loss of a separate unit is generally computed as if
the separate unit were a domestic corporation and based solely on the
items of income, gain, deduction, and
[[Page 64751]]
loss of the domestic owner of the separate unit that are attributable
to the separate unit. See Sec. 1.1503(d)-5(c)(1). If the dual resident
corporation or domestic owner is a member of a consolidated group, then
the computations are made in accordance with rules under section 1502
regarding the computation of consolidated taxable income. See Sec.
1.1503(d)-5(b)(1) and (c)(1).
The income or dual consolidated loss of a dual resident corporation
or separate unit does not, however, include items attributable to an
interest in a ``transparent entity.'' See Sec. 1.1503(d)-5(b)(2)(iii),
(c)(1)(i) and (iii). A transparent entity is an entity that (i) is not
taxable as an association for U.S. tax purposes, (ii) is not subject to
income tax in a foreign country as a corporation either on its
worldwide income or on a residence basis, and (iii) is not a pass-
through entity under the laws of the foreign country under which the
relevant separate unit or dual resident corporation is subject to tax.
See Sec. 1.1503(d)-1(b)(16)(i). A domestic limited liability company
that, for U.S. tax purposes, is either disregarded as an entity
separate from its owner or classified as a partnership is an example of
a business entity that may be a transparent entity if the foreign
jurisdiction does not view it as a pass-through entity. Because it is
unlikely that items attributable to an interest in a transparent entity
are taken into account by the jurisdiction in which the dual resident
corporation or separate unit is subject to tax, such items should not
affect the calculation or use of a dual consolidated loss. See TD 9315
(72 FR 12902, 12904-05).
For purposes of attributing items to a separate unit, only items of
the domestic owner of the separate unit that are regarded for U.S. tax
purposes are taken into account. See Sec. 1.1503(d)-5(c)(1)(ii). Thus,
items related to disregarded transactions--irrespective of whether such
items are regarded and taken into account for foreign tax or accounting
purposes--are not taken into account for purposes of determining the
amount of income or dual consolidated loss of the separate unit. See
id.; see also Sec. Sec. 1.1503(d)-7(c)(6)(iii), 1.1503(d)-7(c)(23),
and 1.1503(d)-7(c)(24) for examples illustrating this treatment for
various types of disregarded payments.
In the case of a foreign branch separate unit (as defined in Sec.
1.1503(d)-1(b)(4)(i)(A)), items of the domestic owner generally are
attributable to the separate unit based on rules under section 864 and
Sec. 1.882-5 (by treating the domestic owner as a foreign corporation
and the foreign branch separate unit as a trade or business within the
United States). See Sec. 1.1503(d)-5(c)(2).
In the case of a hybrid entity separate unit (as defined in Sec.
1.1503(d)-1(b)(4)(i)(B)), items of a domestic owner generally are
attributable to the separate unit to the extent they are reflected on
the books and records of the hybrid entity. See Sec. 1.1503(d)-
5(c)(3)(i). These items reflected on the books and records must,
however, be adjusted to conform to U.S. tax principles. Id.
Pursuant to a special rule, any amount included in income of a
domestic owner arising from the ownership of stock in a foreign
corporation through a separate unit (for example, a subpart F
inclusion) is attributable to the separate unit if an actual dividend
from such foreign corporation would have been so attributed. See Sec.
1.1503(d)-5(c)(4)(iv); see also Sec. 1.1503(d)-7(c)(24) for an example
illustrating the application of Sec. 1.1503(d)-5(c)(4)(iv).
In general, these rules are intended to attribute items existing
for U.S. tax purposes to a separate unit to the extent that it is
likely that the relevant foreign country would take into account the
item (assuming the item is recognized) for tax purposes, with such
approach serving as a proxy for determining whether a double-deduction
outcome could result. See TD 9315 (72 FR 12902, 12908).
C. Made Available Standard and All or Nothing Principle
A foreign use may occur if any portion of a dual consolidated loss
is made available to offset income, even if there are no items of
income to actually offset in that taxable year. See Sec. 1.1503(d)-
3(b). This ``made available'' standard was adopted because of the
administrative complexity that would result from having a foreign use
occur only when the dual consolidated loss actually offsets income. See
REG-102144-04 (70 FR 29868, 29872-73). For example, if a portion of a
dual consolidated loss is made available to be used by another person,
and that person already has a loss before accounting for the dual
consolidated loss, then a portion of the dual consolidated loss could
become part of a loss carryover, which could be available to be carried
forward or carried back to offset income in different taxable years.
Departing from the made available standard would require that the
portion of the loss carryforward or carryback that was taken into
account in computing the dual consolidated loss be identified and
tracked, which would require detailed ordering rules for determining
when such losses were used and an understanding of the timing and base
differences between the United States and the foreign jurisdiction. See
id.
In general, any amount of the dual consolidated loss being put to a
foreign use would cause the entire amount of the dual consolidated loss
to be recaptured and reported as income. See Sec. 1.1503(d)-6(e)(1).
This ``all or nothing'' principle was adopted because, like the made
available standard, departing from it would have led to significant
administrative complexity and the need for detailed ordering rules. See
TD 9315 (72 FR 12902, 12910-11). For example, to depart from this
standard and determine the amount of recapture on actual foreign use,
taxpayers and the IRS would need to undertake a complex analysis of
foreign law and distinguish a permanent (or base) difference from a
timing difference, to ensure that the portion of the dual consolidated
loss that is not recaptured will not be available for a foreign use at
some point in the future. See id.
D. Mirror Legislation Rule
A foreign use of a dual consolidated loss may also be deemed to
occur pursuant to the ``mirror legislation'' rule if the foreign income
tax laws would deny any opportunity for the foreign use of the dual
consolidated loss in the year in which the dual consolidated loss is
incurred (assuming the foreign country recognized the loss in the same
year), provided that the foreign use of the loss is denied under such
laws for any of the following reasons: (i) the dual resident
corporation or separate unit that incurred the loss is subject to
income taxation by another country (for example, the United States) on
its worldwide income or on a residence basis; (ii) the loss may be
available to offset income (other than income of the dual resident
corporation or separate unit) under the laws of another country (for
example, the United States); or (iii) the deductibility of any portion
of a deduction or loss taken into account in computing the dual
consolidated loss depends on whether such amount is deductible under
the laws of another country (for example, the United States). See Sec.
1.1503(d)-3(e). Thus, in order for the rule to apply, two requirements
must be satisfied: the income tax laws of the foreign country must deny
any opportunity for a foreign use, and the reason for such denial must
be described in one of the three enumerated paragraphs in Sec.
1.1503(d)-3(e)(1). In other words, being described in one of the three
enumerated paragraphs alone does not cause a foreign law to be treated
as mirror
[[Page 64752]]
legislation (if, for example, the dual consolidated loss could
nevertheless be put to a foreign use).
The mirror legislation rule is intended to prevent foreign
jurisdictions from enacting legislation that gives taxpayers no choice
but to use a dual consolidated loss to offset an affiliate's income in
the United States. See REG-102144-04 (70 FR 29868, 29873-74). A lack of
choice is contrary to the approach in the dual consolidated loss rules
providing taxpayers the option of putting a dual consolidated loss to
either a domestic use or a foreign use (but not both). See id.
E. Foreign Income Tax
Section 1503(d)(2)(A) defines a dual consolidated loss as any net
operating loss of a domestic corporation which is subject to an income
tax of a foreign country on its income without regard to whether such
income is from sources in or outside of such foreign country, or is
subject to such a tax on a residence basis. The exception to the
definition of a dual consolidated loss under section 1503(d)(2)(B)
similarly references ``foreign income tax law.'' The legislative
history to section 1503(d) references foreign taxes on income without
further discussion of the characteristics of a foreign income tax. See,
for example, S. Rep. No. 99-313, 99th Cong., 2nd Sess., at 419-421
(1986). Similarly, the regulations only reference a foreign income tax
when setting forth many dual consolidated loss rules. See, for example,
Sec. Sec. 1.1503(d)-(1)(b)(2) (dual resident corporation definition),
1.1503(d)-(1)(b)(3) (hybrid entity definition), 1.1503(d)-(1)(b)(16)
(transparent entity definition) and 1.1503(d)-(3)(a)(1) (foreign use
definition). Thus, the dual consolidated loss rules neither define the
term ``income tax'' nor describe the characteristics that distinguish
an income tax from another type of tax.
II. The Intercompany Transaction Regulations and the Matching Rule
The regulations under Sec. 1.1502-13 (the ``intercompany
transaction regulations'') provide rules for taking into account items
of income, gain, deduction, and loss of consolidated group members from
intercompany transactions (as defined in Sec. 1.1502-13(b)(1)(i)).
Their purpose is to provide rules to clearly reflect the taxable income
(and tax liability) of the group as a whole by preventing intercompany
transactions from creating, accelerating, avoiding, or deferring
consolidated taxable income (or consolidated tax liability). This is
accomplished by treating the selling member (``S'') and the buying
member (``B'') as separate entities for some purposes, but as divisions
of a single corporation for other purposes. S's income, gain,
deduction, or loss arising from an intercompany transaction is an
intercompany item, and B's income, gain, deduction, or loss arising
from an intercompany transaction, or from property acquired in an
intercompany transaction, is the corresponding item. The amount and
location of S's intercompany items and B's corresponding items are
determined on a separate entity basis (``separate entity treatment'').
The timing, character, source, and other attributes of the intercompany
items and corresponding items, although initially determined on a
separate entity basis, generally are redetermined under the
intercompany transaction regulations to produce the effect of
transactions between divisions of a single corporation (``single entity
treatment'').
One of the principal rules within the intercompany transaction
regulations that implements single entity treatment is the matching
rule of Sec. 1.1502-13(c). Section 1.1502-13(c)(1) requires the
attributes of the intercompany and corresponding items to be
redetermined to the extent necessary to achieve the same overall effect
as if the members were divisions of a single corporation.
Under the matching rule, although treated as divisions of a single
corporation, S and B are treated as engaging in their actual
transaction and owning any actual property involved in the transaction
(rather than treating the transaction as not occurring). Accordingly,
under Sec. 1.1502-13(c), the existence of the intercompany transaction
and the intercompany items generally is not disregarded. Although
treated in the same manner as divisions of a single corporation, S and
B are treated as having any special status that they have under the
Code or regulations.
Section 1.1502-13(c)(4) provides rules for allocating and
redetermining attributes under the matching rule. To the extent that
B's corresponding item matches S's intercompany item in amount, the
attributes of B's corresponding item generally will control S's
offsetting intercompany item. The symmetry that is ordinarily required
under the matching rule by conforming the source, character, and other
attributes of one member's items to the other member's items is
expressly overridden when either S or B has a ``special status.''
Section 1.1502-13(c)(5) provides that, when the attributes otherwise
determined under Sec. 1.1502-13(c)(1)(i) for a member's item are
permitted or not permitted under the Code or regulations because of a
member's special status, the attributes required by the Code or
regulations apply to that member's items, but not to the items of
another member. The special status rule lists examples of members with
special status, including banks, life insurance companies, and a member
carrying forward a loss subject to limitation under the separate return
limitation year (``SRLY'') rules.
III. Sections 301.7701-1 Through 301.7701-3--Classification of Business
Entities
Sections 301.7701-1 through 301.7701-3 classify a business entity
with two or more members as either a corporation or a partnership, and
a business entity with a single owner as either a corporation or
disregarded as an entity separate from its owner (``disregarded
entity''). Certain business entities with a single owner are classified
as disregarded entities by default or through an election. See Sec.
301.7701-3(a) through (c).
IV. Pillar Two
A. GloBE Model Rules
On December 20, 2021, the OECD/G20 Inclusive Framework on BEPS
published model rules (the ``GloBE Model Rules'') \4\ to assist in the
implementation of a reform to the international tax system. See OECD/
G20, Tax Challenges Arising from the Digitalisation of the Economy
Global Anti-Base Erosion Model Rules (Pillar Two). The GloBE Model
Rules create a coordinated system of minimum taxation intended to
ensure that certain large Multinational Enterprise Groups (``MNE
Groups'') pay a minimum level of tax based on the income, adjusted for
certain items, arising in each of the jurisdictions where they
operate.\5\
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\4\ As the context requires, references to the GloBE Model Rules
include references to a foreign jurisdiction's legislation
implementing the GloBE Model Rules.
\5\ Capitalized terms used in this part IV of the Background
section and parts I.D of the Explanation of Provisions section of
this preamble, but not defined herein, have the meanings ascribed to
such terms under the GloBE Model Rules.
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Under the GloBE Model Rules, an in-scope MNE Group must compute the
GloBE Income or Loss of each of its Constituent Entities.\6\ The
computation of GloBE Income or Loss generally begins with the net
income or loss of a Constituent Entity determined using the accounting
standard used in preparing the Consolidated Financial Statements and
without any consolidation
[[Page 64753]]
adjustments that would eliminate income or expense attributable to
intra-group transactions. To reflect GloBE policy outcomes, this amount
is then adjusted for specific items to determine the Constituent
Entity's GloBE Income or Loss.\7\
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\6\ Constituent Entities include legal persons (other than a
natural person), arrangements that prepare separate financial
accounts (such as a partnership or trust), or a Permanent
Establishment.
\7\ In addition to adjustments to reflect common differences
between the applicable financial accounting standard and the local
income tax rules, the computation of a Low-Tax Entity's GloBE Income
or Loss excludes any expense attributable to an Intragroup Financing
Arrangement that can reasonably be anticipated to increase the
expenses of the Low-Tax Entity without resulting in a commensurate
increase in the taxable income of the High-Tax Counterparty.
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The MNE Group must then calculate its Effective Tax Rate (``ETR'')
for each jurisdiction in which it operates. The ETR of a jurisdiction
equals (i) the sum of Adjusted Covered Taxes of each Constituent Entity
located in the jurisdiction, divided by (ii) the Net GloBE Income of
the jurisdiction for the Fiscal Year. The Net GloBE Income of the
jurisdiction is determined by aggregating the GloBE Income or Loss of
all Constituent Entities of the MNE Group located in the same
jurisdiction.\8\ This ``jurisdictional blending'' is mandatory and is
intended to avoid distortions arising from tax consolidation and
similar regimes and shifting income and taxes between Constituent
Entities located in the same jurisdiction. See OECD (2024), Tax
Challenges Arising from the Digitalisation of the Economy--Consolidated
Commentary to the Global Anti-Base Erosion Model Rules (2023);
Inclusive Framework on BEPS, OECD Base Erosion and Profit Shifting
Project, April 2024, OECD Publishing, Paris (``GloBE Model Rules
Consolidated Commentary''), Article 5.1.1, Paragraph 4. If the ETR in
that jurisdiction would be below the 15% Minimum Rate, a top-up tax may
be imposed and collected under a Qualified Domestic Minimum Top-up Tax
(``QDMTT''), an IIR (the income inclusion rule), or a UTPR (commonly
referred to as the undertaxed profits rule) to the extent necessary to
ensure that the MNE Group's Excess Profits in the jurisdiction is taxed
at the Minimum Rate. Certain countries have enacted, and others have
proposed, legislation to implement taxes based on the GloBE Model Rules
for fiscal years beginning as early as December 31, 2023.\9\
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\8\ However, a Stateless Constituent Entity (such as a Reverse
Hybrid Entity) is treated as a single Constituent Entity located in
a separate and unspecified jurisdiction; the GloBE Income or Loss of
a Reverse Hybrid Entity is not aggregated with that of any other
Constituent Entity.
\9\ The UTPR will generally be effective for Fiscal Years
beginning on or after December 31, 2024. Under the European Union
(EU) Directive requiring the adoption of the GloBE Model Rules, EU
Member States will apply the UTPR for years beginning on or after
December 31, 2023, but only in limited circumstances. See Council
Directive 2022/2523, art. 50, 2022 OJ (L 328) 1, 55.
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On December 20, 2022, the OECD/G20 Inclusive Framework on BEPS
published the Safe Harbours and Penalty Relief document, which includes
guidelines on aspects of the design and operation of a Transitional
CbCR Safe Harbour to the GloBE Model Rules. See OECD (2022), Safe
Harbours and Penalty Relief: Global Anti-Base Erosion Rules (Pillar
Two), December 2022, OECD/G20 Inclusive Framework on BEPS, OECD,
Paris.\10\ The Transitional CbCR Safe Harbour is designed to ameliorate
the compliance burden of undertaking full GloBE calculations during the
Transition Period \11\ by limiting the circumstances in which an MNE
will be required to perform such calculations to a smaller number of
higher-risk jurisdictions. An MNE Group uses its Qualified CbC Report
and financial accounting data to determine if its operations in a
jurisdiction qualify for the Transitional CbCR Safe Harbour and, if
such operations qualify, the jurisdiction is effectively excluded from
the scope of the GloBE Model Rules. Specifically, under the
Transitional CbCR Safe Harbour, the Jurisdictional Top-up Tax in a
jurisdiction for a Fiscal Year beginning on or before December 31, 2026
\12\ is deemed to be zero if (i) the MNE Group reports Total Revenue of
less than EUR 10 million and Profit (Loss) before Income Tax of less
than EUR 1 million in the jurisdiction on its Qualified CbC Report for
the Fiscal Year, (ii) the MNE Group has a Simplified ETR that is equal
to or greater than the Transition Rate in the jurisdiction for the
Fiscal Year, or (iii) the MNE Group's Profit (Loss) before Income Tax
in such jurisdiction is equal to or less than the Substance-based
Income Exclusion amount, for Constituent Entities resident in that
jurisdiction under the Qualified CbC Report, as calculated under the
GloBE Model Rules. Expenses and losses are relevant in determining
whether each of these three tests is satisfied.
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\10\ <a href="https://www.oecd.org/tax/beps/safe-harbours-and-penalty-relief-global-anti-base-erosion-rules-pillar-two.pdf">https://www.oecd.org/tax/beps/safe-harbours-and-penalty-relief-global-anti-base-erosion-rules-pillar-two.pdf</a>. The Safe
Harbours have since been incorporated into the GloBE Model Rules
Consolidated Commentary.
\11\ The Transition Period covers all of the Fiscal Years
beginning on or before December 31, 2026, but not including a Fiscal
Year that ends after June 30, 2028.
\12\ Other than a Fiscal Year that ends after June 30, 2028. The
Safe Harbour takes a ``once out, always out'' approach under which,
if an MNE Group does not apply the Safe Harbour with respect to a
jurisdiction in a Fiscal Year in which it is subject to the GloBE
Rules, the MNE Group cannot qualify for the Safe Harbour for that
jurisdiction in a subsequent year, except where the MNE Group did
not have any Constituent Entities located in the jurisdiction in the
previous Fiscal Year.
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B. Notice 2023-80
On December 11, 2023, the Treasury Department and the IRS released
Notice 2023-80, which, among other things, described the interaction of
the dual consolidated loss rules with the GloBE Model Rules. The notice
explains that in certain cases, the aggregation of GloBE Income or Loss
of Constituent Entities in the same jurisdiction in calculating the ETR
can be viewed as giving rise to double-deduction outcomes that the dual
consolidated loss rules were intended to address. Moreover, the notice
recognizes that these concerns could exist with respect to a dual
consolidated loss incurred in a taxable year ending before the
effective date of foreign legislation implementing the GloBE Model
Rules, for example, due to certain timing differences. The notice also
recognizes that certain features of the GloBE Model Rules may differ
from traditional foreign income tax systems. For example, the GloBE
Model Rules do not include a mechanism that would permit taxpayers to
forgo the aggregation of GloBE Income and GloBE Losses, and in some
cases where the ETR in the jurisdiction is or would otherwise be at or
above the Minimum Rate, a loss may not reduce the amount of a
Jurisdictional Top-up Tax.
