SECTION 2. GLOBE MODEL — Internal Revenue Bulletin 2023-52

AND THE FOREIGN TAX CREDIT

.01 Background . Section 901 generally allows a credit for the amount of any income, war profits, and excess profits taxes (collectively, foreign income taxes) paid or accrued during the taxable year to any foreign country or to any territory of the United States, and in the case of a domestic corporation, the taxes deemed to have been paid under § 960. Section 903 provides that foreign income taxes include a tax paid in lieu of a generally-imposed foreign income tax.

This section 2 describes rules that would address the treatment of certain taxes, including IIRs, UTPRs, and QDMTTs, under §§ 59(l), 78, 275, 704, 901, 903, 951A, 954, and 960. For purposes of section 2 of this notice, the term IIR, the term UTPR, and the term QDMTT mean a tax imposed under a foreign tax law ⁵ that is consistent with the IIR, UTPR, and QDMTT, respectively, described in the GloBE Model Rules.

.02 Final Top-up Tax . (1) In general . The Treasury Department and the IRS intend to issue proposed regulations consistent with the guidance provided in this section 2.02, which describes the treatment of final top-up taxes under §§ 59(l), 78, 275, 704, 901, 903, 951A, 954, and 960.

1 Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

2 Org. for Econ. Coop. & Dev. [OECD], Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two) (Dec. 14, 2021), https://www. oecd-ilibrary.org/taxation/tax-challenges-arising-from-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two_782bac33-en.

3 Capitalized terms used in this notice, but not defined herein, have the meanings ascribed to such terms under the GloBE Model Rules.

4 Under the European Union (EU) Directive requiring the adoption of the GloBE Model Rules, EU Member States will apply the UTPR for years beginning on or after December 31, 2023 but only in limited circumstances. See Council Directive 2022/2523, art. 50, 2022 OJ (L 328) 1, 55.

5 The term “foreign tax law” in this notice has the meaning in § 1.901-2(g)(4).

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(2) Definition of final top-up tax . A foreign income tax (tested tax) is a final top-up tax if, in computing the tested tax, the foreign tax law takes into account: (a) 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 (b) 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.

(3) Treatment of a final top-up tax under §§ 901 and 59(l) . No credit is allowed under §§ 901 or 59(l) to a person for a final top-up tax if, under the foreign tax law, any amount of United States federal income tax liability of the person would be taken into account in computing the final top-up tax (without regard to whether the person has any amount of United States federal income tax liability that, in fact, is taken into account in such computation).

(4) Treatment of a final top-up tax paid by a partnership or CFC . In general, 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 pursuant to section 2.02(3) of this notice applying at the level of the partner or U.S. shareholder, as applicable. This treatment is intended to facilitate appropriate results where a final top-up tax is creditable as to one partner or U.S. shareholder of a partnership or CFC, as applicable, but not as to another. Further, a final top-up tax is not taken into account in determining whether the high-tax exception to foreign base company income in § 1.954-1(d) or the high-tax exclusion from tested income in § 1.951A-2(c)(7) applies.

(a) Creditable foreign tax expenditure . A final top-up tax is treated as a creditable foreign tax expenditure under § 1.7041(b)(4)(viii)(b). (b) Eligible current year tax . A final top-up tax is treated as an eligible current year tax under § 1.960-1(b)(5).

(c) Application of the high-tax excep- tions under §§ 951A and 954(b)(4) . In computing the effective rate of foreign income tax under § 1.954-1(d)(2) and § 1.951A-2(c)(7)(vi), a final top-up tax

is excluded from the amount of foreign income taxes described in § 1.954-1(d) (2)(i) and § 1.951A-2(c)(7)(vi)(A), and increases the amount of the net item of income described in § 1.951-1(d)(2)(ii) and the amount of the tentative tested income item described in § 1.951A-2(c) (7)(vi)(B), as applicable.

