Report on recent US international tax developments – 2 September 2021

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EY Global

2 Sep 2021
Subject Tax Alert
Jurisdictions United States

The FY 2022 Budget resolution that has now passed both the United States (US) Senate and the House includes reconciliation instructions to various committees to report provisions under their jurisdictions by 15 September, though there is no penalty for missing the deadline. The House Ways and Means Committee will begin a markup the week of 6 September, which likely will continue over a period of days. The ultimate size of the proposed US$3.5 trillion reconciliation bill remains unclear at this time, with the amount of investments ultimately dictating the amount of pay-fors, including expected tax increases.

The House returns from the August recess on 20 September. The Senate returns to Washington on 13 September.

In a recent Chief Counsel Advice Memorandum (CCA 202132009 (pdf)), the Internal Revenue Service (IRS) concluded that an affiliated group's joint and several liability for the payment of a branded prescription drug fee is not solely determinative in deciding whether the remitting member may exclude any reimbursement of the fee from its gross income. The IRS provided several factors that should be considered in determining whether the remitting member benefits from the payment of the fee and, therefore, may not exclude the reimbursement from its gross income.

The taxpayer is a US corporation and member of an affiliated group that develops, manufactures and distributes branded drugs and other medical care products. The foreign members of the group manufacture the drugs and own the intellectual property related to the branded drugs. Under an intercompany agreement with the foreign members, the taxpayer distributes the drugs in the United States and receives a fixed profit margin resulting from the sales. The taxpayer's transfer pricing method allocates excess profits or losses beyond the specified operating profit margin to the foreign members.

The five-factor test articulated in the CCA is helpful because it provides insight as to how the IRS may analyze intracompany reimbursements. The five-factor test does not articulate new principles; instead, it distills authorities from the reimbursement doctrine, capital contribution principles, and direct-and-proximate-benefit principles on which taxpayers rely when analyzing reimbursement payments. Although the CCA focused on whether a reimbursement was includible in gross income, the five-factor test may also be helpful in determining whether the reimbursing party or the party receiving the reimbursement may claim a deduction for the reimbursed expense.

The US and France recently signed a joint statement on the spontaneous exchange of country-by-country reports for fiscal years beginning in 2020 and 2021. The exchange will be based on Article 27 of the 1994 US-France income tax treaty, as amended by protocols signed in 2004 and 2009.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), International Tax and Transaction Services, Washington, DC
  • Arlene Fitzpatrick
  • Joshua Ruland

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.