The notice announces limited guidance that would be proposed for
certain ``legacy DCLs,'' which in general are dual consolidated losses
that a taxpayer incurred before the effective date of the GloBE Model
Rules.\13\ Under that guidance, a foreign use does not 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 under the GloBE Model Rules, subject to an anti-abuse rule.
Where a taxpayer uses a fiscal year for tax purposes that ends after
2024, the foreign use exception is conditioned on the relevant MNE
Group using the same fiscal year when applying the GloBE Model Rules.
This condition ensures that the legacy DCL rule applies only to the
extent of book-tax timing differences, and not due to a mismatch
between the U.S. taxable year
[[Page 64754]]
and fiscal year used under the GloBE Model Rules.
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\13\ The notice defines legacy DCLs as dual consolidated losses
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 MNE 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.
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Finally, the notice states that the Treasury Department and the IRS
are studying the interaction of the dual consolidated loss rules and
the GloBE Model Rules and the notice requests comments on the
interaction of the dual consolidated loss rules with the GloBE Model
Rules, including Article 3.2.7 (relating to Intragroup Financing
Arrangements), which is intended to prevent certain avoidance
transactions involving arbitrage. The notice also states that the
Treasury Department and the IRS are studying the interaction of the
GloBE Model Rules with the anti-hybrid rules under sections 245A(e) and
267A.
C. Administrative Guidance Addressing Hybrid Arbitrage Arrangements
On December 15, 2023, the OECD/G20 Inclusive Framework on BEPS
published additional Administrative Guidance on the GloBE Model Rules
(``December 2023 Administrative Guidance''). See OECD (2023), Tax
Challenges Arising from the Digitalisation of the Economy--
Administrative Guidance on the Global Anti-Base Erosion Model Rules
(Pillar Two), December 2023, OECD/G20 Inclusive Framework on BEPS,
OECD, Paris.\14\ Among other issues, the December 2023 Administrative
Guidance addresses the treatment under the Transitional CbCR Safe
Harbour of Hybrid Arbitrage Arrangements entered into after December
15, 2022.
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\14\ <a href="https://www.oecd.org/tax/beps/administrative-guidance-global-anti-base-erosion-rules-pillar-two-december-2023.pdf">https://www.oecd.org/tax/beps/administrative-guidance-global-anti-base-erosion-rules-pillar-two-december-2023.pdf</a>. The
December 2023 Administrative Guidance has since been incorporated
into the GloBE Model Rules Consolidated Commentary.
---------------------------------------------------------------------------
The December 2023 Administrative Guidance involving Hybrid
Arbitrage Arrangements is intended, in part, to address avoidance
transactions that are designed to exploit differences between tax and
financial accounting treatment to allow a Tested Jurisdiction to
qualify for the Transitional CbCR Safe Harbour, which would be contrary
to the purposes of the GloBE Model Rules. One of the Hybrid Arbitrage
Arrangements addressed under the guidance is a ``duplicate loss
arrangement.'' A duplicate loss arrangement includes an arrangement
that results in an expense or loss being included in the financial
statement of a Constituent Entity to the extent that the arrangement
also gives rise to a duplicate amount that is deductible for purposes
of determining the taxable income of another Constituent Entity in
another jurisdiction. An arrangement will not be a duplicate loss
arrangement, however, to the extent that the amount of the relevant
expense is offset against revenue or income that is included in both
(i) the financial statements of the Constituent Entity including the
expense or loss in its financial statements; and (ii) the taxable
income of the Constituent Entity claiming the deduction for the
relevant expense or loss. Under this guidance, a Tested Jurisdiction's
Transitional CbCR Safe Harbour calculation is adjusted by excluding any
expense or loss arising as a result of a duplicate loss arrangement
from the Tested Jurisdiction's profit before tax.
The December 2023 Administrative Guidance states that further
guidance will be provided to address Hybrid Arbitrage Arrangements,
including those addressed in the December 2023 Administrative Guidance,
that may otherwise affect the application of the GloBE Model Rules
outside the context of the Transitional CbCR Safe Harbour.
Explanation of Provisions
I. Dual Consolidated Loss Rules
A. Interaction With the Intercompany Transaction Regulations
As discussed in part I.B of the Background section of this
preamble, the dual consolidated loss regulations provide that, in the
case of an affiliated dual resident corporation or an affiliated
domestic owner acting through a separate unit (a ``section 1503(d)
member''), the computation of income or dual consolidated loss takes
into account rules under section 1502 regarding the computation of
consolidated taxable income. No specific guidance is provided as to the
interaction of rules under section 1502 and those under section
1503(d).
Comments with respect to proposed regulations addressing certain
hybrid arrangements that were published in the Federal Register on
December 28, 2018 (REG-104352-18, 83 FR 67612) (the ``2018 proposed
regulations''), addressed the interaction of the matching rule under
Sec. 1.1502-13(c) with the computation of income or dual consolidated
loss. The preamble to final regulations published in the Federal
Register on April 8, 2020 (TD 9896, 85 FR 19830), stated that the
Treasury Department and the IRS were studying this issue.
The comments recommended that the Treasury Department and the IRS
clarify that the matching rule does not apply to cause regarded items
to be redetermined (and thus effectively disregarded) for purposes of
the dual consolidated loss rules. The comments stated that such an
approach promotes the policies of the dual consolidated loss rules and
leads to more accurate computations. In addition, a comment asserted
that such an approach is consistent with how taxpayers generally apply
the rules, and that for these taxpayers a contrary approach could have
a significant and unanticipated effect on existing structures.
However, one of the comments cautioned that, if the dual
consolidated loss rules were to apply differently with respect to an
item arising from an intercompany transaction and an item arising from
a disregarded transaction, then the disparity could produce
inappropriate policy outcomes. For example, a taxpayer might structure
its internal transactions so that (i) payments by separate units are
made pursuant to disregarded transactions, such that the payments would
not increase or create a dual consolidated loss, and (ii) payments to
separate units are made pursuant to intercompany transactions, such
that the payments would reduce or eliminate a dual consolidated loss.
The comment described additional rules--including a rule that would
require a consolidated group to treat intercompany transactions and
disregarded payments consistently for purposes of the dual consolidated
loss rules--that might minimize tax planning opportunities arising from
any such disparity. These proposed regulations address the concern
raised in this comment with the disregarded payment loss rules, as
discussed in part II of this Explanation of Provisions.
Another comment raised the possibility that taxpayers may have
differing views regarding the interaction of the matching rule with the
dual consolidated loss rules under current law. As a result, taxpayers
currently may be adopting different treatments of the section 1503(d)
member's intercompany (or corresponding) items. Accordingly, the
comment recommended clarifying how these rules interact.
The dual consolidated loss rules are intended to take into account
an item of a dual resident corporation, or attribute an item of a
domestic owner to a separate unit, to the extent that the item is
likely taken into account for foreign tax purposes. Because it is
unlikely that a foreign jurisdiction would disregard an intercompany
transaction (or, more generally, transactions between separate legal
entities), it is consistent with the policies of the dual consolidated
loss rules to take into account items arising from an intercompany
transaction on a separate entity basis, to the extent of the
application of section 1503(d). In
[[Page 64755]]
addition, the failure to take items arising from an intercompany
transaction into account in an appropriate manner for the section
1503(d) rules could lead to distortive results--both an under- and
over-inclusive application of the dual consolidated loss rules--and
could create inappropriate planning opportunities.
Accordingly, and consistent with the approach recommended by the
comments, the proposed regulations would amend Sec. 1.1502-13 to
clarify the treatment of items that are subject to the section 1503(d)
rules and the intercompany transaction regulations. Specifically, the
proposed regulations clarify that a section 1503(d) member has special
status under Sec. 1.1502-13(c)(5) for purposes of applying the dual
consolidated loss rules. This approach is consistent with treating a
member with losses from separate return limitation years as having
special status under Sec. 1.1502-13(c)(5) for purposes of determining
the member's SRLY limitation. See Sec. 1.1502-13(c)(7)(ii)(J)(4).
As a result, if a section 1503(d) member's intercompany (or
corresponding) loss otherwise would be taken into account in the
current year, and if the dual consolidated loss rules apply to limit
the use of that loss (causing the loss to not be currently deductible),
the intercompany transaction regulations would not redetermine that
loss as not being subject to the limitation under section 1503(d).
Therefore, a section 1503(d) member's intercompany (or corresponding)
loss could be limited (and therefore not currently deductible) under
the dual consolidated loss rules, even though such an outcome is
inconsistent with single entity treatment.
In conjunction with the special status rule for the section 1503(d)
member, the proposed regulations also clarify the treatment of the
section 1503(d) member's counterparty in an intercompany transaction.
Proposed Sec. 1.1502-13(j)(10)(iv) applies Sec. 1.1502-13(c) (the
matching rule), or principles of the matching rule as relevant in Sec.
1.1502-13(d) (the acceleration rule), to the counterparty member as if
the section 1503(d) member were not subject to the dual consolidated
loss rules. This approach is consistent with the special status rule in
Sec. 1.1502-13(c)(5), which provides that, even though the Code or
regulations require certain treatment of the special status member's
items by reason of its special status, that treatment does not affect
the attributes of the counterparty member's items under the matching
rule.
For example, assume that, in the current year, S (the counterparty
member) has interest income, and B (a section 1503(d) member) has an
interest deduction on an intercompany loan. Even if B's interest
deduction were limited under the domestic use limitation under Sec.
1.1503(d)-4(b) and therefore not currently deductible, S nevertheless
would take its interest income into account in the current year under
proposed Sec. 1.1502-13(j)(10)(iv). In other words, this rule
clarifies that the intercompany transaction regulations would not
redetermine the attributes of S's interest income to match the
treatment of B's interest deduction in situations where B's deduction
is limited due to B's special status as a section 1503(d) member. The
Treasury Department and the IRS are of the view that redetermining S's
interest income as not currently includible in these situations
effectively would give the consolidated group the benefit of B's
deduction and would not achieve the appropriate result under dual
consolidated loss policy.
These proposed regulations also clarify the order of operation
between Sec. 1.1502-13 and the dual consolidated loss rules. The dual
consolidated loss rules apply to an item only to the extent that the
item is otherwise taken into account in income or loss. Consistent with
this general rule, the proposed regulations clarify that (i) the
intercompany transaction regulations apply first to determine when an
intercompany (or corresponding) item is taken into account, and (ii)
such item is then included in the dual consolidated loss computations.
Thus, for example, in a year in which an intercompany deduction of S (a
section 1503(d) member) is deferred under the intercompany transaction
regulations, the deduction would not be included in computing S's
income or dual consolidated loss for that year under section 1503(d).
Moreover, when S's deduction is taken into account under the matching
rule in a later year, that deduction would be included in S's dual
consolidated loss computations for that year. See proposed Sec.
1.1502-13(j)(15)(xi) for an example illustrating the application of the
matching rule.
B. Computing Income or Dual Consolidated Loss
1. Items Arising From Ownership of Stock
As discussed in part I.B of the Background section of this
preamble, an item of income, gain, deduction, or loss is generally
taken into account for purposes of computing income or dual
consolidated loss to the extent it is likely that the relevant foreign
country would take into account the item (assuming the item is
recognized) for tax purposes. In many cases, gain from the sale or
exchange of stock of a corporation, or a dividend from a corporation,
is unlikely to be included in income in the foreign country due to, for
example, a participation exemption or indirect foreign tax credits. In
addition, an inclusion with respect to stock of a foreign corporation
(such as under section 951(a)(1)(A) or 951A(a)) is unlikely to be taken
into account (and therefore is unlikely to be included in income) in
the foreign country; moreover, the difference resulting from these
inclusions is likely to be permanent because the related earnings of
the foreign corporation are unlikely to be included in income in the
foreign country when distributed.
Further, the Treasury Department and the IRS are aware that
taxpayers may be affirmatively structuring into these rules to produce
inappropriate double-deduction outcomes. For example, in order to
eliminate a dual consolidated loss otherwise attributable to an
interest in a disregarded entity, a domestic corporation could transfer
the stock of a controlled foreign corporation (as defined in section
957(a)) that gives rise to inclusions under section 951A(a) to that
disregarded entity, even though the foreign country in which the
disregarded entity is subject to tax does not tax income of, or
distributions from, the controlled foreign corporation.
In light of the prevalence of participation exemptions (or similar
regimes that exempt income with respect to stock), coupled with
taxpayers structuring into the rules to reduce or eliminate dual
consolidated losses, the Treasury Department and the IRS are of the
view that the rules should be revised. The proposed regulations
therefore generally provide that items arising from the ownership of
stock--such as gain recognized on the sale or exchange of stock,
dividends (including by reason of section 1248), inclusions under
section 951(a) (including by reason of section 245A(e)(2) or 964(e)(4))
or 951A(a), as well as deductions with respect thereto (including under
section 245A(a) or 250(a)(1)(B))--are not taken into account for
purposes of computing income or a dual consolidated loss. See proposed
Sec. 1.1503(d)-5(b)(2)(iv)(A) and (c)(4)(iv)(A). These rules are not
limited to items arising from the ownership of stock of a foreign
corporation because, for example, a dividend from a domestic
corporation may be eligible for a
[[Page 64756]]
participation exemption under the laws of the foreign country.
However, these rules do not apply with respect to a dividend (or
other inclusion) arising from a separate unit or dual resident
corporation's ownership of portfolio stock of a corporation (domestic
or foreign), which generally is defined as stock representing less than
ten percent of the value of the corporation. See proposed Sec.
1.1503(d)-5(b)(2)(iv)(B) and (c)(4)(iv)(B) and (C). In these cases, the
items are likely to be included (or the related earnings are likely to
be subsequently included when distributed) in income in the foreign
country in which the separate unit or dual resident corporation is
subject to tax. The proposed regulations are intended to ensure that
these items, as offset or reduced by any deductions with respect to the
items for U.S. tax purposes, are taken into account for purposes of
computing income or a dual consolidated loss.
The Treasury Department and the IRS are of the view that this
approach is simpler and more administrable than an alternative approach
that would consider the extent to which an item is, or will be,
actually taken into account under the tax law of the foreign country in
which the separate unit or dual resident corporation is subject to tax
and not offset or reduced by an exemption, exclusion, deduction,
credit, or other similar relief particular to the item. Further, in
most cases a more precise approach would not lead to significantly
different results given the likelihood that items of income arising
from the ownership of stock will be offset or reduced under the tax
laws of the foreign country.
The Treasury Department and the IRS recognize that certain amounts
included in the income of a domestic owner arising from the ownership
of stock in a foreign corporation (in the case of a separate unit,
regardless of whether the stock of the foreign corporation is held
through the separate unit) may reflect amounts that have been subject
to tax, to some extent, by both the foreign jurisdiction and the United
States. For example, where a domestic owner of a separate unit that is
taxed as a resident in a particular foreign jurisdiction holds stock of
a controlled foreign corporation that is also taxed as a resident in
the same foreign jurisdiction, the controlled foreign corporation's
income may be taxed, to some extent, under the income tax laws of the
foreign jurisdiction and by the United States through inclusions under
section 951(a) or 951A(a); this could occur regardless of whether the
inclusion itself is taken into account by the same foreign
jurisdiction. To the extent such amounts are taxed in the same manner
and to the same extent as if they were earned directly by the domestic
owner, they could be viewed as representing dual inclusion income (that
is, items that are included in income in both the United States and the
foreign country and not offset or reduced by certain amounts particular
to the item) that could be taken into account when determining the dual
consolidated loss attributable to the separate unit.
The proposed regulations do not provide a rule that would permit
taxpayers to identify and take into account such amounts as dual
inclusion income. Doing so would require complicated rules, and raise
related administrability concerns, to isolate the amount of dual
inclusion income with respect to a particular foreign jurisdiction (for
example, where a controlled foreign corporation owns one or more
disregarded entities that are subject to tax in different foreign
jurisdictions). Such an approach would also need to take into account
rate disparities (for example, as a result of the deduction allowed
under section 250(a)(1)(B) with respect to inclusions under section
951A) and other differences that may result between income earned
directly by a domestic owner and earned indirectly through a controlled
foreign corporation.
2. Adjustments To Conform to U.S. Tax Principles
As discussed in part I.B of the Background section of this
preamble, regarded items of a domestic owner generally are attributable
to a hybrid entity separate unit to the extent they are reflected on
the books and records of the hybrid entity. These items reflected on
the books and records must, however, be adjusted to conform to U.S. tax
principles. Such adjustments would include, for example, adjustments to
reflect differences in the calculation of depreciation for accounting
and tax purposes, and adjustments to eliminate items reflected on the
books and records that are not deductible for tax purposes (such as a
penalty or fine). See Sec. 1.1503(d)-7(c)(25) for an example
illustrating adjustments to conform to U.S. tax principles.
The Treasury Department and the IRS are aware that certain
taxpayers may be taking the position that items that are not reflected
on the books and records of a hybrid entity may nevertheless be
attributable to the hybrid entity separate unit. Specifically,
taxpayers may assert that the adjustments to the books and records
necessary to conform to U.S. tax principles can include an item that
has not been (and will not be) reflected on the books and records of
the hybrid entity. For example, if a hybrid entity provides services to
its domestic owner and receives a payment as compensation for those
services that is generally disregarded for U.S. tax purposes, a
taxpayer may take the position that a portion of the domestic owner's
regarded income can be reallocated to the books and records of the
hybrid entity (and, thus, taken into account by the hybrid entity
separate unit) under, for example, the principles of section 482 or
section 864(c).
This position is incorrect under the current regulations and
misinterprets the required adjustments under Sec. 1.1503(d)-
5(c)(3)(i). Such adjustments account for discrepancies between
accounting treatment and U.S. tax treatment; they are not permitted to
give effect to disregarded payments that Sec. 1.1503(d)-5(c)(1)(ii)
explicitly excludes from the calculation of income or dual consolidated
loss. See Sec. 1.1503(d)-7(c)(23) for an example illustrating the
application of Sec. 1.1503(d)-5(c). Further, this position is contrary
to the policy underlying Sec. 1.1503(d)-5(c)(3), which is to take into
account only items that are regarded for U.S. tax purposes and also are
(or have been or will be) reflected on the books and records of the
hybrid entity. Nevertheless, for the avoidance of doubt, the proposed
regulations clarify that the adjustments necessary to conform to U.S.
tax principles do not permit the attribution to a hybrid entity
separate unit, or an interest in a transparent entity, of any item that
has not been and will not be reflected on the books and records of the
hybrid entity or transparent entity. See proposed Sec. 1.1503(d)-
5(c)(3)(i); see also proposed Sec. 1.1503(d)-7(c)(23)(iii) for an
example illustrating the application of Sec. 1.1503(d)-5(c); but see
Sec. Sec. 1.1503(d)-5(c)(4)(iii), 1.1503(d)-5(c)(4)(v) and 1.1503(d)-
5(c)(4)(vi) (special attribution rules that do not require that an item
be reflected on the books and records to be taken into account).
