Proposed DCL Regulations: Three Main Areas to Consider
The U.S. Department of the Treasury (Treasury) issued proposed regulations on August 6, 2024 under Section 1503(d) of the Internal Revenue Code (IRC) of 1986, as amended (the Code). This Code section is known for the dual consolidated loss (DCL) provisions. These proposed regulations, if finalized, will make a section of the Code that is already complex, even more complex. We will discuss the key provision of the proposed regulations and offer some thoughts on those provisions.
The purpose of the DCL provisions is to prevent a “double deduction” for the same economic loss, both in the U.S. and in a foreign jurisdiction, for tax purposes. These rules apply only to domestic C corporations that are either dual resident corporations (DRC) or “separate unit” owners. A DRC and a separate unit are entities or operations that are subject to tax in a foreign jurisdiction, though they are also subject to U.S. taxation.
This allows for any losses of these entities or operations to be double deducted between the U.S. and the foreign taxing jurisdiction. The existing DCL rules provide for a “domestic use” election, so a loss can be deducted in the U.S. provided certain requirements are met, such as annual certifications. If these requirements are unmet, then the DCL must be recaptured into income.
The proposed regulations have three primary areas of focus:
- Provide modifications to existing regulations
- Address the interplay of the DCL rules with the Global Anti-Base Erosion (GloBE) Model rules
- Create the concept of a disregarded payment loss (DPL)
While there may be commentary on these three areas, the last one involving the DPL has already raised concerns over whether the Treasury can issue such regulations.
The first of the proposed regulations addresses the interaction of the DCL rules with the Section 1502 intercompany transaction rules and how to compute the income or loss of a DRC or separate unit. This portion of the regulations provides helpful guidance and highlights that certain positions taken by taxpayers when computing the DCL are not allowed. However, certain groups are already challenging these provisions.
The second part of the proposed regulations lies in their interaction with the GloBE Model rules. The takeaway from this portion is that qualified domestic minimum top-up tax (QDMTT) and income inclusion rule (IIR) can be foreign taxes and thus trigger a foreign use under the DCL regulations that prevent the loss from being deductible in the United States.
The third part of the proposed regulations is the DPL concept. This was included to address deduction or no-inclusion situations, e.g., deduction in a foreign jurisdiction, but no offsetting income in the United States. One potential benefit of this part of the proposed regulations is that it is limited to interest, royalty, and structured payments.
The complexity and weight of these proposed regulations cannot be overstated, even to the extent that affected taxpayers may consider restructuring business operations. At a minimum, new processes should be implemented to help track DCLs resulting from the GloBE Model rules and existing DPLs.
If you have questions or need assistance navigating the complexities of these regulations, please contact a professional at Forvis Mazars.
Nonresidents & U.S. Real Property
U.S. real property remains an attractive investment for nonresident individuals. The tax rules in this area are complex. Taxation depends on several factors, including the reason for acquiring the property (personal use or rental) and whether the property is owned directly or indirectly through an entity such as a corporation or partnership. The ownership structure also impacts the nonresident’s taxation upon the disposition of the U.S. real property. It is essential to understand these rules as the IRS has increased its examinations in this area.
This article provides an overview of the requirements related to ownership of U.S. real property by nonresidents—particularly those withholding taxes and reporting on rental income and dispositions of property.1
Rental Income
Generally, a nonresident who receives rental income from U.S. real property is subject to a 30% withholding tax imposed on the gross amount of the rental income. To reduce the amount of the rental income subject to tax, the nonresident can elect to be taxed on a net basis, i.e., gross rent less related deductions, including depreciation.
If the nonresident uses a corporation (domestic or foreign) to own the U.S. real property, then rental income could be taxed at the 21% corporate rate. Still, a dividend withholding tax or branch profits tax could be imposed. If a partnership is used to own the property, then withholding occurs on the partner’s distributive share.
