On notice: IRS and Treasury preview guidance related to Pillar Two taxes and extend foreign tax credit relief | Eversheds Sutherland (US) LLP

The Internal Revenue Service (IRS) and US Treasury Department (Treasury) issued Notice 2023-80 (Notice) on December 11, 2023, addressing the extension of relief previously announced under the foreign tax credit rules, and providing guidance related to the application of taxes imposed as countries begin to implement global minimum taxes under the Organisation for Economic Cooperation and Development (OECD) Pillar Two. Specifically, the Notice:

  • Announces the intention to issue proposed regulations that generally preclude foreign tax credits for any Pillar Two taxes that are determined taking into account the taxpayer’s US tax liability, but permit foreign tax credits for Pillar Two taxes payable in respect of income in the taxing jurisdiction;
  • Clarifies that domestic use elections with respect to “dual consolidated losses” (DCLs) for tax years ending before January 1, 2024, will not be impacted by the enactment of Pillar Two taxes, and announces that regulations will be issued clarifying the interaction of the DCL rules with Pillar Two taxes; and
  • Extends temporary relief announced in Notice 2023-55, which allows taxpayers to elect to apply certain provisions of the foreign tax credit regulations that were in existence prior to the finalization of the current foreign tax credit regulations.

Each of these provisions is discussed in greater detail below.

GloBE Model Rules and Foreign Tax Credits

Section 901 of the Internal Revenue Code of 1986, as amended,1 allows taxpayers a credit for certain income taxes paid or accrued to foreign countries. Section 903 provides that a foreign income tax includes a tax paid in lieu of a generally imposed foreign income tax. The Notice provides guidance regarding the treatment of taxes imposed under legislation that is in accordance with the Pillar Two Global Anti-Base Erosion Model Rules (GloBE Model Rules) for the purposes of calculating the foreign tax credit. The GloBE Model Rules set forth an international, coordinated framework for the imposition of minimum taxation on certain multinational enterprise groups (MNEs) with annual revenue of € 750 million or more. Jurisdictions worldwide have begun adopting various iterations of the GloBE Model Rules, with laws in some countries set to go into effect as early as January 2024. Under the GloBE Model Rules, MNEs must calculate their effective tax rate in each jurisdiction in which they operate. If any such effective tax rate is less than 15 percent, a top-up tax may be imposed, under the Qualified Domestic Minimum Top-Up Tax (QDMTT), Income Inclusion Rule (IIR), or Undertaxed Profits Rule (UTPR).

In general, creditability of these taxes turns on whether such taxes take into account the US federal income tax liability of the taxpayer, meaning that taxes imposed under an IIR generally will not be eligible for the foreign tax credit, but a QDMTT may be eligible for the foreign tax credit. The Notice reserves on the treatment of taxes imposed under the UTPR.

Under the Notice, no foreign tax credit is allowed to a US taxpayer for a “final top-up tax” if, under the foreign tax law, any amount of US federal income tax liability of the US taxpayer would be taken into account in computing the final top-up tax. “Final top-up taxes” are taxes that take into account:

  • the amount of tax imposed on the direct or indirect owners of the entity subject to the tested tax by other countries (including the United States) with respect to the income subject to the tested tax, or
  • in the case of an entity subject to the tested tax on income attributable to its branch in the foreign country imposing the tested tax, the amount of tax imposed on the entity by its country of residence with respect to such income.

The Notice includes examples to demonstrate the application of these rules in the context of an IIR and a QDMTT. Notably, the examples illustrate that a final top-up tax that does not take into account tax paid by the US taxpayer is generally creditable, meaning, for example, that a minority shareholder may be eligible for a foreign tax credit with respect to tax imposed under an IIR, because such shareholder’s US tax liability is not taken into account in applying the IIR, even though a shareholder that is part of the same financial reporting group as the entity subject to the IIR would not be eligible for a foreign tax credit with respect to its share of the same foreign taxes.

The Notice expands on the general framework in a few key areas:

  • Partnerships and controlled foreign corporations (CFCs): A final top-up tax is treated as if it were a creditable tax at the partnership and CFC level, with the disallowance of the credit described above applying at the level of the partner or US shareholder. Final top-up taxes are also not taken into account for purposes of the high-tax exceptions in sections 951A and 954(b)(4).
  • Multiple taxpayers: The Notice provides specific allocation rules to determine the taxpayer by whom a QDMTT is considered paid for foreign tax credit purposes when such QDMTT is computed by reference to the income of two or more persons. The allocation calculation set forth in the Notice applies regardless of how the foreign tax law allocates the QDMTT liability among the entities, which entity is obligated to remit the tax, which entity actually remits the tax, or from whom the foreign country could proceed against to collect the tax.

