The American Institute of CPAs has submitted comments to the Department of the Treasury and the Internal Revenue Service on the proposed rules regarding dual consolidated losses and the treatment of certain disregarded payments.
The DCL rules, under section 1503(d), prevent taxpayers from using a single economic loss to reduce both U.S. and foreign tax. Congress enacted the DCL rules to prevent a dual resident corporation (DRC) or a separate unit (including a foreign branch) from “double dipping.” Double dipping occurs when a DRC or separate unit uses a single economic loss to offset income in two tax jurisdictions.
The DCL rules primarily restrict the “domestic use” of a DCL, which is considered to occur when the DCL is made available to offset, directly or indirectly, the income of a domestic affiliate either in the taxable year in which the DCL is recognized, or in any other taxable year.
Treasury and the IRS released proposed regulations (REG-105128-23) on August 6, 2024, that address certain issues arising under the DCL rules. The AICPA highlighted several areas of concern in the proposed regulations. The AICPA’s recommendations include:
- Deferral of application of these rules to at least tax years beginning on or after January 1, 2025. Further Organisation for Economic Co-operation and Development (OECD) guidance on key aspects of the global anti-base erosion (GloBE) model rules, including hybrid arrangements and duplicate loss arrangements, is expected, which should be considered prior to the proposed regulations taking effect.
- Extension of transition relief to no earlier than the tax years beginning on or after January 1, 2025.
- Withdrawal of proposed regulations by Treasury and the IRS for the removal of the stock inclusion rule. At a minimum, Treasury and the IRS should allow inclusions on stock attributable to foreign corporations organized in the same foreign country as the dual resident corporation or sperate unit.
- Deferral to Congress in enacting broader anti-hybrid rules, including those rules targeting structures that may produce deduction/non-inclusion outcome. The AICPA also recommends the current rules not be expanded beyond the limited scope and intended purposes specifically set forth by Congress in the Internal Revenue Code of 1986 as amended.
“The request for the effective date to be delayed is important for everyone, as it will provide greater certainty to taxpayers, and allows Treasury and the IRS to incorporate any further developments expected from the OECD,” says Reema Patel, senior manager, AICPA Tax Policy & Advocacy. “To align the DCL rules with Pillar 2 is quite challenging especially when the Pillar 2 rules, hybrid arrangements and duplicate loss rules are still ongoing from the OECD.”
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