Disposition
Mainly, a nonresident who disposes of an interest in U.S. real property is subject to a 15% withholding tax on the amount realized on the disposition. The ownership structure can impact the amount of tax withheld. If the nonresident owns the property through a domestic corporation, then any gain on the sale of the property is subject to tax at the 21% corporate rate. Alternatively, if the nonresident sells the stock of the domestic corporation, any gain is subject to a 15% withholding tax. However, there generally is no tax if the stock of a foreign corporation is sold.
Reporting & Payment of Tax
The U.S. real property’s buyer or transferee (the withholding agent) must withhold the tax from the amount realized. They can be liable for such tax if they fail to do so. By the 20th day after the date of the transaction, the withholding tax is required to be reported and paid through Form 8288, U.S. Withholding Tax Return for Certain Dispositions by Foreign Persons. Moreover, the purposes of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) was to tax a foreign person who recognized gain on the disposition of U.S. real property, as such persons generally were not subject to tax on gains from the disposition of other property, e.g., stock, in the United States. The foreign seller must file a tax return to calculate the actual tax on the gain from the transaction. At this time, they may have to pay additional tax or receive a refund, depending on the amount of tax withheld. A nonresident may be able to qualify for a reduced rate of withholding tax by requesting relief from the IRS (before the transaction occurs) by filing Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests.
If you have questions concerning these rules or need assistance with the preparation of filing the required forms, please contact a professional at Forvis Mazars.
- 1This article does not address U.S. estate or inheritance tax issues.
Pillar Two Update
In 2021, the Organisation for Economic Co-operation and Development (OECD) developed a framework under its Base Erosion and Profit Shifting (BEPS) 2.0 initiative to help address tax avoidance by multinational enterprises. The initiative calls for a two-pillar approach—our focus is on the second.
Pillar Two aims to subject a multinational enterprise (MNE) to a minimum tax of 15% in each jurisdiction it earns income with annual revenue of €750 million or more. Over 140 countries signed an agreement to enact Pillar Two, but only around 40 countries have enacted such legislation.
The minimum tax would be imposed under one of three regimes that work in tandem with the Pillar Two rules:
- Qualified Domestic Minimum Top-Up Tax (QDMTT): A minimum tax imposed by a jurisdiction’s domestic law that follows the Pillar Two rules.
- Income Inclusion Rule (IIR): This imposes an additional tax at the parent level of an MNE group, with respect to low-taxed income of its lower-tier subsidiaries.
- Undertaxed Payments (Profits) Rule (UTPR): The UTPR operates as a backstop to the IIR, applying only in specific circumstances when the minimum tax is not collected under an IIR or QDMTT.
These rules may apply to the 2024 fiscal year if enacted by a country. The U.S. has not passed these provisions, but there are similar regimes found in the U.S. tax system. The Global Intangible Low-Taxed Income (GILTI) regime is similar to IIR, the Base Erosion Anti-Abuse Tax (BEAT) regime is similar to UTPR, and the Corporate Alternative Minimum Tax (CAMT) is similar to QDMTT. However, these U.S.-enacted regimes do not qualify under Pillar Two rules as an IIR, UTPR, or QDMTT. Consequently, U.S. MNEs could be subject to additional taxes under Pillar Two in a foreign country that has enacted the Pillar Two regime.
U.S. MNEs potentially subject to Pillar Two must start preparing now. However, all U.S. multinationals should be focused on Pillar Two if they are engaged in acquisitive transactions. An acquisition could push your enterprise over the €750 million threshold. The due diligence performed on such acquisitions will be more complex. For example, you typically would perform a local country tax due diligence, but now you must also do a Pillar Two due diligence. This could result in having all target entities, even the immaterial ones, in scope because a country adopted the Pillar Two rules.
We can help you navigate these rules and offer assistance with due diligence, pre-acquisition restructuring, and post-acquisition planning. Be sure to register for our biweekly Pillar Two Technical Series of webinars for an in-depth view of Pillar Two. If you have questions or need assistance, please contact a professional at Forvis Mazars.
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars. Be sure to check out other 2024 Year-End Tax Guides: