Multinationals Need to Keep Eye on Pillar Two, Energy Tax Changes

The 2024 presidential election season has begun, and the clock is ticking on several US tax policy changes that are scheduled to occur at the end of 2025.

Outside the US, global shifts in international taxation are adding to the legislative mix. Taken together, these factors suggest we can expect meaningful tax policy proposals in 2024.

Given the stakes, taxpayers should begin evaluating different potential outcomes and engage on these issues now. Below are several tax policy areas to watch.

International Changes

The global base erosion and profit shifting project to address tax challenges that arise from digitization of economies is expected to transform tax compliance and requirements, and increase complexity for multinational entities.

Individual countries will implement the global minimum tax rules developed under Pillar Two of the BEPS 2.0 project as early as 2024.

The extent the US might ultimately conform its domestic tax law to Pillar Two isn’t yet known, but widespread adoption in other countries will significantly impact large US multinationals, in terms of increased foreign tax liability and administrative challenges.

US multinationals also should closely monitor the interplay between US foreign tax credit administrative guidance and Pillar Two taxes enacted in other countries.

On Dec. 11, the IRS announced its intention to issue proposed regulations concerning treatment of foreign taxes paid under the Pillar Two qualified domestic minimum top-up tax, or QDMTT, or an income inclusion rule, or IIR.

Under the proposed guidance, a credit generally would be allowed for a QDMTT. However, whether a credit is allowed for an IIR tax depends on terms of the relevant foreign tax law. For example, if the calculation of the IIR tax accounts for tax liability to another jurisdiction (including the US) of a direct or indirect owner of the person paying the IIR tax, then a credit wouldn’t be allowed for the IIR tax.

In the case of a controlled foreign corporation paying an IIR tax, if any GILTI tax liability of a US shareholder of the corporation would be accounted in calculating the IIR tax, then a US foreign tax credit wouldn’t be allowed for the IIR tax.

The IRS will likely receive many public comments on this proposal, which could impact final guidance on these issues. Guidance on foreign taxes paid under a foreign jurisdiction’s undertaxed profits rule is expected later, given the delayed implementation of the rule under Pillar Two.

Notice 2023-80 extends indefinitely the IRS’s partial deferral of the final foreign tax credit regulations published in early 2022.

Multinationals also must start preparing for changes to US international tax policies effective at the end of 2025 as part of the Tax Cuts and Jobs Act. This includes an increase to global intangible low-taxed income and base erosion and anti-abuse tax rates, and a reduction to the allowed deduction on foreign-derived intangible income.

If these scheduled changes take effect, US multinationals may be subject to increased US tax liability. Another 2025 issue that could bubble up in 2024 relates to Pillar Two’s undertaxed profit rule, and the scheduled expiration of its safe harbor that currently applies to the US, which will be a factor in the US’ consideration of a potential legislative response to Pillar Two.

How these various issues play out in a Pillar Two world, and whether US policymakers act on them in the near term, will be driven in large part by what can be done in an election year and who holds political power in 2025.

Domestic Policies

Among the US tax policies to monitor are potential modifications of some tax-and-climate law “pre-cliff” provisions now in effect.

These include addressing a change to Section 174 of the tax code that requires five-year or 15-year research-and-development amortization (depending on the activity location) rather than expensing, changes to the interest deduction limitation calculations under Section 163(j), and the phasedown of 100% expensing.

These items have been stuck while Congress tries to negotiate an accompanying expansion of the child tax credit, but that may change if a deal can be reached and there’s an opportunity for it to be attached to a spending bill that Congress needs to pass.

In the near term, taxpayers await additional guidance on some of the clean energy tax credits enacted as part of the Inflation Reduction Act. Looking farther out, the tax incentive landscape may also shift as Pillar Two global minimum taxes become a reality in more tax jurisdictions.

Countries may need to rethink how they design incentives to not trigger minimum taxes in other countries, which can happen when an incentive brings a company’s effective tax rate below 15%.

Taiwan Tax Relief

In contrast to the challenges with obtaining US Senate advice and consent for US income tax treaties, bipartisan legislation to provide treaty-like benefits to Taiwan continues to move through Congress.

Competing bills from the Senate Finance Committee (S. 3084) and Senate Foreign Relations Committee (S. 1457) were combined and received unanimous approval from the House Ways and Means Committee (H.R. 5988). A suitable legislative vehicle still must be identified, but the proposed legislation is one step closer to enactment.

Outlook

With big shifts in US tax laws anticipated at the end of 2025, and additional policy proposals possible during the 2024 presidential campaign season, companies should monitor legislation, engage with policymakers on the issues, prepare for potential changes, and model responses now.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Kevin Flynn is EY Americas vice chair of tax. The views expressed are the author’s and do not necessarily reflect the views of Ernst & Young LLP or any other member firm of the global EY organization.