C. Anti-Avoidance Rule
As discussed in sections I.A (interaction with the matching rule),
I.B.1 (items arising from ownership of stock), I.B.2 (adjustments to
conform to U.S. tax principles), and II.A. (disregarded payment losses)
of this Explanation of Provisions, the Treasury Department and the IRS
continue to learn of transactions or structures that attempt to obtain
a double-deduction outcome while avoiding the application of the dual
consolidated loss rules. In
[[Page 64757]]
addition, the Treasury Department and the IRS are aware of other
avoidance transactions that may facilitate a double-deduction outcome
by manipulating the computation of income or a dual consolidated loss
with items that are not included in income, or do not give rise to tax,
in the foreign country. For example, income-producing assets located
within the United States could be transferred to, or otherwise be
acquired by, a separate unit that is a tax resident in a jurisdiction
that, pursuant to a participation exemption or similar regime
(including a regime that grants a foreign tax credit for foreign taxes
paid on foreign income), would exempt or otherwise not tax the income
derived from those assets. Because such assets are located in the
United States, however, taxpayers could assert that they would not give
rise to a foreign branch separate unit and, assuming they are not held
by a transparent entity, take the position that income derived from
those assets would reduce or eliminate a dual consolidated loss
(despite not being subject to tax in the foreign jurisdiction).
Even if these particular transactions were also addressed by new
rules in these proposed regulations, other avoidance transactions could
continue to be developed. Accordingly, and rather than continuing to
address these transactions on a case-by-case basis, the proposed
regulations include an anti-avoidance rule that, in general, is
intended to address additional transactions, or interpretations, that
may attempt to avoid the purposes of the dual consolidated loss rules.
See proposed Sec. 1.1503(d)-1(f); see also Sec. 1.1503(d)-7(c)(43)
for an example illustrating the application of the anti-avoidance rule
to a transfer of assets located in the United States to a separate
unit. This anti-avoidance rule also applies with respect to
transactions that attempt to avoid the purposes of the disregarded
payment loss rules because, as discussed in part II of this Explanation
of Provisions, such rules are also intended to address transactions
that raise policy concerns similar to those arising under the dual
consolidated loss rules. See proposed Sec. 1.1503(d)-1(f).
D. GloBE Model Rules
1. General Applicability of Dual Consolidated Loss Rules
As discussed in part IV.B of the Background section of this
preamble, Notice 2023-80 requested comments on the interaction of the
dual consolidated loss rules with the GloBE Model Rules. In response,
comments requested that the dual consolidated loss rules be made
inapplicable with respect to a foreign tax based on the GloBE Model
Rules. In support of these recommendations, comments asserted that the
QDMTT, IIR, and UTPR have unique characteristics that are not present
in the income taxes that were in existence when section 1503(d) was
enacted. According to some comments, these taxes are not based on the
traditional concept of tax residency and thus do not present the
possibility for the mismatches in tax residency that the dual
consolidated loss rules were intended to address. Comments further
noted that the QDMTT, IIR, and UTPR are minimum taxes based on an MNE
Group's financial accounting income and, in contrast to typical tax
consolidation or group relief regimes, the aggregation of revenue or
expense under the GloBE Model Rules is not elective. Finally, comments
asserted that the IIR differs from a typical foreign income tax because
it is not a tax on an entity's income (including income imputed from a
subsidiary) arising in the foreign jurisdiction where the entity is a
tax resident. According to these comments, a foreign use cannot occur
under the current dual consolidated loss rules as a result of a loss
being taken into account under an IIR if the entity incurring the loss
is not a tax resident in the foreign jurisdiction imposing the IIR--
that is, these comments assert a foreign use can only occur if a dual
consolidated loss is made available under the laws of the foreign
jurisdiction in which the loss arises.
As indicated in Notice 2023-80, the Treasury Department and the IRS
are of the view that the aggregation of items of revenue and expense of
Constituent Entities in the same jurisdiction in calculating the ETR
can result in double-deduction outcomes that the dual consolidated loss
rules were intended to address. First, despite the differences between
the GloBE Model Rules and more traditional foreign income tax systems,
the GloBE Model Rules can also present a typical example of tax
residency arbitrage that the dual consolidated loss rules were intended
to address. For example, assume USP, a domestic corporation, owns all
the interests in DEx, an entity organized under the laws of Country X
that is disregarded as an entity separate from its owner. DEx, in turn,
owns all the stock in CFCx, a foreign corporation organized under the
laws of Country X. DEx incurs a $100x loss and CFCx generates $100x of
income. If Country X does not impose an income tax on Country X
entities, then the $100x loss incurred by DEx would not be a dual
consolidated loss with respect to USP's interests in DEx. See Sec.
1.1503(d)-1(b)(5)(ii), (b)(3), and (b)(4)(i). This is appropriate as
the loss could not be used to offset CFCx's income and give rise to a
double-deduction outcome because there is no Country X income tax that
could be reduced as a result of the offset. If, however, Country X
enacted a QDMTT that is an income tax, and absent the application of
the dual consolidated loss rules, the $100x loss of DEx could then be
available to reduce U.S. tax imposed on USP's income as well as the
Country X QDMTT imposed on CFCx's income. The Treasury Department and
the IRS are of the view that as a matter of the policy underlying the
dual consolidated loss rules there is no meaningful distinction between
using DEx's $100x loss to offset the Country X QDMTT versus using the
loss to instead offset a more traditional income tax imposed by Country
X; both cases give rise to a double-deduction outcome. Further, a
double-deduction outcome could also occur if the loss were to offset
income under another country's IIR, rather than under a QDMTT.
Moreover, the features of the IIR or QDMTT noted by comments--such
as using financial accounting income as a starting point for purposes
of determining GloBE Income or Loss, or being a minimum tax--do not
preclude an IIR or QDMTT from being the type of tax to which the dual
consolidated loss rules were intended to apply. Indeed, these types of
features are included in the U.S. income tax. See, for example,
sections 55, 56A, and 59 (corporate alternative minimum tax). The
sharing of the loss through the mechanics of calculating Net GloBE
Income similarly is an insufficient basis to distinguish the IIR or
QDMTT from a more traditional foreign income tax where the loss is
shared pursuant to a consolidation election or similar loss-sharing
regime.
As an alternative to a foreign use exception, some comments
recommended an anti-abuse rule that provides that a foreign use can
only occur as a result of aggregation under the GloBE Model Rules if
the losses were created for a tax-avoidance purpose. These proposed
regulations do not provide such an anti-abuse rule because there is no
indication in the statutory language or legislative history that the
application of the dual consolidated loss rules should be limited to
losses incurred for a tax-
[[Page 64758]]
avoidance purpose.\15\ Many deductions that can be structured to give
rise to a double-deduction outcome are incurred for non-tax business
reasons, such as interest expense incurred on external debt that is
issued to acquire property or fund business operations.
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\15\ In contrast, the anti-avoidance rule under proposed Sec.
1.1503(d)-1(f) is intended to backstop the dual consolidated loss
rules, which apply to losses without regard to whether incurred for
a tax-avoidance purpose.
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Accordingly, the proposed regulations provide that an income tax
may include a tax that is intended to ensure a minimum level of
taxation on income or computes income or loss by reference to financial
accounting net income or loss. See proposed Sec. 1.1503(d)-
1(b)(6)(ii). Therefore, an IIR or QDMTT may be an income tax for
purposes of the dual consolidated loss rules and a foreign use may
occur under such tax by reason of a loss being used in the calculation
of Net GloBE Income or to qualify for a Transitional CbCR Safe Harbour.
See proposed Sec. 1.1503(d)-7(c)(3)(ii) for an example illustrating
the application of the dual consolidated loss rules with respect to a
QDMTT. These proposed regulations do not, however, provide specific
guidance regarding the UTPR. The Treasury Department and the IRS
continue to analyze issues related to the UTPR.
2. Effect on Certain Entities and Foreign Business Operations
As discussed in parts I.A, I.B, and I.E of the Background section
of this preamble, the definitions of hybrid entity, hybrid entity
separate unit, and dual resident corporation are each based, in part,
on whether the relevant entity is subject to an income tax of a foreign
country on its worldwide income or on a residence basis. The definition
of a foreign branch separate unit, on the other hand, is based on the
level of activities required to constitute a foreign branch under Sec.
1.367(a)-6T(g)(1) (subject to an exception where business operations do
not constitute a permanent establishment under an applicable income tax
convention). Among other requirements, an entity is a transparent
entity only if it is not subject to an income tax of a foreign country
on its worldwide income or on a residence basis.
As discussed in part IV.A of the Background section of this
preamble, a top-up tax may be collected by a jurisdiction with respect
to the Net GloBE Income of a Constituent Entity under a QDMTT or an
IIR. The top-up tax under an IIR with respect to the Net GloBE Income
of an entity located in one jurisdiction may be collected by a
different jurisdiction from another Constituent Entity in the MNE
Group. As mentioned in part I.D.1 of this Explanation of Provisions,
comments have asserted that the IIR is not based on the traditional
concept of tax residency and, if a loss does not arise in the foreign
jurisdiction that assesses the tax, the dual consolidated loss rules do
not apply.
The Treasury Department and the IRS are of the view, that where a
loss reduces or eliminates the amount of Net GloBE Income in a
jurisdiction, the results under the dual consolidated loss rules should
be the same regardless of the jurisdiction collecting tax with respect
to the amount of Jurisdictional Top-up Tax. For example, assume a
domestic corporation (``DC'') owns a foreign disregarded entity
(``FDEx''), a tax resident in Country X that imposes a QDMTT that is an
income tax. Further assume that FDEx owns all the stock of a foreign
corporation organized under the laws of Country X (``CFCx'') and that
is also a tax resident in Country X. FDEx should be treated as subject
to the QDMTT, and as a hybrid entity as a result of being subject to
the QDMTT, to prevent the double-deduction outcome discussed in part
I.D.1 of this Explanation of Provisions.
Alternatively, assume that DC owns another disregarded entity
(``FDEy''), that is a tax resident in Country Y, a jurisdiction that
imposes an IIR that is income tax, and FDEy owns FDEx, which owns CFCx,
and that Country X does not impose a QDMTT. In this case, a loss of
FDEx can reduce the GloBE Income of CFCx for purposes of the Country Y
IIR and, as was the case with a Country X QDMTT (that is also
calculated in part by reference to FDEx's income), a double-deduction
outcome may result. The treatment of an interest in FDEx as a separate
unit should not be affected if, instead of the QDMTT being collected
from FDEx with respect to its GloBE Income, an IIR is collected on
FDEy, the owner of FDEx, with respect to the GloBE Income of FDEx.
Moreover, a loss of FDEx cannot offset income of a Country Y
Constituent Entity for purposes of the Country Y IIR and, therefore,
the FDEx separate unit should not be part of a combined separate unit
that includes FDEy, which would otherwise distort the calculation of
income or loss attributable to the combined Country Y separate unit. In
other words, specifically identifying these separate units is necessary
to apply the separate unit combination rule, including for purposes of
describing the location of separate units arising from a QDMTT or an
IIR.
Accordingly, the proposed regulations generally provide that if the
income or loss of a foreign entity that is not taxed as an association
for Federal income tax purposes is taken into account in determining
the amount of tax under an IIR, then a domestic corporation's directly
or indirectly held interest in such an entity is a hybrid entity
separate unit. See proposed Sec. 1.1503(d)-1(b)(4)(i)(B)(2). Further,
such a hybrid entity separate unit would form part of a combined
separate unit based on where the relevant entity is located for
purposes of the IIR. See proposed Sec. 1.1503(d)-1(b)(4)(ii)(A) and
(b)(4)(ii)(B)(2). Thus, in both variations of the example in the
preceding paragraph, the interest in FDEx would, by reason of the
relevant foreign income tax, be treated as a separate unit in Country
X, which is the country in which FDEx is located for purposes of the
QDMTT and IIR. Further, because a double-deduction outcome may also
result from a place of business conducted by a domestic corporation
outside the United States that is treated as a Permanent Establishment
with respect to a QDMTT or an IIR, the proposed regulations would treat
such a place of business as a foreign branch separate unit. See
proposed Sec. 1.1503(d)-1(b)(4)(i)(A)(2).
These new definitions of hybrid entity separate unit and foreign
branch separate unit do not apply to an interest in an entity, or place
of business, respectively, that would otherwise qualify as a separate
unit under the definitions included in the current regulations. This is
because a loss attributable to a separate unit as defined under the
current regulations is already a dual consolidated loss and, thus,
additional rules are not necessary to prevent a double-deduction
outcome from occurring as a result of the use of losses attributable to
such separate units for purposes of a QDMTT or IIR. For example, if a
hybrid entity's loss is also taken into account in determining the
amount of tax under an IIR, a foreign use may result if a dual
consolidated loss attributable to an interest in the entity is made
available to offset income either for purposes of the foreign income
tax to which the entity is subject or for purposes of the IIR.
Under the proposed regulations, being subject to an IIR would not
cause an interest in a Tax Transparent Entity to be a hybrid entity
separate unit. See proposed Sec. 1.1503(d)-1(b)(4)(i)(B)(2). Although
a calculation of GloBE Income or Loss is required for a Tax Transparent
Entity, for purposes of an IIR, all of the entity's Financial
Accounting Net Income or Loss is allocated to its owners
[[Page 64759]]
(or to a permanent establishment of the entity) and, thus, it is
unlikely that a loss attributable to an interest in such an entity
could give rise to a double-deduction outcome. This treatment is also
consistent with the treatment, and policy rationale, under the existing
dual consolidated loss rules that an interest in a partnership that is
not a hybrid entity is not a separate unit.
The Treasury Department and the IRS are of the view that the
treatment of a foreign entity or a place of business outside the United
States as a Stateless Constituent Entity should not preclude treating a
domestic corporation's interest in such an entity or the place of
business as an individual separate unit. Even though the GloBE Income
or Loss of a Stateless Constituent Entity is not combined with the
GloBE Income or Loss of any other Constituent Entity, treating an
interest in such an entity or a place of business as an individual
separate unit is appropriate to prevent double-deduction outcomes that
may nevertheless arise (for example, if the foreign entity were to
generate a loss during the first half of the taxable year and then
elect to be treated as a foreign corporation for U.S. tax purposes).
The income or loss of a domestic entity may also be taken into
account in determining the amount of tax imposed under an IIR (for
example, if a domestic corporation were wholly owned by a foreign
corporation organized under the laws of a jurisdiction that imposed an
IIR). However, the Treasury Department and the IRS are of the view that
the IIR alone should not cause a domestic entity to be treated as a
dual resident corporation or a hybrid entity. The dual consolidated
loss rules are intended to prevent double-deduction outcomes that can
arise from structures involving the possibility of a form of arbitrage,
such as from an entity or place of business being subject to tax in
more than one country, or from the entity or place of business having
different tax classifications under U.S. and foreign tax law. Absent
this type of arbitrage, the dual consolidated loss rules would not
apply to limit the deductibility of a domestic entity's loss due to
that entity's income or loss being reflected in the amount of tax
imposed under an IIR (or a similar shareholder-level tax). Moreover, if
a loss of a domestic entity were viewed as giving rise to a second
deduction because it is taken into account to determine the amount of
tax imposed under an IIR, the loss is likely only available to offset
dual inclusion income (and therefore would not give rise to a double-
deduction outcome) since the income of any domestic affiliate that
could be offset by the loss for domestic tax purposes should also be
taken into account in determining the amount of tax imposed under the
IIR. Accordingly, under the proposed regulations a domestic entity is
not treated as a dual resident corporation or a hybrid entity solely as
a result of the domestic entity's income or loss being taken into
account in determining the amount of an IIR. See proposed Sec.
1.1503(d)-7(c)(3)(iii) for an example illustrating the treatment of
domestic entities under an IIR. Applying the dual consolidated loss
rules only when there is an element of hybridity (or mismatch) is
consistent with the scope of both the current dual consolidated loss
regulations and the OECD reports addressing hybrid and branch mismatch
arrangements.\16\
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\16\ See, for example, OECD/G20, Neutralising the Effects of
Hybrid Mismatch Arrangements, Action 2: 2015 Final Report (October
2015) (``Hybrid Mismatch Report''), Part I recommendations,
paragraph 13 (``While cross-border mismatches arise in other
contexts (such as the payment of deductible interest to a tax exempt
entity), the only types of mismatches targeted by this report are
those that rely on a hybrid element to produce such outcomes.'').
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3. Application to Transitional CbCR Safe Harbour
Comments requested guidance providing that, even if the dual
consolidated loss rules apply with respect to the GloBE Model Rules, a
foreign use should not occur solely because a dual consolidated loss is
taken into account for purposes of the Transitional CbCR Safe Harbour.
The comments noted that, unlike the QDMTT, IIR, and UTPR, the
Transitional CbCR Safe Harbour is not a collection mechanism and thus
does not operate to impose a tax liability. Instead, according to some
comments, the Transitional CbCR Safe Harbour can be viewed as a
``gating'' mechanism to determine if a taxpayer is subject to tax,
similar to a determination of whether activity rises to the level of a
permanent establishment under an applicable tax treaty. Further,
comments claimed that the calculation of income and expenses under the
Transitional CbCR Safe Harbour is substantially different from such
calculations under the general GloBE Model Rules and generally accepted
accounting principles.
Because the Transitional CbCR Safe Harbour is intended to serve as
a simplified proxy for determining whether the Tested Jurisdiction is
likely to have an ETR that is at or above the minimum rate, the
Treasury Department and the IRS are of the view that a foreign use
exception for the Transitional CbCR Safe Harbour is not appropriate
where, in the absence of the Transitional CbCR Safe Harbour, a dual
consolidated loss could be made available to reduce the amount of
income subject to a Top-up Tax. In other words, the use of a loss or
expense to qualify for the Transitional CbCR Safe Harbour, and thereby
avoid tax that may otherwise be imposed under the GloBE Model Rules
absent the application of the Transitional CbCR Safe Harbour, has the
same double-deduction outcome effect as if the loss or expense were
made available to directly reduce the tax. As a result, a foreign use
may occur with respect to the application of the Transitional CbCR Safe
Harbour. See proposed Sec. 1.1503(d)-7(c)(3)(ii) for an example
illustrating that duplicate loss arrangement rules may prevent such a
foreign use.
Finally, one comment requested guidance that jurisdictional
blending in a Tested Jurisdiction under the GloBE Model Rules does not
constitute a foreign use of a dual consolidated loss if the
Transitional CbCR Safe Harbour is satisfied in that Tested Jurisdiction
after the application of the duplicate loss arrangement rules. This
concern could arise because satisfying the Transitional CbCR Safe
Harbour in a Tested Jurisdiction technically does not preclude the
application of the GloBE Model Rules (and, thus, technically would not
preclude a foreign use that could occur under the ``made available''
standard), but rather only deems the Jurisdictional Top-up Tax in the
Tested Jurisdiction to be zero. Consistent with the guidance requested
in this comment, the proposed regulations provide a limited foreign use
exception under which there is deemed to be no foreign use with respect
to the GloBE Model Rules where the Transitional CbCR Safe Harbour is
satisfied and no foreign use occurs with respect to the Transitional
CbCR Safe Harbour due to the application of the duplicate loss
arrangement rules. See proposed Sec. 1.1503(d)-3(c)(9). For the
avoidance of doubt, however, this foreign use exception does not
preclude a foreign use from occurring if the duplicate loss arrangement
rules do not apply and a dual consolidated loss is taken into account
in determining whether the Transitional CbCR Safe Harbour is satisfied.
4. Mirror Legislation
As discussed in part IV.C. of the Background section of this
preamble, the December 2023 Administrative Guidance contains rules that
disallow expenses for purposes of qualifying for the Transitional CbCR
Safe Harbour if there is a duplicate loss arrangement. An arrangement
qualifies as a duplicate loss arrangement, in relevant part, if an
[[Page 64760]]
expense or loss in the financial statements of a Constituent Entity
also gives rise to a duplicate amount that is deductible in determining
the taxable income of another Constituent Entity in another
jurisdiction. Comments requested guidance as to whether the duplicate
loss arrangement rules in the December 2023 Administrative Guidance
constitute mirror legislation (within the meaning of Sec. 1.1503(d)-
3(e)(1)).
As discussed in part I.D of the Background section of this
preamble, the taxpayer's ability to choose the jurisdiction in which a
dual consolidated loss is used is a long-standing feature of the dual
consolidated loss rules. The mirror legislation rule was issued to
address situations where foreign legislation undermines the taxpayer's
ability to choose by denying any opportunity for a foreign use of a
particular dual consolidated loss and thereby compelling the taxpayer
to make a domestic use election. However, not all forms of foreign law
that deny the foreign use of deductions composing a dual consolidated
loss are mirror legislation. See Sec. 1.1503(d)-7(c)(18)(iii) for an
example illustrating that a foreign law similar to the dual
consolidated loss rules is not mirror legislation because it permits
the loss to be used in that jurisdiction if the loss is not used in
another jurisdiction.
The Treasury Department and the IRS are of the view that a
taxpayer's ability to choose whether to put a dual consolidated loss to
a domestic use or a foreign use can be preserved even if the foreign
law does not explicitly provide an election to use the loss (like the
dual consolidated loss rules) and instead only denies a loss to avoid a
double-deduction outcome. The duplicate loss arrangement rules in the
December 2023 Administrative Guidance preserve such a choice and thus
do not constitute mirror legislation because a dual consolidated loss
could be put to a foreign use for purposes of the Transitional CbCR
Safe Harbour. That is, if no domestic use election is made with respect
to a dual consolidated loss, then the loss is subject to the domestic
use limitation, and the duplicate loss arrangement rules should not
apply because the loss would not be deductible for purposes of
determining the taxable income of another Constituent Entity in another
jurisdiction. If, on the other hand, a domestic use election is made
for a dual consolidated loss, then the loss would be put to a domestic
use and the duplicate loss arrangement rules should prevent the expense
or loss from being taken into account for purposes of the Transitional
CbCR Safe Harbour (that is, they should prevent a foreign use). Thus,
through its ability to make or forgo a domestic use election, a
taxpayer retains the choice to put a dual consolidated loss to a
domestic use or a foreign use (but not both). For the same reason, the
double-deduction rules included in the OECD report addressing hybrid
and branch mismatch arrangements,\17\ which similarly deny the foreign
use of a dual consolidated loss to the extent it is deductible in
another jurisdiction, do not constitute mirror legislation.\18\
Accordingly, the proposed regulations clarify that foreign law that
preserves a taxpayer's choice to put a dual consolidated loss to a
domestic use or a foreign use (but not both) does not constitute mirror
legislation, even if there are specific instances where the foreign law
denies the foreign use of a deduction or expense to the extent
necessary to prevent a double-deduction outcome. See proposed Sec.
1.1503(d)-7(c)(18)(iv) for an example illustrating a foreign law that
provides such a choice.
---------------------------------------------------------------------------
\17\ See the Hybrid Mismatch Report; OECD/G20, Neutralising the
Effects of Branch Mismatch Arrangements, Action 2: Inclusive
Framework on BEPS (July 2017).
\18\ See, for example, New Zealand's Tax Information Bulletin,
Vol. 31 No. 3 April 2019 at p. 50, which discusses New Zealand's
deduction disallowance rules that are based on the double-deduction
rules in the Hybrid Mismatch Report. In discussing the interaction
of the New Zealand rules with the dual consolidated loss rules, the
Bulletin provides:
Expenditure incurred by a US taxpayer, or a New Zealand hybrid
entity which is deductible by a US owner, will not be subject to
[New Zealand's deduction disallowance rules] so long as the US
taxpayer is subject to the [dual consolidated loss] rules and has
not made a domestic use election. If the US taxpayer has made a
domestic use election, then [the New Zealand deduction disallowance
rules] will apply to deny a deduction for the expenditure. That is
because the domestic use election is an election that the [dual
consolidated loss] rules do not apply to the US taxpayer in respect
of the relevant expenditure.
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5. Transition Rules
As discussed in part IV.B of the Background section of this
preamble, Notice 2023-80 announced that future regulations would be
promulgated concerning legacy DCLs (that is, certain dual consolidated
losses incurred before any legislation enacting the GloBE Model Rules
is effective).
Several comments requested that the foreign use exception described
in Notice 2023-80 be extended to include dual consolidated losses
incurred in taxable years beginning after December 31, 2023 (for
example, for taxable years ending on or before December 31, 2024, or
taxable years beginning in the year that final regulations concerning
the applicability of the dual consolidated loss rules with respect to
the QDMTT and IIR are issued). Comments asserted that the extension of
the foreign use exception is warranted to provide certainty and to take
into account further developments from the OECD, such as the possible
future application of the duplicate loss arrangement rules outside the
context of the Transitional CbCR Safe Harbour.
The Treasury Department and the IRS are of the view that it is
appropriate to extend, for a limited period, relief from the
application of the dual consolidated loss rules with respect to the
GloBE Model Rules. This would provide taxpayers more certainty, allow
for further consideration of these proposed regulations and comments
that may be submitted, and allow for consideration of any future
developments at the OECD. Extending the relief only for a limited
period is intended to minimize the double-deduction outcomes that may
result. Accordingly, and subject to an anti-abuse rule, these proposed
regulations provide that the dual consolidated loss rules apply without
taking into account QDMTTs or Top-up Taxes with respect to losses
incurred in taxable years beginning before August 6, 2024. See proposed
Sec. 1.1503(d)-8(b)(12).
In addition to not being limited to legacy DCLs, this transition
relief differs from the relief provided in Notice 2023-80 in that it
applies beyond foreign use, applying with respect to all the dual
consolidated loss rules (including foreign use). This broader relief is
intended, in part, to relieve the administrative burden of having to
file a domestic use election and annual certifications for dual
consolidated losses that would otherwise qualify for the foreign use
exception described in Notice 2023-80 (or for the additional relief
provided under the proposed regulations). Further, this would prevent a
loss from being subject to recapture as a result of a triggering event
other than a foreign use, such as the failure to file an annual
certification.
6. Interaction With Anti-Hybrid Rules
As noted in part IV.B of the Background section of this preamble,
the Treasury Department and the IRS are studying the interaction of the
GloBE Model Rules with the rules under sections 245A(e) and 267A and
request comments in this regard. For example, the Treasury Department
and the IRS are considering whether a foreign country's traditional
income tax and a Top-up Tax with respect to the operations in the
foreign country should be viewed as part of the same ``tax laws''
[[Page 64761]]
of the country for purposes of section 267A.
E. Applicability Dates
Proposed Sec. 1.1502-13(j)(10), relating to the interaction of the
dual consolidated loss rules with the intercompany transaction
regulations, is proposed to apply to taxable years for which the
original Federal income tax return is due (without extensions) after
the date that final regulations are published in the Federal Register.
See proposed Sec. 1.1502-13(l)(11). However, taxpayers may apply
proposed Sec. 1.1502-13(j)(10), once published in the Federal Register
as final regulations, to an earlier taxable year that remains open,
provided that the taxpayer and all members of its consolidated group
apply the regulations consistently in that taxable year and each
subsequent taxable year. See id.
The parenthetical in proposed Sec. 1.1503(d)-1(c)(1)(ii),
clarifying that a specified foreign tax resident that is a disregarded
entity can be related to a domestic consenting corporation for purposes
of Sec. 1.1503(d)-1(c)(1)(ii), is proposed to apply to determinations
relating to taxable years ending on or after August 6, 2024. See
proposed Sec. 1.1503(d)-8(b)(6).
Proposed Sec. 1.1503(d)-5(b)(2)(iv) and (c)(4)(iv), relating to
the attribution of items arising from ownership of stock, are proposed
to apply to taxable years ending on or after August 6, 2024. See
proposed Sec. 1.1503(d)-8(b)(9).
The fourth and fifth sentences of proposed Sec. 1.1503(d)-
5(c)(3)(i), relating to the adjustments to conform to U.S. tax
principles, are proposed to apply to taxable years ending on or after
August 6, 2024. See proposed Sec. 1.1503(d)-8(b)(10). As noted in part
I.B.2 of this Explanation of Provisions, the proposed addition of these
two sentences is intended merely to clarify the existing regulation for
the avoidance of any doubt. The IRS may challenge contrary positions
for taxable years ending before August 6, 2024 under the rules
applicable to such taxable years.
Proposed Sec. 1.1503(d)-8(b)(12), relating to the application of
the dual consolidated loss rules without regard to QDMTTs or Top-up
Taxes, applies with respect to losses incurred in taxable years
beginning before August 6, 2024.
Proposed Sec. 1.1503(d)-3(c)(9), relating to the foreign use
exception for qualification for the Transitional CbCR Safe Harbour, is
proposed to apply to taxable years beginning on or after August 6,
2024. See proposed Sec. 1.1503(d)-8(b)(13).
Proposed Sec. Sec. 1.1503(d)-1(b)(4)(i)(A)(2), 1.1503(d)-
1(b)(4)(i)(B)(2), and 1.1503(d)-1(b)(4)(ii)(B)(2), relating to separate
units arising as a result of a QDMTT or IIR, apply to taxable years
beginning on or after August 6, 2024. See proposed Sec. 1.1503(d)-
8(b)(14).
Proposed Sec. 1.1503(d)-1(f), relating to an anti-avoidance rule,
is proposed to apply to taxable years ending on or after August 6,
2024. See proposed Sec. 1.1503(d)-8(b)(15).
Proposed Sec. 1.1503(d)-1(b)(6)(ii), relating to minimum taxes and
taxes based on financial accounting principles, is proposed to apply to
taxable years ending on or after August 6, 2024. See proposed Sec.
1.1503(d)-8(b)(16).
A taxpayer may rely on these proposed regulations for any taxable
year ending on or after August 6, 2024 and beginning on or before the
date that regulations finalizing these proposed regulations are
published in the Federal Register, provided that the taxpayer and all
members of its consolidated group apply the proposed regulations in
their entirety and in a consistent manner for all taxable years
beginning with the first taxable year of reliance until the
applicability date of those final regulations. In addition, a taxpayer
may rely on the foreign use exception described in Notice 2023-80 for
any taxable year ending on or after December 11, 2023 and before August
6, 2024, provided that the taxpayer and all members of its consolidated
group apply those rules in their entirety and in a consistent manner
for all taxable years beginning with the first taxable year of reliance
until the applicability date of the final regulations on this topic.
II. Rules Regarding Disregarded Payment Losses
A. Overview
The preamble to the 2018 proposed regulations describes structures
involving payments from foreign disregarded entities to their domestic
corporate owners that are regarded for foreign tax purposes but
disregarded for U.S. tax purposes. For foreign tax purposes, the
payments give rise to a deduction or loss that, for example, can be
surrendered (or otherwise used, such as through a consolidation regime)
to offset non-dual inclusion income. The preamble notes that these
structures are not addressed under the current section 1503(d)
regulations but give rise to significant policy concerns that are
similar to those arising under sections 245A(e), 267A, and 1503(d). In
addition, the preamble states that the Treasury Department and the IRS
are studying these transactions and request comments.
In response to this request, a comment agreed that these structures
can produce a deduction/no-inclusion (``D/NI'') outcome. In a similar
context, the comment asserted that arriving at the correct result would
generally require, for U.S. tax purposes, disaggregating a disregarded
payment into a regarded item of deduction and a regarded item of
income, and taking such items into account for purposes of the dual
consolidated loss rules to the extent reflected on the books and
records of the entity. However, the comment did not recommend this
approach due to complexity, noting, for example, that it would require
tracking of transactions between a foreign disregarded entity and its
domestic corporate owner, as well as determining the character and
source of items that would not otherwise exist for U.S. tax purposes.
To mitigate certain D/NI outcomes, the comment recommended an
alternative approach, which would track disregarded items only so as to
offset regarded items, and thus not so as to create items of income and
deduction. The comment conceded, however, that this approach would not
address the paradigm structure involving only disregarded deductions
that give rise to D/NI outcomes and therefore would not address the
policy concerns. The comment queried whether it might be better for the
dual consolidated loss rules not to apply, with the expectation that
the foreign jurisdiction could, in some cases, eliminate D/NI outcomes
by denying the foreign tax deduction.
The Treasury Department and the IRS are of the view that treating
items otherwise disregarded for U.S. tax purposes as regarded could
give rise to considerable complexity, and that the alternative approach
recommended by the comment would not address the paradigm structure,
and therefore would not sufficiently address the policy concerns
underlying these structures. Accordingly, neither of these approaches
is adopted. However, the Treasury Department and the IRS are not of the
view that these structures should be addressed only to the extent of
applicable foreign tax rules addressing D/NI outcomes; in the absence
of a foreign tax rule denying a foreign tax deduction, these structures
would continue to give rise to the significant policy concerns noted
above. In addition, the OECD/G20 recommends defensive rules that
require income inclusions to neutralize D/NI outcomes. See, for
example, Hybrid Mismatch
[[Page 64762]]
Report Recommendations 1.1(b) and 3.1(b).
Accordingly, the proposed regulations address these structures
through the entity classification rules under section 7701 and the dual
consolidated loss rules under section 1503(d), in a manner that is
consistent with the ``domestic consenting corporation'' approach under
Sec. Sec. 301.7701-3(c)(3) and 1.1503(d)-1(c) addressing domestic
reverse hybrids. Under this approach, when certain eligible entities
(``specified eligible entities'') are treated as disregarded entities
for U.S. tax purposes, a domestic corporation that acquires, or on the
effective date of the election directly or indirectly owns, interests
in such a specified eligible entity consents to be subject to the rules
of proposed Sec. 1.1503(d)-1(d). See proposed Sec. 301.7701-
3(c)(4)(i).
Pursuant to these rules (the ``disregarded payment loss'' rules),
and as further discussed in part II.B. of this Explanation of
Provisions, the domestic corporation agrees that it will monitor a net
loss of the entity under a foreign tax law that is composed of certain
payments that are disregarded for U.S. tax purposes and, if a D/NI
outcome occurs as to the loss, include in gross income an amount equal
to the loss. See proposed Sec. 1.1503(d)-1(d)(1). The Treasury
Department and the IRS are of the view that the domestic corporation's
inclusion of the amount in gross income generally neutralizes the D/NI
outcome, and places the parties in approximately the same position in
which they would have been had the specified eligible entity not been
permitted to be classified as a disregarded entity. In addition, the
Treasury Department and the IRS are of the view that this approach is
more administrable than alternative approaches, such as disaggregating
each disregarded payment into a regarded item of deduction and income,
or, upon a D/NI outcome as to the loss, terminating the specified
eligible entity's classification retroactive to the taxable year in
which the loss was incurred. These alternative approaches would have
the same effect of giving rise to an item of income to the domestic
corporation because the payment would be regarded.
The proposed regulations also include a deemed consent rule
pursuant to which, beginning on the date that is twelve months after
the date that the disregarded payment loss rules are applicable, a
domestic corporation that directly or indirectly owns interests in a
specified eligible entity is deemed to consent to be subject to the
rules, to the extent it has not otherwise so consented. See proposed
Sec. 301.7701-3(c)(4)(iii) and (vi). This default rule is intended to
reflect the result that taxpayers would be expected to favor (for
example, to avoid the various income inclusion rules that would
typically apply upon the conversion of a hybrid entity to a foreign
corporation). However, the deemed consent can be avoided if the
specified eligible entity elects to be treated as an association.\19\
See proposed Sec. 301.7701-3(c)(4)(iv). Further, the twelve-month
delay for deemed consent provides an opportunity to restructure
existing arrangements to avoid the application of the disregarded
payment loss rules without changing the classification of a specified
eligible entity.
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\19\ The deemed consent rule could also be avoided by
restructuring such that the rule would not apply, for example, by
contributing the interests in the specified eligible entity to a
foreign corporation or by converting the entity into a partnership.
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B. Consequences of Consent
1. In General
When a domestic corporation consents to be subject to the
disregarded payment loss rules, the domestic corporation agrees that if
the specified eligible entity (described below) incurs a disregarded
payment loss during a certification period (discussed in section II.B.3
of this Explanation of Provisions) and a triggering event occurs with
respect to that loss, then the domestic corporation will include in
gross income the DPL inclusion amount. See proposed Sec. 1.1503(d)-
1(d)(1)(i). These rules also apply to a disregarded payment loss of a
foreign branch of the domestic corporation because disregarded payments
from the domestic corporation to the specified eligible entity may,
under the branch's tax law, be attributable to, and deductible by, the
branch and thus could produce a D/NI outcome (for example, if the
branch surrendered the loss to a foreign corporation). See id.
In general, a specified eligible entity is an entity that, when
classified as a disregarded entity, could pay or receive amounts that
could give rise to a D/NI outcome by reason of being disregarded for
U.S. tax purposes but deductible for foreign tax purposes. Thus, a
specified eligible entity includes an eligible entity (regardless of
whether domestic or foreign) that is a foreign tax resident (which, in
the case of a domestic eligible entity, may occur, for example, if the
entity is managed and controlled in a foreign country), because amounts
paid by such an entity may be disregarded for U.S. tax purposes but
deductible for foreign tax purposes. See proposed Sec. 301.7701-
3(c)(4)(i).
2. Disregarded Payment Loss Computation
A disregarded payment loss with respect to a specified eligible
entity or a foreign branch (in either case, a ``disregarded payment
entity,'' and the domestic corporation that consents to be subject to
the disregarded payment loss rules, the ``specified domestic owner'' of
the disregarded payment entity) is computed for each foreign taxable
year of the entity. See proposed Sec. 1.1503(d)-1(d)(6)(ii). The
disregarded payment loss generally measures the entity's net loss, if
any, for foreign tax purposes that is composed of certain payments that
are disregarded for U.S. tax purposes as transactions between the
disregarded payment entity and its tax owner (for example, a payment by
the disregarded payment entity to the specified domestic owner or to
another disregarded payment entity of the specified domestic owner), or
as a transaction between a foreign branch and its home office (for
example, a payment by the foreign branch to a disregarded entity of the
specified domestic owner). See id. That is, it generally measures the
entity's net loss that, but for the disregarded payment loss rules,
could produce a D/NI outcome. For example, if for a foreign taxable
year a disregarded payment entity's only items are a $100x interest
deduction and $70x of royalty income, and if each item were disregarded
for U.S. tax purposes as a payment between a disregarded entity and its
tax owner (but taken into account under foreign law), then the entity
would have a $30x disregarded payment loss for the taxable year.
In general, the items of deduction taken into account for purposes
of computing a disregarded payment loss include any item that is
deductible under the relevant foreign tax law, is disregarded for U.S.
tax purposes and, if regarded for U.S. tax purposes, would be interest,
a structured payment, or a royalty within the meaning of Sec. 1.267A-
5(a)(12), (b)(5)(ii), or (a)(16), respectively. See proposed Sec.
1.1503(d)-1(d)(6)(ii)(C). Similar rules apply for determining items of
income that offset the items of income for purposes of determining a
disregarded payment loss. See proposed Sec. 1.1503(d)-1(d)(6)(ii)(D).
The Treasury Department and the IRS are of the view that defining a
duplicated payment loss in this manner tailors the application of the
rules to arrangements that are likely structured to produce a D/NI
outcome. Moreover, this approach is consistent with the scope of
section 267A. In addition, only items generated or incurred during a
[[Page 64763]]
period in which an interest in the disregarded payment entity is a
separate unit are taken into account. See proposed Sec. 1.1503(d)-
1(d)(6)(ii). In other words, items generally are taken into account
only to the extent they would be subject to the dual consolidated loss
rules but for the items being disregarded for U.S. tax purposes. Thus,
for example, if a domestic corporation becomes a dual resident
corporation as a result of changing its place of management,
disregarded payments made to or from a domestic disregarded entity held
by the domestic corporation are not taken into account in computing a
disregarded payment loss to the extent such payments gave rise to a
deduction under the relevant foreign law before the domestic
corporation was a dual resident corporation subject to the dual
consolidated loss rules.
The rules for computing a disregarded payment loss therefore differ
in certain respects from comparable rules applicable for purposes of
computing a dual consolidated loss. For example, the latter rules do
not take into account the deductibility of an item under a foreign tax
law and are not limited to interest, structured payments, or royalties.
See Sec. 1.1503(d)-5(b) through (d).
3. Triggering Events
In general, the specified domestic owner must include in gross
income the DPL inclusion amount with respect to a disregarded payment
loss if either of two triggering events occurs with respect to the loss
during a certification period (the ``DPL certification period''). See
proposed Sec. 1.1503(d)-1(d)(2)(i). The DPL certification period
includes the foreign taxable year in which the disregarded payment loss
is incurred, any prior foreign taxable year, and the subsequent 60-
month period. See proposed Sec. 1.1503(d)-1(d)(6)(iii); but see
proposed 1.1503(d)-1(d)(7)(iii) (terminating the certification period
upon a sale of the disregarded payment entity). This proposed
definition is consistent with the certification period under the dual
consolidated loss rules, which is revised to include at least the 60-
month period following the year in which the dual consolidated loss is
incurred, as well as all taxable years (unlike the disregarded payment
loss rules, as determined under U.S. tax law) before the taxable year
in which a dual consolidated loss is incurred. See proposed Sec.
1.1503(d)-1(b)(20).
The two triggering events are based on certain principles of the
dual consolidated loss rules. See proposed Sec. 1.1503(d)-1(d)(3). The
first triggering event addresses likely D/NI outcomes--that is, a
foreign use of the disregarded payment loss (determined by taking into
account the exceptions described in Sec. 1.1503(d)-3(c)).\20\ See
proposed Sec. 1.1503(d)-1(d)(3)(i). However, for purposes of
determining whether a foreign use occurs (and unlike the approach under
the dual consolidated loss rules), only persons that are related to the
specified domestic owner are taken into account. See id. This
limitation is intended to minimize triggering events resulting from
transactions that are not tax motivated, such as a foreign use
resulting from the sale of a disregarded payment entity to an unrelated
person, yet still deter arrangements structured to produce D/NI
outcomes that typically involve related parties. Thus, for example, a
foreign use triggering event occurs if, under a foreign tax law, a
deduction taken into account in computing the disregarded payment loss
is made available (including by reason of a foreign consolidation
regime or similar regime, or a sale, merger, or similar transaction) to
offset an item of income that, for U.S. tax purposes, is an item of a
foreign corporation, but only if that foreign corporation is related to
the specified domestic owner of the disregarded payment entity.
---------------------------------------------------------------------------
\20\ Because an expense resulting from an Intragroup Financing
Arrangement is generally excluded from the calculation of a Low-Tax
Entity's GloBE Income or loss if there is no commensurate increase
in the taxable income of the High-Tax Counterparty, a disregarded
payment loss (that is, a payment that generally does not increase
U.S. taxable income) should generally not be put to a foreign use as
a result of jurisdictional blending under the GloBE Model Rules.
---------------------------------------------------------------------------
The second triggering event is a failure by the specified domestic
owner to comply with certification requirements. See proposed Sec.
1.1503(d)-1(d)(3)(ii). In general, the specified domestic owner must,
for the foreign taxable year in which a disregarded payment loss is
incurred, and for each subsequent taxable year within the DPL
certification period, file a statement providing information about the
disregarded payment loss of such entity and certifying that a foreign
use of the disregarded payment loss has not occurred. See proposed
Sec. 1.1503(d)-1(d)(4). Relief is available for a failure to properly
comply with the certification requirements. See proposed Sec.
1.1503(d)-1(e).
For simplicity purposes, the proposed regulations include fewer
triggering events than the dual consolidated loss rules. For example,
the disregarded payment loss triggering events do not include specific
triggering events related to the transfer of assets of, or interests
in, a disregarded payment entity. Nevertheless, the scope of the
disregarded payment loss triggering events is, in general, consistent
with that of the dual consolidated loss triggering events because a
foreign use triggering event typically occurs, or will occur, in
connection with other dual consolidated loss triggering events that are
not rebutted. For example, the transfer of all the interests in a
disregarded entity by its domestic owner to a related and wholly owned
foreign corporation would constitute a triggering event described in
Sec. 1.1503(d)-6(e)(1)(v) (transfer of 50 percent or more of an
interest in a separate unit). However, such a transfer would also
typically give rise to a foreign use triggering event described in
Sec. 1.1503(d)-6(e)(1)(i) because a portion of a deduction or loss
taken into account in computing the dual consolidated loss would
generally carry over under foreign law following the transfer and thus
be made available to offset or reduce an item that is recognized as
income or gain under foreign law and that is, or would be, considered
under U.S. tax principles to be an item of a foreign corporation. See
Sec. 1.1503(d)-3(a)(1). Many of these non-foreign use dual
consolidated loss triggering events are intended to heighten awareness
that certain transactions or events are likely to give rise to a
foreign use, which results in a double-deduction outcome, and therefore
serve to increase compliance with the rules. Because D/NI outcomes from
disregarded payment losses involve only related parties and typically
are highly-structured, however, the Treasury Department and the IRS are
of the view that the foreign use and certification triggering events
are sufficient for purposes of the disregarded payment loss rules.
4. DPL Inclusion Amount
In general, the DPL inclusion amount is, with respect to a
disregarded payment loss as to which a triggering event occurs during
the DPL certification period, the amount of the disregarded payment
loss. See proposed Sec. 1.1503(d)-1(d)(2)(i). For U.S. tax purposes,
the DPL inclusion amount is treated as ordinary income and
characterized in the same manner as if the amount were interest or
royalty income paid by a foreign corporation. See proposed Sec.
1.1503(d)-1(d)(2)(ii).
In certain cases, the DPL inclusion amount is reduced by the
positive balance, if any, of the ``DPL cumulative register'' with
respect to the disregarded payment entity. See proposed Sec.
1.1503(d)-1(d)(5)(i). The DPL cumulative register is similar to the
cumulative register for dual
[[Page 64764]]
consolidated loss purposes, and generally reflects each disregarded
payment loss or amount of ``disregarded payment income'' of a
disregarded payment entity. See Sec. 1.1503(d)-1(d)(5)(ii).
Disregarded payment income is computed in a manner similar to that of
computing a disregarded payment loss, and measures a disregarded
payment entity's net income, if any, for a foreign taxable year that is
composed of certain disregarded payments attributable to interest,
structured payments, or royalties. See proposed Sec. 1.1503(d)-
1(d)(6)(ii). Taking into account whether there is sufficient cumulative
register to absorb a disregarded payment loss is intended to ensure
that the DPL inclusion amount represents only the portion of the
disregarded payment loss that is available to be put to a foreign use
under the foreign tax law. For example, if a disregarded payment entity
incurs a $100x disregarded payment loss in year 1 and has $80x of
disregarded payment income in year 2, only $20x of the disregarded
payment loss is likely available under the foreign tax law to be put to
a foreign use. As such, if a triggering event occurs at the end of year
2, then the specified domestic owner must include in gross income $20x
(rather than the entire $100x of the disregarded payment loss).
5. Disregarded Payment Entity Combination Rule
Similar to the dual consolidated loss rules, the proposed
regulations include a rule pursuant to which disregarded payment
entities for which the relevant foreign tax law is the same
(``individual disregarded payment entities'') are generally combined
and treated as a single disregarded payment entity (``combined
disregarded payment entity'') for purposes of the disregarded payment
loss rules. See proposed Sec. 1.1503(d)-1(d)(7)(i); see also Sec.
1.1503(d)-1(b)(4)(ii) (combined separate unit rule for dual
consolidated loss purposes). Accordingly, for a foreign taxable year,
only a single amount of disregarded payment income or a single
disregarded payment loss exists with respect to the combined
disregarded payment entity. This amount is computed by first
determining the disregarded payment income or loss with respect to each
of the individual disregarded payment entities and then aggregating
such amounts.
This combination rule is intended to prevent the application of the
disregarded payment loss rules to cases in which, taking into account
the overall effect of disregarded payments under a foreign tax law,
there is not an opportunity for a disregarded payment loss of an
individual disregarded payment entity to produce a D/NI outcome. For
example, assume USP, a domestic corporation, wholly owns DE1X, which
wholly owns DE2X, and each of DE1X and DE2X is a disregarded payment
entity tax resident in Country X. Further assume that, computed on a
separate basis during a foreign taxable year, DE1X has a $100x
disregarded payment loss (consisting solely of a $100x payment by DE1X
to DE2X), and DE2X has $100x of disregarded payment income (consisting
solely of the $100x payment received by DE2X from DE1X). Absent the
combination rule, the specified domestic owner of DE1X would be
required to monitor DE1X's disregarded payment loss and annually
certify that no foreign use has occurred with respect to the loss.
However, taking into account the overall effect of the payment under
Country X law, there is likely to be no net loss attributable to the
payment and, as a result, there likely is not an opportunity for the
payment to give rise to a D/NI outcome. The combination rule thus
limits the application of the disregarded payment loss rules to cases
in which it is likely that disregarded payments could give rise to a D/
NI outcome.
6. Application to Dual Resident Corporations
The proposed regulations include special rules pursuant to which
the disregarded payment loss rules also apply to dual resident
corporations, because a disregarded payment by a dual resident
corporation to its disregarded entity could also give rise to a D/NI
outcome (for example, if the dual resident corporation surrenders the
loss to a foreign corporation). Thus, pursuant to the consent rules
described in part II.A of this Explanation of Provisions, a dual
resident corporation that directly or indirectly owns interests in an
eligible entity that is classified as a disregarded entity agrees, for
purposes of the disregarded payment loss rules, to be treated as a
disregarded payment entity and as a specified owner of such disregarded
payment entity. See proposed Sec. Sec. 1.1503(d)-1(d)(1)(ii) and
301.7701-3(c)(4)(ii).
C. Interaction With Dual Consolidated Loss Rules
Although the disregarded payment loss rules address similar policy
concerns as, and rely on certain aspects of, the existing dual
consolidated loss rules, the Treasury Department and the IRS are of the
view that integrating the two regimes would result in considerable
complexity and administrative burden. For example, integrating the
regimes could require rules pursuant to which a disregarded payment
entity's deduction under a foreign tax law for a disregarded payment is
considered to in part offset the entity's items of regarded income
(which would have the effect of increasing a dual consolidated loss,
relative to not taking into account the payment for purposes of the
dual consolidated loss rules) and to in part offset the entity's items
of income that are disregarded for U.S. tax purposes (which would have
the effect of decreasing a disregarded payment loss, relative to only
taking into account the payment for purposes of the disregarded payment
loss rules).
The disregarded payment loss rules therefore operate independently
of the dual consolidated loss rules. Thus, for example, only items that
are regarded for U.S. tax purposes are taken into account in computing
a dual consolidated loss (or cumulative register), and only items that
are disregarded for U.S. tax purposes are taken into account in
computing a disregarded payment loss (or DPL cumulative register). In
addition, a disregarded payment entity may have both a dual
consolidated loss and a disregarded payment loss for the same taxable
year, and both of these items could be triggered by a single event
(such as a foreign use pursuant to a foreign loss surrender regime); in
contrast, a foreign use could be avoided both for a dual consolidated
loss and disregarded payment loss of the same disregarded payment
entity if, for example, an election is required to enable a foreign use
and no such election is made.
As discussed in part I.B of the Background section of this
preamble, the dual consolidated loss rules do not take into account
disregarded transactions (that typically are regarded for foreign tax
purposes) for purposes of attributing items to a separate unit or an
interest in a transparent entity. This approach, which minimizes the
need for additional complex rules, can result in both the over- and
under-application of the dual consolidated loss rules as compared to
more precise rules that would take into account such items to the
extent necessary to neutralize double-deduction outcomes. Thus, the
decision to ignore disregarded transactions in the dual consolidated
loss rules for this purpose reflects a balance of policy and
administrability. In other contexts, various policy objectives have
required giving effect to certain disregarded transactions. See, for
[[Page 64765]]
example, Sec. 1.904-4(f)(2)(vi) (attributing gross income to a foreign
branch) and Sec. 1.951A-2(c)(7)(ii)(B)(2) (determining gross income
for purposes of applying the high-tax exception). The Treasury
Department and the IRS are of the view that, in light of the policies
underlying the enactment of sections 245A(e), 267A, and 1503(d), the
disregarded payment loss rules are another case where it is necessary
to take into account disregarded transactions; the absence of such
rules would otherwise permit taxpayers to continue to implement
structures involving such payments to obtain D/NI outcomes. The
Treasury Department and the IRS will continue to study the treatment of
disregarded items for purposes of the dual consolidated loss rules,
including whether it may be appropriate to take into account items of
disregarded income, gain, deduction or loss in other cases.
D. Applicability Date
The proposed rules relating to consent to be subject to the
disregarded payment loss rules are proposed to apply to entity
classification elections filed on or after August 6, 2024 (regardless
of whether the election is effective before August 6, 2024). See
proposed Sec. 301.7701-3(c)(4)(vi)(A). The proposed rule relating to
deemed consent is proposed to apply on or after August 6, 2025. See
proposed Sec. 301.7701-3(c)(4)(vi)(B). The proposed rules relating to
disregarded payment losses are proposed to apply to taxable years
ending on or after August 6, 2024. See proposed Sec. 1.1503(d)-
8(b)(11).
Conforming Amendments to Other Regulations
The Treasury Department and the IRS intend to make conforming
amendments to the regulations under section 1503(d), including with
respect to examples, upon finalization of the proposed regulations.
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (``PRA'')
requires that a Federal agency obtain the approval of the OMB before
collecting information from the public, whether such collection of
information is mandatory, voluntary, or required to obtain or retain a
benefit. Section 1.1503(d)-1(d)(4) of these proposed regulations
requires the collection of information.
As discussed in part II.B of this Explanation of Provisions, the
proposed regulations require certain taxpayers to certify that no
foreign use has occurred with respect to a disregarded payment loss.
The IRS will use this information to determine the extent to which
these taxpayers need to recognize income under the proposed
regulations.
The reporting burden associated with this collection of information
will be reflected in the PRA submissions associated with Form 1120 (OMB
control number 1545-0123). The Treasury Department and the IRS do not
have readily available data to determine the number of taxpayers
affected by this collection of information because no reporting module
currently identifies these types of disregarded payments. The Treasury
Department and the IRS request comments on all aspects of information
collection burdens related to the proposed regulations, including ways
for the IRS to minimize the paperwork burden.
III. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) (``RFA'') requires the agency to
prepare and make available for public comment an initial regulatory
flexibility analysis that will describe the impact of the proposed rule
on small entities. See 5 U.S.C. 603(a). Section 605 of the RFA provides
an exception to this requirement if the agency certifies that the
proposed rulemaking will not have a significant economic impact on a
substantial number of small entities. A small entity is defined as a
small business, small nonprofit organization, or small governmental
jurisdiction. See 5 U.S.C. 601(3) through (6).
The Treasury Department and the IRS do not expect that the proposed
dual consolidated loss regulations described in parts I.A, I.B, and I.C
of the Explanation of Provisions will have a significant economic
impact on a substantial number of small entities because those
regulations refine computations under the current dual consolidated
loss regulations without changing the economic impact of the current
regulations. Further, the Treasury Department and the IRS do not expect
the proposed dual consolidated loss regulations described in parts
I.D.1 through I.D.6 of the Explanation of Provisions will have a
significant economic impact on a substantial number of small entities
because they provide exceptions and other rules that limit the
application of the current dual consolidated loss regulations. However,
because there is a possibility of significant economic impact on a
substantial number of small entities, an initial regulatory flexibility
analysis for the regulation is provided below. The Treasury Department
and the IRS request comments from the public on the number of small
entities that may be impacted and whether that impact will be
economically significant.
A. Reasons Why Action Is Being Considered
The proposed dual consolidated loss regulations described in parts
I.A through I.D of the Explanation of Provisions address potential
uncertainty, and refine or adjust certain computations, under current
law. In addition, the proposed dual consolidated loss regulations
provide limited exceptions to the application of the dual consolidated
loss rules where not inconsistent with the general policy underlying
those rules. As a result, this portion of the proposed regulations
increases the precision of the dual consolidated loss regulations and
reduces inappropriate planning opportunities.
As explained in part II.A of the Explanation of Provisions, the
proposed disregarded payment loss regulations address certain hybrid
payments that can give rise to deduction/no-inclusion outcomes.
B. Objectives of, and Legal Basis for, the Proposed Regulations
The proposed regulations described in parts I.A, I.B, I.C, I.D.1,
I.D.2, and I.D.4 of the Explanation of Provisions address potential
uncertainty, and refine or adjust certain computations, under the
current dual consolidated loss regulations. The proposed dual
consolidated loss regulations described in parts I.D.3 and I.D.5 of the
Explanation of Provisions limit the application of the current dual
consolidated loss regulations. The proposed disregarded payment loss
regulations described in part II of the Explanation of Provisions
require an income inclusion for U.S. tax purposes to eliminate the
deduction/no-inclusion outcome that would otherwise arise from certain
hybrid payments. The legal basis for these regulations is contained in
sections 1502, 1503(d), 7701, and 7805.
[[Page 64766]]
C. Small Entities to Which These Regulations Will Apply
Because an estimate of the number of small businesses affected is
not currently feasible, this initial regulatory flexibility analysis
assumes that a substantial number of small businesses will be affected.
The Treasury Department and the IRS do not expect that these proposed
regulations will affect a substantial number of small nonprofit
organizations or small governmental jurisdictions.
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The proposed dual consolidated loss regulations do not impose
additional reporting or recordkeeping obligations. The proposed
disregarded payment loss regulations impose a certification requirement
that is filed with a domestic corporation's tax return.
E. Duplicate, Overlapping, or Relevant Federal Rules
These proposed regulations would replace portions of the dual
consolidated loss regulations. The Treasury Department and the IRS are
not aware of any Federal rules that duplicate, overlap, or conflict
with these proposed regulations.
F. Alternatives Considered
The Treasury Department and the IRS did not consider any
significant alternative to the proposed dual consolidated loss
regulations. The proposed regulations described in parts I.A, I.B, I.C,
I.D.1, I.D.2, and I.D.4 of the Explanation of Provisions simply address
potential uncertainty, or refine or adjust certain computations, under
current law. The proposed regulations described in parts I.D.3 and
I.D.5 of the Explanation of Provisions limit the application of the
dual consolidated loss regulations. As a result, the proposed dual
consolidated loss regulations do not impose an additional economic
burden and, consequently, the regulations represent the approach with
the least economic impact.
As discussed in part II.A of the Explanation of Provisions, the
proposed disregarded payment loss regulations address policy concerns
that are similar to the concerns underlying the enactment of sections
245A(e), 267A, and 1503(d). Sections 245A, 267A, and 1503(d) apply
uniformly to large and small business entities, and the Treasury
Department and the IRS are of the view that the proposed disregarded
payment loss regulations should generally apply without regard to the
size of the corporation--a small business exception would undermine the
anti-hybridity policies underlying these regulations. Accordingly,
there is no viable alternative to the proposed regulations for small
entities.
Pursuant to section 7805(f) of the Code, the proposed regulations
have been submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact on small
businesses. The Treasury Department and the IRS also request comments
from the public on the analysis in part III of the Special Analyses.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (``UMRA'')
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. The proposed rules do not include any Federal mandate that
may result in expenditures by State, local, or Tribal governments, or
by the private sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of Executive Order 13132. The proposed rules do not have
federalism implications and do not impose substantial direct compliance
costs on State and local governments or preempt State law within the
meaning of Executive Order 13132.
Incorporation by Reference
Sections 1.1503(d)-1(b)(4)(i)(A)(2), (b)(4)(i)(B)(2),
(b)(4)(ii)(B)(2), and (b)(21), and Sec. Sec. 1.1503(d)-3(c)(9),
1.1503(d)-7(b)(16) and (c)(3), and 1.1503(d)-8(b)(12) of these proposed
regulations use terminology based on their definitions under the GloBE
Model Rules and the GloBE Model Rules Consolidated Commentary. The
Office of the Federal Register has regulations concerning incorporation
by reference. 1 CFR part 51. These regulations require that agencies
must discuss in the preamble to a rule or proposed rule the way in
which materials that the agency incorporates by reference are
reasonably available to interested persons, and how interested parties
can obtain the materials. 1 CFR 51.5(b).
The GloBE Model Rules and Administrative Guidance addressing Hybrid
Arbitrage Arrangements are discussed in Part IV of the Background
section of this preamble. The GloBE Model Rules and the GloBE Model
Rules Consolidated Commentary were issued by the OECD on December 20,
2021, and April 25, 2024, respectively, and are available at
<a href="http://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.htm">www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.htm</a>. The
Administrative Guidance was issued on December 15, 2023, and is
available at <a href="http://www.oecd.org/tax/beps/administrative-guidance-global-anti-base-erosion-rules-pillar-two-june-2024.pdf">www.oecd.org/tax/beps/administrative-guidance-global-anti-base-erosion-rules-pillar-two-june-2024.pdf</a>.
Comments and Requests for Public Hearing
Before these proposed amendments to the final regulations are
adopted as final regulations, consideration will be given to comments
that are submitted timely to the IRS as prescribed in this preamble
under the ADDRESSES heading. In addition to the comments specifically
requested in the Explanation of Provisions, the Treasury Department and
the IRS request comments on all other aspects of the proposed
regulations. Any comments submitted will be made available at <a href="https://www.regulations">https://www.regulations</a>.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register.
Drafting Information
The principal authors of these regulations are Andrew L. Wigmore of
the Office of Associate Chief Counsel (International) and Julie Wang of
the Office of Associate Chief Counsel (Corporate). However, other
personnel from the Treasury Department and the IRS participated in
their development.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin or Cumulative Bulletin and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
[[Page 64767]]
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR parts 1 and 301 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the entry for section 1.1503(d) and adding entries for sections
1.1503(d)-1 through 1.1503(d)-8 in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Sections 1.1503(d)-1 through 8 also issued under 26 U.S.C.
953(d), 26 U.S.C. 1502, 26 U.S.C. 1503(d), 26 U.S.C. 1503(d)(2)(B),
26 U.S.C. 1503(d)(3), and 26 U.S.C. 1503(d)(4).
* * * * *
0
Par. 2. Section 1.1502-13, as proposed to be amended at 88 FR 52057
(August 7, 2023) and at 88 FR 78134 (November 14, 2023), is further
amended by:
0
1. In paragraph (a)(6)(ii) in the table revising the entry ``(G)
Miscellaneous operating rules''.
0
2. In paragraph (c)(5), adding the language ``See paragraph (j)(10) of
this section for rules regarding the special status of a section
1503(d) member.'' after the last sentence.
0
3. Redesignating paragraph (j)(10) as paragraph (j)(15).
0
4. Adding new paragraph (j)(10).
0
5. Adding and reserving paragraphs (j)(11) through (14).
0
6. Adding paragraphs (j)(15)(x) and (xi), and (l)(11).
The additions and revision read as follows:
Sec. 1.1502-13 Intercompany transactions.
(a) * * *
(6) * * *
(ii) * * *
----------------------------------------------------------------------------------------------------------------
Rule General location Paragraph Example
----------------------------------------------------------------------------------------------------------------
* * * * * * *
(G) Miscellaneous operating rules.... Sec. 1.1502-13(j)(15)..... (i).................... Example 1.
Intercompany sale
followed by
section 351
transfer to
member.
(ii)................... Example 2.
Intercompany sale
of member stock
followed by
recapitalization.
(iii).................. Example 3. Back-to-
back intercompany
transactions--mat
ching.
(iv)................... Example 4. Back-to-
back intercompany
transactions--acc
eleration.
(v).................... Example 5.
Successor group.
(vi)................... Example 6.
Liquidation--80%
distributee.
(vii).................. Example 7.
Liquidation--no
80% distributee.
(viii)................. Example 8. Loan by
section 987 QBU.
(ix)................... Example 9. Sale of
property by
section 987 QBU.
(x).................... Example 10.
Interest on
intercompany
obligation.
(xi)................... Example 11. Loss
of a section
1503(d) member.
----------------------------------------------------------------------------------------------------------------
* * * * *
(j) * * *
(10) Dual consolidated loss rules--(i) Scope. The rules of this
paragraph (j)(10) apply to an intercompany transaction if either party
to the transaction is a section 1503(d) member. A section 1503(d)
member is a member that is--
(A) An affiliated dual resident corporation (as defined in Sec.
1.1503(d)-1(b)(10)); or
(B) An affiliated domestic owner (as defined in Sec. 1.1503(d)-
1(b)(10)) acting through a separate unit (as defined in Sec.
1.1503(d)-1(b)(4)) that is not regarded as separate from the domestic
owner for Federal income tax purposes.
(ii) Ordering rule for the section 1503(d) member. In determining
when the section 1503(d) member's intercompany (or corresponding) item
is taken into account, the dual consolidated loss rules under section
1503(d) and the regulations thereunder (the dual consolidated loss
rules) do not apply to the relevant item until that item would
otherwise be taken into account under paragraph (c) or (d) of this
section.
(iii) Status as a section 1503(d) member. A section 1503(d) member
has special status under paragraph (c)(5) of this section with respect
to its intercompany (or corresponding) items for purposes of applying
the dual consolidated loss rules to those items. Therefore, for
purposes of applying the dual consolidated loss rules, paragraph
(c)(1)(i) of this section does not apply to redetermine the attributes
of the section 1503(d) member's intercompany (or corresponding) items.
(iv) Application of the matching rule to the counterparty member.
The special status of a section 1503(d) member does not affect the
application of the matching rule in paragraph (c) of this section (or
under paragraph (d) of this section, to the extent the matching rule
principles are applicable) to the counterparty member in an
intercompany transaction. For example, assume S sells depreciable
property to B (a section 1503(d) member) at a gain, and the property is
also subject to depreciation in the hands of B. For purposes of taking
into account S's items, the matching rule applies as if B were not a
section 1503(d) member. Therefore, even if B's annual depreciation
deduction on the acquired property is limited under the dual
consolidated loss rules and not currently deductible, S nevertheless
takes into account a portion of its intercompany gain pursuant to the
matching rule every year as if B were entitled to deduct the additional
depreciation resulting from the intercompany sale.
* * * * *
(15) * * *
(x) Example 10. Interest on intercompany obligation--(A) Facts.
S lends money to B, an affiliated dual resident corporation (a
section 1503(d) member), with $10 of interest due annually for Year
1 through Year 5. For the years at issue, B has a dual consolidated
loss (within the meaning of Sec. 1.1503(d)-1(b)(5)(i)) with respect
to which it makes a domestic use election (within the meaning of
Sec. 1.1503(d)-6(d)).
(B) Analysis--(1) Interest expense deduction of the section
1503(d) member. For each year at issue, B has $10 of interest
expense deduction. Under paragraph
[[Page 64768]]
(j)(10)(ii) of this section, the matching rule in paragraph (c) of
this section applies first (before the dual consolidated loss rules)
to determine if B's deduction is taken into account. Pursuant to
paragraph (c)(2)(i) of this section, B would take its $10 of
interest deduction into account annually. Therefore, the amount of
B's dual consolidated loss in each year reflects the $10 of interest
expense.
(2) Interest income of the counterparty member. For each year at
issue, S has $10 of interest income. Although B has a dual
consolidated loss for each year at issue, B makes a domestic use
election and deducts the $10 of interest expense annually. Under the
matching rule in paragraph (c) of this section, for each year, S
takes into account its $10 of interest income to match B's $10 of
interest deduction.
(C) Treatment for counterparty member when deduction is
deferred. The facts are the same as in paragraph (j)(15)(x)(A) of
this section, except that for the years at issue, B's interest
expense deduction would be limited under the domestic use limitation
rule of Sec. 1.1503(d)-4(b) (and no exception under Sec.
1.1503(d)-6 applies) and is not currently deductible for the years
at issue. Under paragraph (j)(10)(iv) of this section, the matching
rule applies to S (the counterparty member) as if B did not have
section 1503(d) member status. Therefore, for the purpose of
determining S's income inclusion, B is treated as deducting $10 of
interest expense per year. Thus, S's interest income is not
redetermined to be deferred, even though B's interest expense
deduction is deferred under the dual consolidated loss rules.
(D) Treatment for counterparty member when a dual consolidated
loss is recaptured. The facts are the same as in paragraph
(j)(15)(x)(A) of this section, with B making a domestic use election
(within the meaning of Sec. 1.1503(d)-6(d)) in Year 1 and deducting
$10 of interest expense in Year 1. Then in Year 2, B is required
under Sec. 1.1503(d)-6(e) to recapture and report as ordinary
income $10 (plus applicable interest) with respect to the $10 of
interest expense incurred in Year 1. Because the matching rule
applies to S (the counterparty member) as if B did not have its
section 1503(d) member status, the recapture of B's Year 1 dual
consolidated loss will not affect the treatment of S's intercompany
interest income. See paragraph (j)(10)(iv) of this section.
(E) Intercompany obligation involving an affiliated domestic
owner. The facts are the same as in paragraph (j)(15)(x)(A) of this
section, except that B is an affiliated domestic owner with respect
to a directly owned foreign branch separate unit, S lends money to
this separate unit of B, and the $10 of interest expense, when it is
taken into account under the section 1503(d) rules, would be
attributable to B's foreign branch separate unit for the years at
issue. The analysis and treatment of S's intercompany item and B's
corresponding item (attributable to the separate unit) are the same
as in paragraphs (j)(15)(x)(B), (C), and (D) of this section.
However, if B does not act through its separate unit in entering the
intercompany loan with S, the rules of paragraph (j)(10) of this
section do not apply. See paragraph (j)(10)(i) of this section.
(xi) Example 11. Loss of a section 1503(d) member--(A) Facts. S
is an affiliated dual resident corporation (a section 1503(d)
member). S owns inventory with a basis of $100. In Year 1, S sells
the inventory to B for $60. In Year 3, B sells the inventory to X
for $110. For the years at issue, S's $40 of loss is subject to the
domestic use limitation rule of Sec. 1.1503(d)-4(b) (and no
exception under Sec. 1.1503(d)-6 applies) and would not be
currently deductible.
(B) Analysis--(1) Year 1 and Year 2: timing. S recognizes $40 of
loss on the intercompany inventory sale to B. Pursuant to the
ordering rule in paragraph (j)(10)(ii) of this section, in each
year, the matching rule in paragraph (c) of this section applies
first to determine whether S's loss is taken into account. In Year 1
and Year 2, because the $40 of loss is deferred under the matching
rule, no amount of loss from the sale is subject to the dual
consolidated loss rules in those years.
(2) Year 3: timing and attributes. In Year 3, B sells the
inventory to X for $110, for a $50 gain. Consequently, under the
matching rule (disregarding the application of section 1503(d)), S's
$40 of loss would be taken into account in that year. Since S's item
would otherwise be taken into account, the section 1503(d) rules are
applicable to the $40 loss in Year 3, and the loss would be subject
to the domestic use limitation under Sec. 1.1503(d)-4(b) and would
not be currently deductible. The application of Sec. 1.1503(d)-4(b)
to limit S's loss is not subject to redetermination under paragraph
(c)(1)(i) of this section, because S has special status. See
paragraph (j)(10)(iii) of this section. Moreover, B's gain is taken
into account in Year 3, without regard to S's status as a section
1503(d) member. See paragraph (j)(10)(iv) of this section.
(C) Intercompany transaction involving a separate unit of an
affiliated domestic owner. The facts are the same as in paragraph
(j)(15)(xi)(A) of this section, except that S is an affiliated
domestic owner with respect to a directly owned foreign branch
separate unit, and S acts through the foreign branch separate unit
in selling the inventory to B such that the loss on the inventory,
when it is taken into account under the section 1503(d) rules, would
be attributable to S's foreign branch separate unit. The analysis
and treatment of S's intercompany item (attributable to the foreign
branch separate unit) and B's corresponding item are the same as in
paragraphs (j)(15)(xi)(B)(1) and (2) of this section.
* * * * *
(l) * * *
(11) Applicability date. Paragraph (j)(10) of this section applies
to taxable years for which the original Federal income tax return is
due (without extensions) after [DATE OF PUBLICATION OF THE FINAL
REGULATIONS IN THE FEDERAL REGISTER]. However, taxpayers may choose to
apply these provisions to an earlier taxable year, if the period for
the assessment of tax for that taxable year has not expired, provided
the taxpayer and all members of its consolidated group apply these
provisions consistently for that taxable year and each subsequent
taxable year.
* * * * *
0
Par. 3. Section 1.1503(d)-1 is amended by:
0
1. Revising the section heading.
0
2. Revising the third sentence in paragraph (a) and adding three new
sentences at the end.
0
3. Revising paragraphs (b)(4)(i) and (ii), and (b)(6).
0
4. In the second sentence of paragraph (b)(16)(i), removing the
language ``An entity'' and adding the language ``Other than an entity
described in paragraph (b)(4)(i)(B)(2) of this section, an entity'' in
its place.
0
5. In paragraph (b)(20),
0
a. Adding the language ``(not less than 60 months)'' after ``time'';
and
0
b. Adding the language ``, as well as any prior taxable years'' after
``incurred'' at the end of the sentence.
0
6. Adding paragraph (b)(21).
0
7. In paragraph (c)(1)(ii), adding the language ``(including, in the
case of a specified foreign tax resident that under Sec. Sec.
301.7701-1 through 301.7701-3 of this chapter is disregarded as an
entity separate from its owner for U.S. tax purposes, by reason of its
tax owner bearing)'' after the language ``bears.''
0
8. Redesignating paragraph (d) as paragraph (e).
0
9. Adding paragraphs (d) and (f).
The revisions and additions read as follows:
Sec. 1.1503(d)-1 Definitions, special rules, and filings.
(a) * * * Paragraph (c) of this section provides rules for a
domestic consenting corporation. Paragraph (d) of this section provides
rules for disregarded payment losses. Paragraph (e) of this section
provides relief for certain compliance failures due to reasonable cause
and a signature requirement for filings. Paragraph (f) of this section
provides an anti-avoidance rule.
(b) * * *
(4) * * *
(i) In general. The term separate unit means either a foreign
branch separate unit or a hybrid entity separate unit.
(A) Foreign branch separate unit. The term foreign branch separate
unit means either of the following that is carried on, directly or
indirectly, by a domestic corporation (including a dual resident
corporation):
(1) Except to the extent provided in paragraph (b)(4)(iii) of this
section, a business operation outside the United States that, if
carried on by a U.S. person, would constitute a foreign branch as
defined in Sec. 1.367(a)-6T(g)(1).
[[Page 64769]]
(2) A place of business (including a deemed place of business)
outside the United States that is a Permanent Establishment with
respect to a QDMTT or an IIR, provided that the Permanent Establishment
is not otherwise described in paragraph (b)(4)(i)(A)(1) of this
section.
(B) Hybrid entity separate unit. The term hybrid entity separate
unit means either of the following that is owned, directly or
indirectly, by a domestic corporation (including a dual resident
corporation):
(1) An interest in a hybrid entity; and
(2) An interest in a foreign entity (other than a Tax Transparent
Entity with respect to an IIR) that is not taxed as an association for
Federal tax purposes and the net income or loss of which is taken into
account in determining the amount of tax under an IIR, provided that
the interest is not otherwise described in paragraph (b)(4)(i)(B)(1) of
this section. See Sec. 1.1503(d)-7(c)(3)(iii) for an example
illustrating the application of this rule.
(ii) Separate unit combination rule--(A) In general. Except as
otherwise provided in paragraph (b)(4)(ii)(B) of this section, if a
domestic owner, or two or more domestic owners that are members of the
same consolidated group, have two or more separate units (individual
separate units), then all such individual separate units that are
located (in the case of a foreign branch separate unit or a hybrid
entity separate unit described in paragraph (b)(4)(i)(B)(2) of this
section) or subject to an income tax either on their worldwide income
or on a residence basis (in the case of a hybrid entity an interest in
which is a hybrid entity separate unit described in paragraph
(b)(4)(i)(B)(1) of this section) in the same foreign country are
treated as one separate unit (combined separate unit). See Sec.
1.1503(d)-7(c)(1) for an example illustrating the application of this
paragraph (b)(4)(ii)(A). Except as specifically provided in this
section or Sec. Sec. 1.1503(d)-2 through 1.1503(d)-8, any individual
separate unit composing a combined separate unit loses its character as
an individual separate unit.
(B) Special rules--(1) Certain dual resident corporations. Separate
units of a foreign insurance company that is a dual resident
corporation under paragraph (b)(2)(ii) of this section are not combined
with separate units of any other domestic corporation.
(2) Location of separate units arising from a QDMTT or an IIR. For
purposes of paragraph (b)(4)(ii)(A) of this section, a separate unit
described in paragraph (b)(4)(i)(A)(2) or (b)(4)(i)(B)(2) of this
section is located in the country in which it is located for purposes
of the relevant QDMTT or IIR. If such place of business or entity is
not located in a specific jurisdiction (for example, because the entity
is a stateless entity for purposes of an IIR), the individual separate
unit is not combined with any other separate units. See Sec.
1.1503(d)-7(c)(3)(iii) for an example illustrating the application of
this paragraph (b)(4)(ii)(B)(2).
* * * * *
(6) Tax determination--(i) Subject to tax. For purposes of
determining whether a domestic corporation or another entity is subject
to an income tax of a foreign country on its income, the fact that it
has no actual income tax liability to the foreign country for a
particular taxable year shall not be taken into account.
(ii) Minimum taxes and taxes computed by reference to financial
accounting principles. For purposes of section 1503(d) and the
regulations in this part issued under section 1503(d), the
determination of whether a tax is an income tax is made without regard
to whether the tax is intended to ensure a minimum level of taxation on
income or computes income or loss by reference to financial accounting
net income or loss.
* * * * *
(21) Pillar Two terminology. Qualified Domestic Minimum Top-up Tax
(QDMTT), Income Inclusion Rule (IIR), and any other capitalized terms
that are used in connection with or are otherwise relevant to a minimum
tax based on a QDMTT or IIR have the same meaning ascribed to such
terms under the material listed in paragraphs (b)(21)(i) through (iii)
of this section. These materials are incorporated by reference into
Sec. Sec. 1.1503(d)-1 through 1.1503(d)-8 with the approval of the
Director of the Federal Register under 5 U.S.C. 552(a) and 1 CFR part
51. This material is available for inspection at the IRS and at the
National Archives and Records Administration (NARA). Contact the IRS
at: IRS FOIA Request, Headquarters Disclosure Office, CL:GLD:D, 1111
Constitution Avenue NW, Washington, DC 20224; phone: +1 312 292 3297;
website: <a href="https://foiapublicaccessportal.for.irs.gov/app/Home.aspx">https://foiapublicaccessportal.for.irs.gov/app/Home.aspx</a>. For
information on the availability of this material at NARA, email:
<a href="/cdn-cgi/l/email-protection#5036227e393e2320353324393f3e103e3122317e373f26"><span class="__cf_email__" data-cfemail="6b0d19450205181b0e081f0204052b050a190a450c041d">[email protected]</span></a>, or go to: <a href="http://www.archives.gov/federal-register/cfr/ibr-locations">www.archives.gov/federal-register/cfr/ibr-locations</a>. This material may be obtained from the Organisation
for Economic Co-operation and Development (OECD) at: 2, rue
Andr[eacute] Pascal, 75016 Paris; phone: +33 1 45 24 82 00; website:
<a href="http://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.htm">www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.htm</a>.
(i) OECD (2021), Tax Challenges Arising from the Digitalisation of
the Economy--Global Anti-Base Erosion Model Rules (Pillar Two):
Inclusive Framework on BEPS, OECD, Paris, December 20, 2021. (Available
at <a href="http://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.htm">www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.htm</a>.)
(ii) OECD (2024), Tax Challenges Arising from the Digitalisation of
the Economy--Consolidated Commentary to the Global Anti-Base Erosion
Model Rules (2023): Inclusive Framework on BEPS, OECD/G20 Base Erosion
and Profit Shifting Project, OECD Publishing, Paris, April 23, 2024.
(Available at <a href="https://doi.org/10.1787/b849f926-en">https://doi.org/10.1787/b849f926-en</a>.)
(iii) OECD (2024), Tax Challenges Arising from the Digitalisation
of the Economy--Administrative Guidance on the Global Anti-Base Erosion
Model Rules (Pillar Two), June 2024, OECD/G20 Inclusive Framework on
BEPS, OECD, Paris, December 15, 2023. (Available at <a href="http://www.oecd.org/tax.beps/administrative/guidance/global/anti-base-erosion-rules-pillar-two-june-2024.pdf">www.oecd.org/tax.beps/administrative/guidance/global/anti-base-erosion-rules-pillar-two-june-2024.pdf</a>.)
* * * * *
(d) Disregarded payment loss rules--(1) Consequences of consent--
(i) In general. As provided in Sec. 301.7701-3(c)(4)(i) of this
chapter, a domestic corporation that directly or indirectly owns
interests in a specified eligible entity (as defined in Sec. 301.7701-
3(c)(4)(i) of this chapter) classified as a disregarded entity consents
to be subject to the disregarded payment loss rules of this paragraph
(d). Pursuant to such consent, the domestic corporation agrees that if
the specified eligible entity or a foreign branch of the domestic
corporation (the specified eligible entity or such a foreign branch, a
disregarded payment entity, and the domestic corporation, a specified
domestic owner) incurs a disregarded payment loss (other than a
disregarded payment loss described in paragraph (d)(7)(iii) of this
section) and a triggering event occurs with respect to the disregarded
payment loss during the DPL certification period, then, for the taxable
year of the specified domestic owner during which the triggering event
occurs, the specified domestic owner includes in gross income the DPL
inclusion amount. See Sec. 1.1503(d)-7(c)(42) for an example
illustrating the application of the disregarded payment loss rules.
(ii) Special rule regarding dual resident corporations. As provided
in
[[Page 64770]]
Sec. 301.7701-3(c)(4)(ii) of this chapter, a dual resident corporation
that directly or indirectly owns an interest in an eligible entity
classified as a disregarded entity consents to be subject to the
disregarded payment loss rules of this paragraph (d). Pursuant to such
consent, the dual resident corporation agrees, for purposes of this
paragraph (d), to be treated as a disregarded payment entity and as a
specified domestic owner of such disregarded payment entity. In such a
case, if the dual resident corporation has disregarded payment income
or a disregarded payment loss for a foreign taxable year, then with
respect to a disregarded payment loss, it generally must comply with
the certification requirements of paragraph (d)(4) of this section and,
upon a triggering event, include in gross income an amount equal to the
DPL inclusion amount.
(2) DPL inclusion amount--(i) In general. A DPL inclusion amount
means, with respect to a disregarded payment loss as to which a
triggering event occurs during the DPL certification period, an amount
equal to the disregarded payment loss (or, if applicable, the reduced
amount, as described in paragraph (d)(5)(i) of this section).
(ii) Character and source. A DPL inclusion amount is, for U.S. tax
purposes, treated as ordinary income, and characterized, including for
purposes of sections 904(d) and 907, in the same manner as if the
amount were interest or royalty income paid by a foreign corporation
(taking into account, for example, section 904(d)(3) if such foreign
corporation would be a controlled foreign corporation). For these
purposes, the DPL inclusion amount is considered comprised of interest
or royalty income based on the proportion of interest or royalty
deductions taken into account, respectively, in computing the
disregarded payment loss relative to all the deductions taken into
account in computing the disregarded payment loss.
(iii) Translation into U.S. dollars. A DPL inclusion amount is
translated into U.S. dollars (if necessary) using the yearly average
exchange rate (within the meaning of Sec. 1.987-1(c)(2)) for the
taxable year of the specified domestic owner during which the
triggering event occurs.
(3) Triggering events. An event described in paragraph (d)(3)(i) or
(ii) of this section is a triggering event with respect to a
disregarded payment loss of a disregarded payment entity.
(i) Foreign use. A foreign use of the disregarded payment loss. For
this purpose, a foreign use is determined under the principles of Sec.
1.1503(d)-3 (including the exceptions in Sec. 1.1503(d)-3(c)), by
treating the disregarded payment loss as a dual consolidated loss,
treating the disregarded payment entity as a separate unit (or, in the
case of a disregarded payment entity that is a dual resident
corporation, by treating the disregarded payment entity as a dual
resident corporation), and, in Sec. 1.1503(d)-3(a)(1)(i) and (ii),
only taking into account a person that is related to the specified
domestic owner of the disregarded payment entity. Thus, for example, a
foreign use of a disregarded payment loss occurs if, under a relevant
foreign tax law, any portion of a deduction taken into account in
computing the disregarded payment loss is made available (including by
reason of a foreign consolidation regime or similar regime, or a sale,
merger, or similar transaction) to offset an item of income that, for
U.S. tax purposes, is an item of a foreign corporation, but only if
such foreign corporation is related to the specified domestic owner of
the disregarded payment entity.
(ii) Failure to comply with certification requirements. A failure
by the specified domestic owner of the disregarded payment entity to
comply with the certification requirements of paragraph (d)(4) of this
section.
(4) Certification requirements. Except as otherwise provided in
publications, forms, instructions, or other guidance, a specified
domestic owner of a disregarded payment entity must satisfy the
certification requirements of this paragraph (d)(4) with respect to a
disregarded payment loss of the disregarded payment entity, other than
a disregarded payment loss described in paragraph (d)(7)(iii) of this
section. To satisfy the certification requirements, the specified
domestic owner must meet the requirements in paragraphs (d)(4)(i) and
(ii) of this section.
(i) For its taxable year that includes the date on which the
foreign taxable year in which the disregarded payment loss is incurred
ends, the specified domestic owner must attach with its timely filed
tax return a certification labeled ``Initial Disregarded Payment Loss
Certification,'' which must contain--
(A) The information set forth in Sec. 1.1503(d)-6(c)(2)(ii)
(determined by substituting the phrase ``disregarded payment entity''
for the phrase ``separate unit'');
(B) A statement of the amount of the disregarded payment loss; and
(C) A statement that a foreign use of the disregarded payment loss
has not occurred during the DPL certification period.
(ii) During the DPL certification period, for each of its
subsequent taxable years that includes a date on which a foreign
taxable year ends, the specified domestic owner must attach with its
timely filed tax return a certification labeled ``Annual Disregarded
Payment Loss Certification'' and satisfying the requirements of this
paragraph (d)(4)(ii). Certifications with respect to multiple
disregarded payment losses may be combined in a single certification,
but each disregarded payment loss must be separately identified. To
satisfy the requirements of this paragraph (d)(4)(ii), the
certification must--
(A) Identify the disregarded payment loss to which it pertains by
setting forth the foreign taxable year in which the disregarded payment
loss was incurred and the amount of such loss;
(B) State that there has been no foreign use of the disregarded
payment loss; and
(C) Warrant that arrangements have been made to ensure that there
will be no foreign use of the disregarded payment loss and that the
specified domestic owner will be informed of any such foreign use.
(5) Reduction of DPL inclusion amount in certain cases. With
respect to a disregarded payment loss as to which a triggering event
occurs during the DPL certification period, the following rules apply:
(i) The reduced amount means the excess (if any) of the disregarded
payment loss over the positive balance (if any) of the DPL cumulative
register with respect to the disregarded payment entity, computed as of
the end of the foreign taxable year during which the triggering event
occurs but not taking into account the disregarded payment loss. If
during a taxable year of a specified domestic owner a triggering event
occurs as to multiple disregarded payment losses of a disregarded
payment entity of the specified domestic owner (each such loss, a
triggered loss), then, when computing the DPL cumulative register for
purposes of determining the reduced amount with respect to a triggered
loss incurred in an earlier foreign taxable year, a triggered loss
incurred in a later foreign taxable year is not taken into account.
(ii) The term DPL cumulative register means, with respect to the
disregarded payment entity, an account the balance of which is computed
at the end of each foreign taxable year of the entity, and which
(except as provided in paragraph (d)(5)(i) of this section) is
increased by
[[Page 64771]]
disregarded payment income of the entity for the taxable year or
decreased by a disregarded payment loss of the entity for the foreign
taxable year. The account balance may be positive or negative.
(iii) The reduced amount must be demonstrated to the satisfaction
of the Commissioner. To so demonstrate, the specified domestic owner of
the disregarded payment entity must attach a statement labeled
``Reduction of Disregarded Payment Loss Amount'' to the income tax
return for the taxable year in which the triggering event occurs and
provide any other information as requested by the Commissioner. The
statement must show the disregarded payment income or disregarded
payment loss of the disregarded payment entity for each foreign taxable
year up to and including the foreign taxable year during which the
triggering event occurs.
(6) Definitions. The following definitions apply for purposes of
this paragraph (d).
(i) The term disregarded payment entity has the meaning set forth
in paragraph (d)(1)(i) of this section, and includes a dual resident
corporation treated as a disregarded payment entity pursuant to
paragraph (d)(1)(ii) of this section.
(ii) The terms disregarded payment income and disregarded payment
loss have the meanings set forth in this paragraph (d)(6)(ii). For
purposes of computing the disregarded payment income or disregarded
payment loss of a disregarded payment entity, an item is taken into
account only if it gives rise to income or a deduction under the
relevant foreign tax law during a period in which an interest in the
disregarded payment entity is a separate unit (or the disregarded
payment entity is a dual resident corporation); for purposes of
allocating an item to a period, the principles of Sec. 1.1502-76(b)
apply. Items taken into account in computing disregarded payment income
or disregarded payment loss are calculated in the currency used to
determine tax under the relevant foreign tax law.
(A) Disregarded payment income. Disregarded payment income means,
with respect to a disregarded payment entity and a foreign taxable year
of the entity, the excess (if any) of the sum of the items described in
paragraph (d)(6)(ii)(D) of this section over the sum of the items
described in paragraph (d)(6)(ii)(C) of this section.
(B) Disregarded payment loss. Disregarded payment loss means, with
respect to a disregarded payment entity and a foreign taxable year of
the entity, the excess (if any) of the sum of the items described in
paragraph (d)(6)(ii)(C) of this section over the sum of the items
described in paragraph (d)(6)(ii)(D) of this section.
(C) Items of deduction. With respect to a disregarded payment
entity and a foreign taxable year of the entity, an item is described
in this paragraph (d)(6)(ii)(C) to the extent that it satisfies the
requirements set forth in paragraphs (d)(6)(ii)(C)(1) through (3) of
this section. In addition, an item is described in this paragraph
(d)(6)(ii)(C) if, under the relevant foreign tax law, it is a deduction
with respect to equity (including deemed equity) allowed to the entity
in such taxable year (for example, a notional interest deduction) or a
deduction for an imputed interest payment with respect to a debt
instrument (such as a deduction for an imputed interest payment with
respect to an interest-free loan).
(1) Under the relevant foreign tax law, the entity is allowed a
deduction in such taxable year for the item.
(2) The payment, accrual, or other transaction giving rise to the
item is disregarded for U.S. tax purposes as a transaction between a
disregarded entity and its tax owner (for example, a payment by a
disregarded entity to its tax owner or to another disregarded entity
held by its tax owner, or a payment from a dual resident corporation to
its disregarded entity) or as a transaction between a foreign branch
and its home office (for example, a payment attributable to a foreign
branch to a disregarded entity of its home office).
(3) If the payment, accrual, or other transaction were regarded for
U.S. tax purposes, it would be interest, a structured payment, or a
royalty within the meaning of Sec. 1.267A-5(a)(12), (b)(5)(ii), or
(a)(16), respectively.
(D) Items of income. With respect to a disregarded payment entity
and a foreign taxable year of the entity, an item is described in this
paragraph (d)(6)(ii)(D) to the extent that it satisfies the
requirements set forth in paragraphs (d)(6)(ii)(D)(1) through (3) of
this section.
(1) Under the relevant foreign tax law, the entity includes the
item in income in such taxable year.
(2) The payment, accrual, or other transaction giving rise to the
item is disregarded for U.S. tax purposes as a transaction between a
disregarded entity and its tax owner (for example, because it is a
payment to a disregarded entity from the disregarded entity's tax owner
or from another disregarded entity held by its tax owner, or a payment
to a dual resident corporation from its disregarded entity) or as a
transaction between a foreign branch and its home office (for example,
a payment to a foreign branch by a disregarded entity of its home
office).
(3) If the payment, accrual, or other transaction were regarded for
U.S. tax purposes, it would be interest, a structured payment, or a
royalty with the meaning of Sec. 1.267A-5(a)(12), (b)(5)(ii), or
(a)(16), respectively.
(iii) The term DPL certification period includes, with respect to a
disregarded payment loss, the foreign taxable year in which the
disregarded payment loss is incurred, any prior foreign taxable years,
and, except as provided in paragraph (d)(7)(iv) of this section, the
60-month period following the foreign taxable year in which the
disregarded payment loss is incurred.
(iv) The term foreign branch means a branch (within the meaning of
Sec. 1.267A-5(a)(2)) that gives rise to a taxable presence under the
tax law of the foreign country where the branch is located.
(v) The term foreign taxable year means, with respect to a
disregarded payment entity, the entity's taxable year for purposes of a
relevant foreign tax law.
(vi) The term related has the meaning provided in this paragraph
(d)(6)(vi). A person is related to a specified domestic owner if the
person is a related person within the meaning of section 954(d)(3) and
the regulations thereunder, determined by treating the specified
domestic owner as the ``controlled foreign corporation'' referred to in
that section.
(vii) The term relevant foreign tax law means, with respect to a
disregarded payment entity, any tax law of a foreign country of which
the entity is a tax resident (within the meaning of Sec. 1.267A-
5(a)(23)(i)) or, in the case of a disregarded payment entity that is a
foreign branch, the tax law of the foreign country where the branch is
located.
(viii) The term specified domestic owner has the meaning provided
in paragraph (d)(1)(i) of this section, and includes a dual resident
corporation treated as a specified domestic owner pursuant to paragraph
(d)(1)(ii) of this section and any successor to the corporation
described in either of those paragraphs.
(7) Special rules--(i) Disregarded payment entity combination rule.
For purposes of this paragraph (d), disregarded payment entities for
which the relevant foreign tax law is the same (for example, because
the entities are tax residents of the same foreign country) are
combined and treated as a combined disregarded payment entity under the
principles of paragraph (b)(4)(ii) of this
[[Page 64772]]
section, provided that the entities have the same foreign taxable year
and are owned either by the same specified domestic owner or by
specified domestic owners that are members of the same consolidated
group. However, this paragraph (d)(7)(i) does not apply with respect to
a dual resident corporation treated as a disregarded payment entity
pursuant to paragraph (d)(1)(ii) of this section. In determining the
disregarded payment income or disregarded payment loss of a combined
disregarded payment entity, the principles of Sec. 1.1503(d)-
5(c)(4)(ii) apply. Thus, for example, if multiple individual
disregarded payment entities are treated as a combined disregarded
payment entity pursuant to this paragraph (d)(7)(i), then the combined
disregarded payment entity has either a single amount of disregarded
payment income or a single amount of disregarded payment loss.