The Notice also includes additional rules addressing the effects of the GloBE Model Rules on other specific mechanics of the foreign tax credit rules, including:

  • Gross-up and deduction disallowance rules: A taxpayer who claims a credit for foreign income taxes, must include the amount of any final top-up taxes deemed paid (even if not creditable under the Notice) in gross income for the purpose of the section 78 gross-up rules, and would not be able to claim a deduction for a final top-up tax under section 275(a)(4).
  • Separate levy rules: The Notice clarifies that each of an IIR, UTPR, or QDMTT constitutes a separate levy under Treas. Reg. § 1.901-2(d), even if such tax is imposed by adjusting the base of any other levy (e.g., through an addition to income or denial of deductions).
  • Non-duplication requirement: The Notice provides revised language for the non-duplication requirement for in-lieu-of taxes in Treas. Reg. § 1.903-1(c)(1)(ii) to ensure that foreign taxes continue to be creditable only where consistent with the scope and purposes of section 903.

GloBE Model Rules and Dual Consolidated Losses

The Notice also acknowledges that calculation of effective tax rates under the GloBE Model Rules may give rise to issues under the DCL rules of section 1503(d) and the regulations thereunder. Generally, the DCL rules prevent “double dipping” that could otherwise occur when a dual resident corporation or other entity subject to both US and foreign tax has net operating losses that can be used to offset income subject to US tax, and also be used to offset income under the tax laws of a foreign jurisdiction. Very generally, the rules allow US taxpayers to take into account a DCL if they make a “domestic use election” (DUE), certifying that there will not be a foreign use of the same loss.

The Notice acknowledges that because the effective tax rate calculation under the GloBE Model Rules take a “jurisdictional blending approach,” this may result in certain income and losses being aggregated in a way that implicates the double dipping concerns the DCL rules were intended to address. But, to give taxpayers comfort as to existing DUEs, the Notice provides that no “foreign use” of a DCL incurred in a taxable year ending before January 1, 2024 (and certain other taxable years including December 31, 2023) occurs solely because all or a portion of the deductions or losses that comprise such legacy DCL are taken into account in determining GloBE income, subject to certain anti-abuse limitations.

Treasury and IRS are continuing to study the effects of the GloBE Model Rules and implications for dual consolidated losses, and additional guidance will be issued addressing the interaction of these rules.

Extension of FTC Temporary Relief Period

On January 4, 2022, Treasury issued final regulations under section 901 and section 903, which made certain changes to the definition of foreign income tax, the net gain requirement, and source-based attribution requirements that apply in order for a foreign tax to be creditable. Responding to certain criticisms of the final rules, on November 22, 2022, proposed regulations were issued relating to the cost recovery requirement and the substitution requirement for covered withholding taxes. And, on April 17, 2023, Treasury issued Notice 2023-31, which addressed the application of the “single-country” exception in the proposed regulations.

In Notice 2023-55, the Treasury Department announced that it continues to analyze issues related to the final and proposed regulations, and announced that taxpayers would be allowed to elect to continue to apply certain pre-2022 regulations in determining eligibility for the foreign tax credit under sections 901 and 903. Specifically, taxpayers are permitted to apply the final rules without regard to the “nonconfiscatory gross basis tax rule,” and without regard to certain jurisdictional and source-based attribution requirements. Notice 2023-55 clarifies, however, that gross basis taxes imposed on gross receipts or income arising from the provision of digital services taxes do not satisfy the net income requirement of the regulations. Relief granted under Notice 2023-55 was available only for tax years beginning on or after December 28, 2021 and ending on or before December 31, 2023.

The Notice extends the relief granted by Notice 2023-55 indefinitely, until such time that another notice or other published guidance withdraws or modifies the relief described in the Notice. However, importantly, the extension of relief applies only until guidance is issued, and guidance may be retroactive within the year that it is issued.

The Notice also clarifies how the temporary relief period applies to partners and partnerships, subject to specific applications of the consistent application requirement and single-benefit requirement, as originally set forth in Notice 2023-55.


The Notice introduces much of the guidance relating to foreign tax credits and the GloBE Model Rules that has been previewed at conferences and in speeches over the last several months, and provides taxpayers with helpful guidance as countries begin adopting the GloBE Model Rules. But, the Notice is just a framework and it will be important to understand the details as the rules continue to be fleshed out. The Notice requests written comments on the rules described in the Notice and on the interaction between the DCL rules and the GloBE Model Rules by February 9, 2024.

1 Section references are to the Internal Revenue Code.

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