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US Considers Impact of Global Tax Rules on ‘Disregarded’ Firm Payments

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TLDR:

– The US Internal Revenue Service (IRS) is considering how new guidance for implementing a 15% global minimum tax will affect payments between US corporate entities that are “disregarded” for tax purposes.
– The Organization for Economic Development and Cooperation (OECD) released administrative guidance in December 2023 to address transactions that allow businesses to take advantage of differences in accounting and tax treatment.

The US Internal Revenue Service (IRS) is examining the potential impact of new guidance on how a 15% global minimum tax will affect payments made between US corporate entities that are “disregarded” for tax purposes. The guidance in question was issued by the Organization for Economic Development and Cooperation (OECD) in December 2023 with the aim of addressing transactions that enable businesses to exploit discrepancies in accounting and tax treatment.

The 15% global minimum tax is part of a broader international tax deal, known as Pillar Two, agreed upon by over 140 countries. Under Pillar Two, multinational corporations will be subject to a minimum tax rate of 15% on their global profits. The intention behind the tax deal is to prevent corporations from shifting their profits to low-tax jurisdictions.

The IRS is now considering how the new guidance from the OECD will impact transactions involving disregarded entities, which refers to corporate entities that are not recognized as separate from their owners for tax purposes. These entities are typically single-member limited liability companies (LLCs) or branch operations of foreign corporations. The concern is that these disregarded entities could be used to circumvent the implementation of the global minimum tax.

The guidance issued by the OECD aims to provide clarity on the treatment of certain types of transactions involving disregarded entities. It seeks to ensure that businesses do not abuse these transactions to qualify for a safe harbor that simplifies their tax calculations. The IRS is analyzing this guidance to determine how it will affect payments between US corporate entities.

The implementation of the global minimum tax has been a major focus of international tax reform efforts in recent years. The aim is to create a more level playing field for multinational corporations and reduce tax avoidance strategies. The fact that the IRS is specifically examining the impact of the guidance on disregarded entities indicates that these entities are of particular concern when it comes to potential abuse of the tax rules.

In conclusion, the IRS is closely evaluating how the new guidance from the OECD will impact payments made between US corporate entities that are disregarded for tax purposes. This comes as part of a broader effort to implement the 15% global minimum tax agreed upon by over 140 countries. The concern is that disregarded entities could be used to navigate around the tax rules, and the IRS is seeking to address this potential loophole.

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