Report on recent US international tax developments — 6 September 2024

The US Congress returns to Washington on 9 September in the run-up to the November election. Recall that before adjourning for the August recess, the Senate voted not to begin consideration of the House-passed Tax Relief for American Families and Workers Act (H.R. 7024) package. The bill would expand the Child Tax Credit and Low-Income Housing Credit and address the TCJA pre-cliffs on IRC Section 174 five-year R&D amortization, IRC Section 163(j) interest deductibility and tax treaty benefits with Taiwan, among other measures. The bill originally passed the House on 31 January.

Treasury and the IRS this week issued important and welcome corrections (REG-111629-23 (pdf)) to recently released proposed regulations that restore taxpayers' ability to make or revoke certain foreign-currency elections. Proposed regulations issued in August 2024 eliminated taxpayers' ability to rely on the 2017 Proposed Regulations, thereby limiting their ability to make or revoke those elections. For many taxpayers, this meant they could not make or revoke a mark-to-market election on their 2023 or 2024 tax returns.

The latest corrections modify the applicability dates of the 2024 Proposed Regulations and the partial withdrawal of certain of the 2017 Proposed Regulations. They also clarify the procedures for making a mark-to-market election under Prop. Treas. Reg. Section 1.988-7 for tax years beginning after 19 August 2024.

As a result of these changes, taxpayers can once again make (but not revoke) a mark-to-market election under Prop. Treas. Reg. 1.988-7 for tax years beginning on or before 19 August 2024, under the procedures described in the 2017 Proposed Regulations. Thus, taxpayers generally may make that election for their 2023 and 2024 tax years on their timely filed (including extensions) returns for the 2023 and 2024 tax years. For tax years beginning after 19 August 2024, taxpayers (including controlled foreign corporations (CFCs)) must follow the procedures specified in the 2024 Proposed Regulations to make the mark-to-market election under Prop. Treas. Reg. Section 1.988-7.

Taxpayers that may not have made the mark-to-market election previously (e.g., taxpayers with newly formed CFCs) may consider making the election on their 2023 returns. A Breaking Tax News bulletin has details.

The US Trade Representative on 30 August announced that the US government has requested dispute settlement consultations with Canada under the United States-Mexico-Canada Agreement (USMCA) to address Canada's recently enacted digital services tax (DST). Canada enacted the Digital Services Tax Act on 20 June 2024, retroactive to 1 January 2022. The Act imposes a 3% tax on certain online transactions and applies to companies or groups with annual revenues of €750m or more and Canadian digital services revenue of more than CA$20m.

In a statement issued the same day, the Canadian government said that although it prefers a BEPS Pillar One Multilateral Agreement to address the issue, it has made clear it would act unilaterally to enact a DST if such an agreement was not reached. The Canadian government reiterated it will rescind the new DST "upon entry into force of an acceptable multilateral measure." According to the statement, the Canadian government also indicated that it is in close contact with the US and consultation between the two governments is ongoing.