Tax developments
Pillar 2’s viability: Perspectives from industry leaders
In a prior edition of Tax Bytes, we explained how “some, including the Finance Ministers of Hungary and India, have questioned the viability of Pillar 2.” Last week, the Federation of German Industries (BDI) published a position paper titled, Global Minimum Tax: Developments Jeopardize Competitiveness Necessary Protection of the German Economy. The BDI Paper underscores the urgency for EU decision-makers to take measures to protect the European economy in light of the current executive orders and US tax policies under President Trump. It emphasizes the importance of preventing US punitive taxes and suggests a temporary suspension of the European Minimum Tax Directive to protect the European economy. It further suggests that if the suspension is not possible, mitigating US punitive measures through extending the UTPR safe harbor and simplifying global minimum tax regulations is the next best option.
While the EU has stood firm in its commitment to implementing Pillar 2. BDI, along with others, anticipate the Trump Administration will also stand firm in its position regarding what it deems discriminatory foreign taxes. Treasury is to prepare a list of options for protective measures to take in response to any discriminatory tax measures by March 20, 2025. Separately, several agencies (including Treasury) are also working to provide unified reports, launch investigations, and/or come up with methods to address extraterritorial taxes by President Trump’s April 1 deadline.
We will stay abreast of any updates with respect to Pillar 2 and provide material updates.
Proposed PTEP Rules: Stakeholder feedback and recommendations
Several comments were filed in advance of the March 4 deadline addressing proposed regulations (the Proposed Rules) on Previously Taxed Earnings and Profits (PTEP), which were published on December 2, 2024. Various stakeholders, including the National Foreign Trade Council (NFTC), the Tax Executives Institute, Inc. (TEI), the Alliance for Competitive Taxation (ACT), and the US Chamber of Commerce filed substantive comments. The commenters raised several significant concerns, including highlighting the complexity of the Proposed Rules and the increased compliance burden such rules would impose on taxpayers with respect to share basis tracking and the intricate system of PTEP accounts and basis pools required for compliance.
A central theme across the comments was the potential for double taxation of PTEP under the proposed regulations. The comments voiced material issues with the proposed share-by-share approach to basis adjustments under section 961(b). They argued that this method, while intended to prevent non-economic losses, could paradoxically result in gain recognition and thus double taxation on routine PTEP distributions when the distribution is pro rata across shares with differing bases. Such an outcome contradicts the fundamental purpose of sections 959 and 961. To address these concerns, some comments recommended allowing for more flexibility in utilizing basis across a US shareholder's shares in a CFC. Two organizations proposed a mechanism for transferring basis between shares with excess basis to those with insufficient basis to cover PTEP distributions. Another comment suggested adopting a basis recovery model similar to that used for S corporations and pointed to the consolidated return regulations as another potential framework.
As noted in the comments, the Proposed Rules, as drafted, create instances where double taxation could arise. The proposed solutions would address such issues, but it remains to be seen whether Treasury and IRS agree that such solutions appropriately address the government’s concerns. Considering the change in administration and the proposals for significant tax legislation in 2025, it will be interesting to see whether and when Treasury and IRS will finalize the Proposed Rules and whether the promised further tranches of guidance on PTEP will come.
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