(5) Application of §§ 78 and 275(a)(4) . If a taxpayer chooses with respect to any taxable year to claim a credit for foreign income taxes, absent a specific statutory provision to the contrary (such as § 901(j) (3)), the gross-up rule of § 78 and the deduction disallowance rule of § 275(a) (4) apply to any foreign income tax paid or accrued in such taxable year regardless of whether a foreign tax credit is allowed for the particular tax. The guidance in this section would confirm that result in the case of a final top-up tax, such as an IIR that is a foreign income tax. As a result, a taxpayer who chooses to credit foreign income taxes would be required to include in gross income under § 78 an amount equal to the amount of a final top-up tax deemed paid by the taxpayer under §§ 960(a), (b), and (d), and would not be able to claim a deduction for a final top-up tax under § 275(a)(4).

(a) Section 78 gross-up amount . Section 78 applies to a final top-up tax deemed paid by a domestic corporation that chooses to have the benefits of subpart A of part III of subchapter N for any taxable year.

(b) Section 275(a)(4) deduction dis- allowance . Section 275 applies to deny a deduction for a final top-up tax to any person that chooses to take to any extent the benefits of § 901.

(6) Examples . The following examples illustrate the application of this section 2.02. (a) Example 1—IIR that is a foreign income tax . (i) Facts . Country X imposes an IIR on certain entities resident in Country X. The IIR imposed by Country X is a foreign income tax within the meaning of § 1.901-2(a) and (b). Under Country X tax law, in computing the amount of the IIR, the foreign tax liability of the direct and indirect owners of the Country X taxpayers that relates to income subject to the IIR is taken into account if those owners are part of the same MNE Group (as defined under Country X tax law) as the Country X taxpayers. USP is a domestic corporation that owns all the stock of CFCX, a CFC that is organized in, and is a tax resident of, Country X. CFCX owns all the stock of CFCY, a CFC that is organized in, and is a tax resident of, Country Y. Under Country X tax law, USP is considered part of the same MNE

Group as CFCX and CFCY, and, therefore, any U.S. tax liability of USP that relates to income subject to the IIR is taken into account in computing the IIR. In 2024, CFCX is liable for 5u (units of Country X currency) of the Country X IIR. At all relevant times, 1u = $1. USP is deemed to pay $4 of the Country X IIR under § 960(d). USP chooses to credit foreign income taxes for 2024.

(ii) Analysis . The Country X IIR is a final top-up tax because it is a foreign income tax that takes into account the amount of tax imposed by other countries on the direct or indirect owners of the entity subject to the Country X IIR with respect to the income subject to the Country X IIR. No credit is allowed under § 901 to USP for the $4 of Country X IIR that USP is deemed to pay because, under Country X tax law, USP’s U.S. federal income tax liability may be taken into account in computing the Country X IIR. This result does not depend on whether USP has any amount of U.S. federal income tax liability or whether any of that liability is, in fact, taken into account in computing the Country X IIR. The amount included in USP’s income by reason of § 78 and § 1.78-1(a) is $5.

(b) Example 2—Minority U.S. shareholder . (i) Facts . The facts are the same as in Example 1, except that: (i) USP and USM, a domestic corporation, own 70% and 30%, respectively, of the stock of HoldCo, a CFC that is organized in, and is a tax resident of, Country A, and HoldCo owns all the stock of CFCX, (ii) USM is not considered part of the same MNE Group as USP, CFCX and CFCY under Country X tax law, (iii) CFCX is liable for 6.5u of the Country X IIR, and (iv) under § 960(d), USP is deemed to pay $3.64 of the Country X IIR, and USM is deemed to pay $1.56 of the Country X IIR.

(ii) Analysis . Similar to the analysis in Example 1, the Country X IIR is a final top-up tax, and no credit is allowed under § 901 to USP for the $3.64 of Country X IIR that USP is deemed to pay because, under Country X tax law, USP’s U.S. federal income tax liability may be taken into account in computing the Country X IIR. USM, however, may be allowed a credit under § 901 for the $1.56 of the Country X IIR that USM is deemed to pay under § 960(d) because, under Country X tax law, no amount of USM’s U.S. federal income tax liability can be taken into account in computing the Country X IIR as USM is not considered part of the same MNE Group as CFCX. Under § 78 and § 1.78-1(a), the amount included in USP’s income is $4.55, and the amount included in USM’s income is $1.95.

(i) Facts . The facts are the same as in Example 1, except that Country Y imposes a QDMTT. The QDMTT imposed by Country Y is a foreign income tax within the meaning of § 1.901-2(a) and (b). Under Country Y tax law, in computing the amount of the QDMTT, the foreign tax liability of direct and indirect owners of the entity subject to the QDMTT is not taken into account. Therefore, any U.S. tax liability of USP is not taken into account in computing the QDMTT. In 2024, CFCX is liable for no amount of Country X IIR, and CFCY is liable for 10y (units of Country Y currency) of Country Y QDMTT. At all relevant times, 1y= $1. USP is deemed to pay $8 of the Country Y QDMTT under § 960(d).

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(4) Separate QDMTT Income and Separate Pre-QDMTT Taxes . A person’s Separate QDMTT Income and a person’s Separate Pre-QDMTT Taxes are determined by reference to the relevant amounts (not reduced by negative amounts attributable to any other person) provided on any return, schedule or other document that, under the foreign tax law, must be filed or maintained for purposes of the QDMTT. If no return, schedule, or other document that provides a person’s Separate QDMTT Income and a person’s Separate Pre-QDMTT Taxes is required to be filed or maintained, then, a person’s Separate QDMTT Income and a person’s Separate Pre-QDMTT Taxes are determined by reference to the relevant amounts provided in the books of account regularly maintained by or on behalf of the person and used for purposes of computing the QDMTT.

(5) Examples . The following examples illustrate the application of this section 2.04(2) through (4). (a) Example 1—QDMTT imposed on two or more persons .

(i) Facts . Country X has enacted a QDMTT. Under Country X tax law, entities that are resident in, or have a taxable presence in, Country X and that are members of the same MNE Group, are jointly and severally liable for the QDMTT. USP is a United States person that owns all of the stock of each of CFC1 and CFC2, each of which is a CFC that is a tax resident of Country X. CFC1 and CFC2 are members of the same MNE Group under Country X tax law. In Year 1, CFC1’s Separate QDMTT Income is 100u (units of Country X currency) and CFC1’s Separate Pre-QDMTT Taxes is 5u. In the same year, CFC2’s Separate QDMTT Income is 50u, and CFC2’s Separate Pre-QDMTT Taxes is 5u. The QDMTT Rate in Country X is 15%. Country X imposes 12.5u of QDMTT with respect to CFC1 and CFC2 collectively.

(ii) Analysis . Under Country X tax law, the amount of the QDMTT is computed by reference to the income of both CFC1 and CFC2. Under section 2.04(2) through (4) of this notice, the 12.5u of the Country X QDMTT is allocated between CFC1 and CFC2 in proportion to each person’s QDMTT Allocation Key. CFC1’s QDMTT Allocation Key is 10u ((15% - (5u / 100u)) x 100u), and CFC2’s QDMTT Allocation Key is 2.5u ((15% - (5u / 50u)) x 50u). Accordingly, 10u of the Country X QDMTT (12.5u x (10u / 12.5u)) is allocated to CFC1, and 2.5u of the Country X QDMTT (12.5u x (2.5u / 12.5u)) is allocated to CFC2.

(b) Example 2—Effect of SBIE . (i) Facts . The facts are the same as in Example 1, except that CFC1 and CFC2 collectively have 15u of Substance-based Income Exclusion (SBIE) which, under Country X tax law, can reduce an MNE Group’s QDMTT liability. After taking into account

(ii) Analysis . The Country Y QDMTT is not a final top-up tax because Country Y tax law does not take into account in computing the Country Y QDMTT the amount of tax imposed by other countries on the direct and indirect owners of the entity subject to the Country Y QDMTT. Therefore, USP may be allowed a credit under § 901 for the $8 of Country Y QDMTT deemed paid under § 960(d). The amount included in USP’s income by reason of § 78 and § 1.78-1(a) is $10.

.03 Separate Levy Rules . (1) In general . The Treasury Department and the IRS intend to issue proposed regulations consistent with the guidance provided in this section 2.03, which describes how the separate levy rules of § 1.901-2(d) apply with respect to an IIR, UTPR, and QDMTT. This treatment would reflect that the amount of tax imposed under an IIR, UTPR, or QDMTT is computed separately from any other levy imposed by a foreign country, and would ensure consistent treatment of an IIR, UTPR, and QDMTT regardless of the manner in which a foreign country enacts an IIR, UTPR, or QDMTT under its foreign tax law.

(2) Application of separate levy rules . Each of an IIR, UTPR, and QDMTT imposed by a foreign country is a separate levy within the meaning of § 1.901-2(d) from any other levy imposed by that country, even if the country imposes the IIR, UTPR, or QDMTT by adjusting the base of any other levy (such as through an addition to income or denial of deductions).

.04 Determining the Taxpayer for a QDMTT .

(1) In general . The Treasury Department and the IRS intend to issue proposed regulations consistent with the guidance provided in this section 2.04, which describes rules for determining the person by whom a QDMTT is considered paid under § 1.901-2(f) when a QDMTT is computed by reference to the income of two or more persons.

(2) QDMTT on income of two or more persons . The legal lability for a QDMTT imposed on the income of two or more persons is determined under the rules of this section 2.04(2) through (4) rather than under § 1.901-2(f)(3) (regarding taxes imposed on combined income of two or more persons). If a QDMTT is computed by reference to the income of two or more persons, foreign tax law is considered to impose legal liability for the QDMTT on each person in proportion to the person’s

QDMTT Allocation Key, as determined under this section 2.04(2). A person’s QDMTT Allocation Key is the product of (i) the excess (if any) of the QDMTT Rate over the person’s Separate Pre-QDMTT ETR, and (ii) the person’s Separate QDMTT Income (such terms as defined in section 2.04(3)). If a person’s Separate QDMTT Income is zero or less than zero, then the person’s QDMTT Allocation Key will be treated as zero. The rules of this section 2.04 apply regardless of how the foreign tax law allocates the QDMTT liability among two or more persons, which person is obligated to remit the tax, which person actually remits the tax, or which person the foreign country could proceed against to collect the tax in the event all or a portion of the tax is not paid.

(3) Definitions . The following definitions apply for purposes of this section 2.04. (a) Person . Person means an individual or an entity (including a disregarded entity described in § 301.7701-2(c)(2) (i)) that is subject to a QDMTT imposed by a foreign country. In determining the amount of the QDMTT paid by an owner of a partnership or a disregarded entity, the rule described in section 2.04(2) first applies to determine the amount of the QDMTT paid by the partnership or disregarded entity, and then § 1.901-2(f)(4) applies to allocate the amount of such QDMTT to the owner.

(b) QDMTT Rate . QDMTT Rate means the minimum effective tax rate (ETR), as stated in the foreign tax law, to which the actual ETR of a person or persons is compared for purposes of computing the QDMTT.

(c) Separate Pre-QDMTT Taxes . A person’s Separate Pre-QDMTT Taxes means the taxes (whether positive or negative) of the person that are taken into account under the foreign tax law for purposes of computing the QDMTT.

(d) Separate QDMTT Income . A person’s Separate QDMTT Income means the income or loss of the person that is taken into account under the foreign tax law for purposes of computing the QDMTT.

(e) Separate Pre-QDMTT ETR . A person’s Separate Pre-QDMTT ETR means the person’s Separate Pre-QDMTT Taxes (whether positive or negative) divided by the person’s Separate QDMTT Income.

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considering whether additional changes to § 1.903-1 would be needed to ensure that foreign taxes continue to be creditable only where consistent with the scope and purposes of § 903. These additional changes may include defining a generally-imposed net income tax.

.06 Applicability Date and Reliance . (1) Applicability date . It is anticipated that the proposed regulations will provide that rules consistent with the rules described in section 2 of this notice apply to taxable years ending after December 11, 2023. (2) Reliance . A taxpayer may rely on the guidance described in sections 2.02 through 2.05 of this notice for taxable years that end after December 11, 2023, and on or before the date proposed regulations are published in the Federal Register, provided that the taxpayer consistently follows the guidance in its entirety for all those taxable years. Additionally, for taxable years that begin on or after December 28, 2021, and end on or before December 11, 2023, a taxpayer may rely on the guidance described in section 2.05 of this notice.