Report on recent US international tax developments - 21 June 2024

In a closely watched decision, the US Supreme Court held in a 7-2 opinion that Congress may impose a mandatory repatriation tax (MRT) on accumulated and undistributed income of US-controlled foreign corporations under IRC Section 965. In Moore v. United States, No. 22-800 (June 20, 2024), the majority declined to rule on whether realization is a constitutional requirement of an income tax, but held that Congress may attribute a business entity's realized and undistributed income to the shareholders or partners of that entity. In doing so, it emphasized that its holding "applies when Congress treats the entity as a pass-through." A Tax Alert on the Court's opinion is forthcoming.

The IRS this week addressed the issue of certain related-party partnership basis shifting transactions it considers potentially abusive. In proposed regulations (REG 124593-23) released on 17 June, the IRS identified certain partnership related-party basis-adjustment transactions, and substantially similar transactions, as transactions of interest under Reg. Section 1.6011-4(b) that must be reported to the agency on Form 8886, Reportable Transactions Disclosure statement. Material advisors to such transactions would also be required to report them under IRC Section 611(a), subject to penalties imposed by IRC Section 6707(a) and (b). Material advisors must also maintain a list of all taxpayers for which they acted as a material advisor for a reportable transaction, as required by IRC Section 6112(a).

The IRS on the same day also released a related notice and revenue ruling. In Notice 2024-54, Treasury and the IRS announced they intend to publish two sets of proposed regulations to address certain basis-shifting transactions involving partnerships and related partners. And in Revenue Ruling 2024-14, the IRS said the codified economic substance doctrine in IRC Section 7701(o) applies to related-party basis-adjustment transactions under IRC Sections 732(b), 734(b) and 743(b).

The US Treasury on 17 June announced that it has formally notified the Russian Federation of the suspension of key provisions of the 1992 US-Russia Tax Treaty, along with the suspension of its accompanying protocol, by mutual agreement.

The suspended provisions are paragraph 4 of Article 1 (relating to the exceptions to the savings clause of paragraph 3), Articles 5 through 21 (substantive provisions) and Article 23 (nondiscrimination in taxation matters), as well as the Protocol, which detailed each country's respective rights to tax certain categories of income (these provisions were suspended by Russia in 2023).

According to Treasury's press release, the suspension responds to Russia's notification on 8 August 2023 of its intent to suspend specific provisions in tax treaties with 38 countries, including the United States. Regarding the United States, Russia announced suspension of paragraph 4 of Article 1, Articles 5 through 21 and Article 23 of the US-Russia Tax Treaty and the operation of its accompanying protocol. Treasury had previously announced the suspension of tax information exchange with Russia in April 2022. The press release indicates the suspension of these provisions will take effect on 16 August 2024 for taxes withheld at source and for other taxes and will continue until otherwise decided by the two governments. A detailed Tax Alert is forthcoming.

The OECD/G20 Inclusive Framework on BEPS (IF) on 17 June 2024 released a series of documents on the Pillar One Amount B approach for transfer pricing for certain baseline marketing and distribution transactions and the Pillar Two global minimum tax rules. The two Pillar One Amount B documents included a statement on the definitions of qualifying jurisdictions within the meaning of section 5.2 and 5.3 of the Amount B guidance (which provide for specified adjustments to the Amount B calculations for such jurisdictions) and the definition of covered jurisdictions within scope of the political commitment on Amount B. The two Amount B documents provide current lists of the jurisdictions that are qualified for specified adjustments to the calculations under the Amount B approach and a current list of the jurisdictions that are covered by the political commitment of IF member jurisdictions to respect the outcome of their jurisdictions' application of Amount B.

On the same date, the IF released two new documents on the Pillar Two global minimum tax rules. The first document was the fourth tranche of agreed Administrative Guidance, containing additional details on the allocation of current and deferred taxes, the deferred tax liability recapture rule, divergence between GloBE and accounting carrying values, and the treatment of securitization vehicles. The second Pillar Two release was a brief Question & Answer document on the qualified status of the GloBE rules, including information on the peer review process for determining the qualified status of the GloBE rules of implementing jurisdictions. This EY Global Tax Alert provides details.