(ii) Partial ownership of disregarded payment entity. If a
specified domestic owner of a disregarded payment entity indirectly
owns less than all the interests in the entity (for example, if the
specified domestic owner and another person are partners in a
partnership that owns all the interests in the entity), then the rules
of this paragraph (d) are applied on a proportionate basis as to the
specified domestic owner, based on the percentage of interests (by
value) of the disregarded payment entity that the specified domestic
owner directly or indirectly owns. In such a case, as to the specified
domestic owner, only a proportionate share of the disregarded payment
entity's items of deduction or income are taken into account in
computing disregarded payment income or disregarded payment loss of the
entity. In addition, with respect to the disregarded payment loss as so
computed, the specified domestic owner generally must comply with the
certification requirements of paragraph (d)(4) of this section and,
upon a triggering event, directly include in gross income an amount
equal to the DPL inclusion amount.
(iii) Termination of DPL certification period. With respect to a
disregarded payment loss of a disregarded payment entity, the DPL
certification period does not include any date after the end of the
specified domestic owner's taxable year during which the specified
domestic owner, or a person related to the specified domestic owner, no
longer holds directly or indirectly any of the interests in, or, in the
case of a disregarded payment entity that is a foreign branch,
substantially all of the assets of the foreign branch. In such a case,
the specified domestic owner ceases to be subject to the rules of
paragraph (d)(1) of this section with respect to the disregarded
payment loss; thus, for example, beyond the end of such taxable year
the specified domestic owner is not subject to the certification
requirements of paragraph (d)(4)(ii) of this section with respect to
the loss, and will not be required to include in gross income the DPL
inclusion amount with respect to such loss.
(iv) Common parent as agent for specified domestic owner. If a
specified domestic owner is a member, but not the common parent, of a
consolidated group, then the common parent is the agent of the
specified domestic owner under Sec. 1.1502-77(a)(1). Thus, for
example, the common parent must attach to its tax return any
certification or statement required or permitted to be filed pursuant
to this paragraph (d), and references in this paragraph (d) to a
timely-filed tax return of the specified domestic owner include a
timely-filed tax return of the consolidated group.
(v) Coordination with foreign hybrid mismatch rules. Whether a
disregarded payment entity is allowed a deduction under a relevant
foreign tax law is determined with regard to hybrid mismatch rules, if
any, under the relevant foreign tax law. Thus, for example, if a
relevant foreign tax law denies a deduction for an item to prevent a
deduction/no-inclusion outcome (that is, a payment that is deductible
for the payer jurisdiction and is not included in the ordinary income
of the payee), the item is not taken into account for purposes of
computing the amount of disregarded payment income or disregarded
payment loss. For this purpose, the term hybrid mismatch rules has the
meaning provided in Sec. 1.267A-5(b)(10).
(vi) DPL inclusion amount not taken into account for dual
consolidated loss purposes. A DPL inclusion amount included in the
gross income of a dual resident corporation or a domestic owner of a
separate unit is not taken into account for purposes of determining the
income or dual consolidated loss of the dual resident corporation, or
the income or dual consolidated loss attributable to the separate unit,
under Sec. 1.1503(d)-5(b) or (c).
* * * * *
(f) Anti-avoidance rule. If a transaction, series of transactions,
plan, or arrangement is engaged in with a view to avoid the purposes of
section 1503(d) and the regulations in this part issued under section
1503(d), then appropriate adjustments will be made. A transaction,
series of transactions, plan, or arrangement (including an arrangement
to reflect, or not reflect, items on books and records) engaged in with
a view to avoid the purposes of section 1503(d) and the regulations
issued in this part under section 1503(d) includes one engaged in with
a view to reduce or eliminate a dual consolidated loss or a disregarded
payment loss while putting an item of deduction or loss that composes
(or would compose) the dual consolidated loss or disregarded payment
loss to a foreign use (determined under Sec. 1.1503(d)-3 or the
principles thereof). Such appropriate adjustments may include
adjustments to disregard the transaction, series of transactions, plan,
or arrangement, or adjustments to modify the items that are taken into
account for purposes of determining the income or dual consolidated
loss of or attributable to a dual resident corporation or a separate
unit, or for purposes of determining income or loss of an interest in a
transparent entity under Sec. 1.1503(d)-5. See Sec. 1.1503(d)-
7(c)(43) for an example illustrating the application of this paragraph
(f).
* * * * *
0
Par. 4. Section 1.1503(d)-3 is amended by:
0
1. In paragraph (c)(1), removing the language ``Paragraphs (c)(2)
through (9)'' and adding the language ``Paragraphs (c)(2) through
(10)'' in its place.
0
2. Redesignating paragraph (c)(9) as paragraph (c)(10) and adding a new
paragraph (c)(9).
The addition reads as follows:
Sec. 1.1503(d)-3 Foreign use.
* * * * *
(c) * * *
(9) Qualification for Transitional CbCR Safe Harbour. This
paragraph (c)(9) applies with respect to a dual consolidated loss
incurred in a taxable year in a Tested Jurisdiction where the
Transitional CbCR Safe Harbour is satisfied (such that the
Jurisdictional Top-up Tax in that jurisdiction is deemed to be zero for
that taxable year), and no foreign use occurs with respect to the
Transitional CbCR Safe Harbour due to the application of rules
addressing Duplicate Loss Arrangements. In such a case, no foreign use
is considered to occur with respect to that dual consolidated loss
solely because any portion of the deductions or losses that compose the
dual consolidated loss is taken into account in determining the Net
GloBE Income in that jurisdiction for that taxable year. See Sec.
1.1503(d)-7(c)(3)(ii)(C) for an
[[Page 64773]]
example illustrating the application of this paragraph (c)(9).
* * * * *
0
Par. 5. Section 1.1503(d)-5 is amended by:
0
1. In paragraph (b)(1):
0
a. Adding the language ``(including the special rules under Sec.
1.1502-13(j)(10) concerning the treatment of intercompany (or
corresponding) items (as defined in Sec. 1.1502-13(b)(2) and (3))'' in
the second sentence after the language ``1502.''
0
b. Adding a sentence after the second sentence.
0
2. Removing the language ``the following shall not be taken into
account--'' from the introductory text of paragraph (b)(2) and adding
the language ``any item described in paragraphs (b)(2)(i) through (iv)
is not taken into account.'' in its place.
0
3. Revising paragraphs (b)(2)(i) through (iii).
0
4. Adding paragraph (b)(2)(iv).
0
5. In paragraph (c)(1)(i):
0
a. Adding the language ``(including the special rules under Sec.
1.1502-13(j)(10) concerning the treatment of intercompany (or
corresponding) items (as defined in Sec. 1.1502-13(b)(2) and (3))
attributable to a separate unit'' in the second sentence after the
language ``1502.''
0
b. Adding a sentence after the second sentence.
0
6. Adding two sentences after the third sentence of paragraph
(c)(3)(i).
0
7. Revising paragraph (c)(4)(iv).
The revisions and additions read as follows:
Sec. 1.1503(d)-5 Attribution of items and basis adjustments.
* * * * *
(b) * * *
(1) * * * For examples illustrating the interaction of the
intercompany transaction rules in Sec. 1.1502-13 with the dual
consolidated loss rules, see Sec. 1.1502-13(j)(15)(x) and (xi). * * *
(2) * * *
(i) Net capital loss. An item described in this paragraph (b)(2)(i)
is any net capital loss of the dual resident corporation.
(ii) Carryover or carryback loss. An item described in this
paragraph (b)(2)(ii) is any carryover or carryback loss.
(iii) Item attributable to a separate unit or transparent entity.
An item described in this paragraph (b)(2)(iii) is any item of income,
gain, deduction, or loss that is attributable to a separate unit or an
interest in a transparent entity of the dual resident corporation.
(iv) Items arising from ownership of stock--(A) In general. Except
as provided in paragraph (b)(2)(iv)(B) of this section, an item
described in this paragraph (b)(2)(iv)(A) is an amount that the dual
resident corporation takes into account in its gross income as a result
of ownership of stock in a corporation (including as a result of a sale
or other disposition), as well as any deduction or loss with respect to
such amount. Thus, for example (and except as provided in paragraph
(b)(2)(iv)(B) of this section), an item described in this paragraph
(b)(2)(iv)(A) includes gain recognized on the sale or exchange of
stock, a dividend (including an amount under section 78), a deduction
allowed under section 245A(a) with respect to a dividend, an amount
included in gross income under section 951 or 951A, foreign currency
gain or loss under section 986(c), and a deduction allowed under
section 250(a)(1)(B) with respect to an inclusion under section 951A.
(B) Exception for portfolio stock. Paragraph (b)(2)(iv)(A) of this
section does not apply to a dividend received by the dual resident
corporation from a corporation, any other amount that the dual resident
corporation includes in its gross income as a result of ownership of
stock in a corporation, or any deduction with respect to either such
amount, if the dual resident corporation owns less than ten percent of
the sum of the value of all classes of stock of the corporation. For
purposes of the preceding sentence, the percentage of stock owned by
the dual resident corporation is determined as of the beginning of the
taxable year of the dual resident corporation in which it receives the
dividend, includes in gross income another amount as a result of
ownership of stock, or claims a deduction with respect to the dividend
or inclusion in gross income, and by applying the rules of section
318(a) (except that in applying section 318(a)(2)(C), the phrase ``ten
percent'' is used instead of the phrase ``50 percent'').
(c) * * *
(1) * * *
(i) * * * For examples illustrating the interaction of the
intercompany transaction rules in Sec. 1.1502-13 with the dual
consolidated loss rules, see Sec. 1.1502-13(j)(15)(x) and (xi). * * *
* * * * *
(3) * * *
(i) * * * For this purpose, an adjustment to conform to U.S. tax
principles does not include the attribution to a hybrid entity separate
unit or an interest in a transparent entity of any items that have not
and will not be reflected on the books and records of the hybrid entity
or transparent entity; for example, items that are reflected on the
books and records of the domestic owner cannot be attributed to a
hybrid entity separate unit or an interest in a transparent entity as a
result of disregarded payments made between the domestic owner and the
hybrid entity or transparent entity. See Sec. 1.1503(d)-5(c)(1)(ii)
(providing that items reflected on the books and records of the hybrid
entity or transparent entity are eliminated if they are otherwise
disregarded for U.S. tax purposes). See also Sec. 1.1503(d)-7(c)(6)
and (c)(23) through (25) for examples illustrating the application of
this paragraph (c)(3)(i). * * *
(4) * * *
(iv) Items arising from ownership of stock--(A) In general. Except
as provided in paragraph (c)(4)(iv)(B) of this section, for purposes of
determining the items of income, gain, deduction, and loss of a
domestic owner that are attributable to a separate unit or an interest
in a transparent entity, any amount that the domestic owner includes in
gross income as a result of ownership of stock in a corporation
(including as a result of a sale or other disposition), as well as any
deduction or loss with respect to such an amount, is not taken into
account. Thus, for example (and except as provided in paragraph
(c)(4)(iv)(B) of this section), gain recognized by a domestic owner on
the sale or exchange of stock is not attributable to a separate unit of
the domestic owner; in addition, neither a dividend received by a
domestic owner (including an amount under section 78), nor any
deduction allowed under section 245A(a) with respect to a dividend, is
attributable to a separate unit of the domestic owner; further, neither
an amount included in gross income by a domestic owner under section
951 or 951A, foreign currency gain or loss under section 986(c), nor
any deduction under section 250(a)(1)(B) with respect to an inclusion
under section 951A, is attributable to a separate unit of the domestic
owner. See Sec. 1.1503(d)-7(c)(24) for an example illustrating the
application of this paragraph (c)(4)(iv)(A).
(B) Exception for portfolio stock. Paragraph (c)(4)(iv)(A) of this
section does not apply to a dividend received by a domestic owner from
a corporation, any other amount that is included in gross income by the
domestic owner as a result of ownership of stock in a corporation, or
any deduction with respect to either such amount, if the domestic owner
owns less than ten percent of the sum of the value of all classes of
stock of the corporation. For purposes of the preceding sentence, the
percentage of stock owned by the
[[Page 64774]]
domestic owner is determined as of the beginning of the taxable year of
the domestic owner in which it receives the dividend or includes in
gross income the other amount, and by applying the rules of section
318(a) (except that in applying section 318(a)(2)(C), the phrase ``ten
percent'' is used instead of the phrase ``50 percent'').
(C) Additional rules for portfolio stock. For purposes of
determining the items of income, gain, deduction, and loss of a
domestic owner that are attributable to a separate unit or an interest
in a transparent entity--
(1) The amount of a dividend described in paragraph (c)(4)(iv)(B)
of this section that is taken into account is equal to the amount of
the dividend less the amount of any deduction with respect to the
dividend; and
(2) Any other amount described in paragraph (c)(4)(iv)(B) of this
section is taken into account if an actual dividend from the
corporation described in paragraph (c)(4)(iv)(B) of this section would
be attributable to the separate unit or interest in the transparent
entity.
* * * * *
Sec. 1.1503(d)-6 [Amended]
0
Par. 6. Section 1.1503(d)-6 is amended by:
0
1. In paragraph (d)(2):
0
a. Removing the language ``there is a triggering event in the year the
dual consolidated loss is incurred'' in the paragraph heading and
adding the language ``a triggering event has occurred'' in its place;
and
0
b. Adding the language ``or before'' immediately before the language
``such taxable year'' in the first sentence.
0
Par. 7. Section 1.1503(d)-7 is amended by:
0
1. Adding paragraph (b)(16).
0
2. Revising and republishing paragraph (c)(3).
0
3. Adding a sentence after the first sentence in paragraph
(c)(6)(iii)(B).
0
4. In paragraph (c)(18)(iii):
0
a. Removing the language ``the Country X mirror legislation'' from the
first sentence and adding the language ``instead of Country X mirror
legislation, Country X law'' in its place.
0
b. Removing the language ``mirror legislation'' from the third sentence
and adding the language ``law'' in its place.
0
c. Removing the language ``Sec. 1.1503(d)-(4)(e)'' from the last
sentence and adding the language ``Sec. 1.1503(d)-(3)(e)'' in its
place.
0
5. Adding paragraph (c)(18)(iv).
0
6. Adding a sentence after the third sentence in paragraph (c)(23)(ii).
0
7. Adding paragraph (c)(23)(iii).
0
8. Adding the language ``not'' before the language ``attributable'' in
the paragraph (c)(24) heading.
0
9. In paragraph (c)(24)(i):
0
a. Removing the language ``(or related section 78 gross-up)'' from the
fourth sentence.
0
b. Revising the fifth sentence.
0
c. Removing the last sentence.
0
10. In paragraph (c)(24)(ii), revising the first sentence and removing
the second, fifth, and sixth sentences.
0
11. In paragraph (c)(25)(ii)(B), adding a sentence after the fifth
sentence.
0
12. In paragraph (c)(26)(i), removing the language from the fifth
sentence ``all of the interests'' and adding the language ``90 percent
of the interests'' in its place.
0
13. Adding paragraphs (c)(42) and (43).
The revisions and additions read as follows:
Sec. 1.1503(d)-7 Examples.
* * * * *
(b) * * *
(16) No country imposes a tax collected under either a Qualified
Domestic Minimum Top-up Tax, IIR, or UTPR.
(c) * * *
(3) Domestic use limitation and certain top-up taxes--(i) Example
3. Domestic use limitation--foreign branch separate unit owned through
a partnership--(A) Facts. P and S organize a partnership, PRSX, under
the laws of Country X. PRSX is treated as a partnership for both U.S.
and Country X tax purposes. PRSX owns FBX. PRSX earns U.S. source
income that is unconnected with its FBX branch operations, and such
income is not subject to tax by Country X. In addition, such U.S.
source income is not attributable to FBX under Sec. 1.1503(d)-5.
(B) Result. Under Sec. 1.1503(d)-1(b)(4)(i)(A), P's and S's shares
of FBX owned indirectly through their interests in PRSX are individual
foreign branch separate units. Pursuant to Sec. 1.1503(b)-1(b)(4)(ii),
these individual separate units are combined and treated as a single
separate unit of the consolidated group of which P is the parent.
Unless an exception under Sec. 1.1503(d)-6 applies, any dual
consolidated loss attributable to FBX cannot offset income of P or S
(other than income attributable to FBX, subject to the application of
Sec. 1.1503(d)-4(c)), including their distributive share of the U.S.
source income earned through their interests in PRSX, nor can it offset
income of any other domestic affiliates.
(ii) Example 3A. QDMTT--(A) Facts. P owns DE1X. DE1X owns FSX.
Effective January 1, 2025, Country X imposes a Qualified Domestic
Minimum Top-up Tax (Country X QDMTT). The Country X QDMTT is a foreign
income tax for purposes of section 1503(d) and the regulations
thereunder. Other than the Country X QDMTT, Country X does not impose
an income tax on Country X entities. For the taxable year and Fiscal
Year ending December 31, 2025, DE1X incurs a $100x deduction for
interest expense. The $100x of interest expense is reflected on the
books and records of DE1X and is taken into account to determine the
amount of income or loss for purposes of the Country X QDMTT. If the
$100x expense were deducted by P in determining U.S. taxable income,
the loan and $100x of interest expense thereon would be a Duplicate
Loss Arrangement under the Transitional CbCR Safe Harbour for the
Country X QDMTT (Safe Harbour) and, as a result of Country X's rules
for Duplicate Loss Arrangements (Country X DLA rules), the $100x of
interest expense would be excluded from Country X's Profit (Loss)
before Income Tax (PBT) for purposes of the Safe Harbour calculation.
If the $100x of interest expense were taken into account in determining
whether the Safe Harbour is satisfied (that is, if it were not excluded
from PBT by the Country X DLA rules), the Safe Harbour would be
satisfied; if it were not so taken into account, the Safe Harbour would
not be satisfied. Because the Country X DLA rules apply only for
purposes of the Safe Harbour, in all cases the $100x of interest
expense would be taken into account in determining Net GloBE Income
under the Country X QDMTT for the 2025 Fiscal Year.
(B) Result--(1) General application to QDMTT. Because DE1X is not
taxable as an association for U.S. tax purposes and is subject to a
foreign income tax (that is, the Country X QDMTT), DE1X is a hybrid
entity, P's interest in DE1X is a hybrid entity separate unit, and the
$100x interest expense deduction gives rise to a $100x dual
consolidated loss attributable to P's interest in DE1X. See Sec.
1.1503(d)-1(b)(3), (b)(4)(i)(B)(1) and (b)(5)(ii). Unless an exception
applies, the $100x dual consolidated loss is subject to the domestic
use limitation under Sec. 1.1503(d)-4(b). The result would be the same
if, in addition to the Country X QDMTT, Country X imposed another
income tax on Country X entities and, under the laws of that income
tax, the loss of DE1X is not available to offset or reduce items of
income or gain of FSX without an election, and no such election is
made.
(2) Ability to make a domestic use election. P cannot make a
domestic use election with respect to the $100x dual consolidated loss
if there is a foreign use of the dual consolidated loss in the year in
which it was incurred (or in any prior
[[Page 64775]]
year). Sec. 1.1503(d)-6(d)(2). Thus, to determine whether a domestic
use election can be made it must first be determined whether the dual
consolidated loss has been or will be put to a foreign use under the
Country X QDMTT, including whether it would be put to a foreign use if
a domestic use election were made. If a domestic use election were
made, such that the dual consolidated loss could be deducted by P in
determining its taxable income for U.S. tax purposes, then the Country
X DLA rules would apply and prevent the $100x expense from being
[…truncated; see source link]Indexed from Federal Register on August 7, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.