IRS Unveils Roadmap for GloBE, FTC, & DCL Interaction

The international tax landscape shifted gears when the IRS dropped Notice 2023-80 on December 11, 2023. This advance notice unveils the agency’s preliminary blueprint for addressing the interplay between the Pillar Two Global Anti-Base Erosion (GloBE) rules, the foreign tax credit (FTC), and the dual consolidated loss (DCL) rules. What does this mean for multinational enterprises (MNEs) grappling with these intricacies? Let’s break it down.

GloBE Top-up Taxes: Navigating the Creditability Maze
The notice tackles the creditability of top-up taxes levied under GloBE’s Income Inclusion Rule (IIR), Undertaxed Profits Rule (UTPR), and Qualified Domestic Minimum Top-up Tax (QDMTT). Here’s the gist:

•  IIR Top-up Taxes: Generally, not creditable if they consider U.S. federal income tax liability, but treated as creditable at the CFC or partnership level for gross-up purposes. However, they can’t be used for GILTI high-tax exceptions or the high-tax exclusion.
• UTPR Top-up Taxes: Creditability depends on factors like the tax base and nexus to the taxing jurisdiction.
• QDMTTs: Specific rules determine creditability for QDMTTs computed based on the income of multiple entities.

DCLs and GloBE: Avoiding Collateral Damage
MNEs worried about DCLs tripping GloBE triggers can breathe a sigh of relief. The notice outlines proposed rules to prevent GloBE from creating “foreign use” of legacy DCLs (incurred before 2024) subject to existing domestic use elections. This safeguards existing DCL utilization strategies. However, future DCLs might face a different story, with the IRS seeking comments on potential limitations.

Temporary FTC Relief Extended and Clarified
The notice extends the temporary relief from the 2022 FTC final regulations until further guidance. Notably, it modifies the applicability to partnerships, clarifying that partnerships apply the relief for their own taxes, while partners can choose to apply it for their share of partnership taxes under certain conditions.

The Takeaway: A Roadmap, Not a Destination
Notice 2023-80 offers valuable guidance but doesn’t answer every question. The IRS and Treasury Department are actively seeking feedback, particularly on the intersection of DCLs and GloBE. Stay tuned for further developments in this evolving tax landscape.

Contact our Global Business Services team for questions on Notice 2023-80 or any other international tax issue.