SECTION 3. GLOBE MODEL — Internal Revenue Bulletin 2023-52

AND DUAL CONSOLIDATED LOSSES

.01 Background . Section 1503(d) and the regulations thereunder (DCL rules) prevent “double dipping” of losses, which occurs when the same economic loss offsets or reduces both income subject to U.S. tax (but not a foreign jurisdiction’s tax) and income subject to the foreign jurisdiction’s tax (but not U.S. tax). See S. Rep. 313, 99th Cong., 2d Sess., at 419-20 (1986). A dual consolidated loss (DCL) is defined as a net operating loss of a dual resident corporation and a net loss of a domestic corporation that is attributable to certain foreign branches or interests in hybrid entities (separate units). See § 1.1503(d)-1(b)(5). Under the DCL rules, a DCL cannot offset the income of a domestic affiliate (a domestic use), subject to certain exceptions. See § 1.1503(d)-4(b).

Under one exception, a domestic use of a DCL is permitted if the taxpayer makes a domestic use election, which requires the taxpayer to certify that there

the SBIE, Country X imposes 11.25u of QDMTT with respect to CFC1 and CFC2 collectively.

(ii) Analysis . The amount of SBIE (if any), and the entity to which it may be attributable, is not taken into account in the calculation of each person’s QDMTT Allocation Key. The QDMTT Allocation Key for each of CFC1 (10u) and CFC2 (2.5u) remains the same as in Example 1 because each of CFC1 and CFC2 has the same Separate QDMTT Income and Separate Pre-QDMTT Taxes as in Example 1. Accordingly, 9u of the Country X QDMTT (11.25u x (10u / 12.5u)) is allocated to CFC1, and 2.25u of the Country X QDMTT (11.25u x (2.5u / 12.5u)) is allocated to CFC2.

(i) Facts . The facts are the same as in Example 1, except that USP also owns all of the stock of CFC3, which is a CFC that is a tax resident of Country X. CFC3 is a member of the same MNE Group as CFC1 and CFC2 under Country X tax law. In Year 1, CFC3’s Separate QDMTT Income is a net loss of 50u, and its Separate Pre-QDMTT Taxes is zero. Country X imposes 5u of QDMTT with respect to CFC1, CFC2, and CFC3 collectively.

(ii) Analysis . Under Country X tax law, the amount of the QDMTT is computed by reference to the income of CFC1, CFC2, and CFC3. Under section 2.04(2) through (4) of this notice, the 5u of Country X QDMTT is allocated among CFC1, CFC2, and CFC3 in proportion to each person’s QDMTT Allocation Key. The QDMTT Allocation Key for CFC1 (10u) and for CFC2 (2.5u) remain the same as in Example 1 because they have the same Separate QDMTT Income and Separate PreQDMTT Taxes as in Example 1. CFC3’s QDMTT Allocation Key is treated as zero because its Separate QDMTT Income is less than zero. Accordingly, 4u of the Country X QDMTT (5u x (10u / 12.5u)) is allocated to CFC1, 1u of the Country X QDMTT (5u x (2.5u / 12.5u)) is allocated to CFC2, and none of the Country X QDMTT (5u x 0u / 12.5u) is allocated to CFC3.

(d) Example 4—Negative Separate Pre-QDMTT Taxes .

(i) Facts . The facts are the same as in Example 1, except that: (i) in Year 1, CFC1’s Separate PreQDMTT Taxes is -5u, representing a negative amount of income tax expense (a tax benefit), and (ii) Country X imposes 22.5u of QDMTT with respect to CFC1 and CFC2 collectively.

(ii) Analysis . As in Example 1, 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 22.5u of Country X QDMTT is allocated between CFC1 and CFC2 in proportion to each person’s QDMTT Allocation Key. The QDMTT Allocation Key for CFC2 (2.5u) remains the same as in Example 1 because CFC2 has the same Separate QDMTT Income and Separate Pre-QDMTT Taxes as in Example 1. However, CFC1’s QDMTT Allocation Key is now 20u ((15% - (-5u / 100u)) x 100u), reflecting the change in CFC1’s Separate PreQDMTT Taxes. Accordingly, 20u of the Country X QDMTT (22.5u x (20u / 22.5u)) is allocated to CFC1, and 2.5u of the Country X QDMTT (22.5u x (2.5u / 22.5u)) is allocated to CFC2.

.05 The Non-duplication Requirement for In Lieu of Taxes .

(1) In general . The Treasury Department and the IRS intend to amend the non-duplication requirement in § 1.903-1(c)(1)(ii) as described in this section 2.05.

(2) Non-duplication requirement . A foreign tax, in order to qualify as an in lieu of tax, need only be in substitution for a generally-imposed net income tax and not in substitution for all net income taxes imposed by that country. Accordingly, the first sentence of the non-duplication requirement in § 1.903-1(c)(1)(ii) would be revised as follows: “The generally-imposed net income tax for which the tested foreign tax is imposed in substitution is not also imposed, in addition to the tested foreign tax, on any persons with respect to any portion of the income to which the amounts (such as sales or units of production) that form the base of the tested foreign tax relate (the ‘excluded income’).” Conforming changes to the second sentence of § 1.9031(c)(1)(ii) and the examples in § 1.903-1(d) would be made as appropriate.

(3) Example . (a) Facts . Country X imposes a net income tax within the meaning of § 1.901-2(a)(3) on the income of nonresident companies that is attributable to the nonresident’s activities within Country X (NRCIT) and that constitutes a generally-imposed net income tax. The NRCIT applies to all nonresident corporations that engage in business in Country X except for nonresident corporations that engage in activities related to Industry B, which are instead subject to the Industry B Tax. The NRCIT and the Industry B Tax were enacted contemporaneously, and the statutory language of the NRCIT expressly excludes gross income derived by corporations engaged in activities related to Industry B. Country X enacts a QDMTT that is a net income tax within the meaning of § 1.901-2(a)(3). The Country X QDMTT is imposed with respect to gross income that is also included in the base of the Industry B Tax.

(b) Analysis . The Industry B Tax meets the requirement in § 1.903-1(c)(1)(i) because Country X has a generally-imposed net income tax, the NRCIT. In addition, the Industry B Tax meets the requirement in § 1.903-1(c)(1)(ii), modified as described in section 2.05(2), because the generally-imposed net income tax for which the tested foreign tax is imposed in substitution, the NRCIT, is not also imposed, in addition to the Industry B Tax, on any persons with respect to any portion of the income to which the amounts that form the base of the Industry B Tax relate (“excluded income”). It is not relevant that the Country X QDMTT is also imposed on the excluded income.

(4) Additional changes to § 1.903-1 . The Treasury Department and the IRS are

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has not been, and will not be, a foreign use of the DCL. See § 1.1503(d)-6(d) and § 1.1503(d)-1(b)(20). In general, a foreign use of a DCL occurs when any portion of the DCL is made available under the income tax laws of a foreign country to offset or reduce, directly or indirectly, any income that under U.S. tax principles is income of a foreign corporation or a direct or indirect owner of certain interests in hybrid entities. See § 1.1503(d)-3(a)(1). In the event of a foreign use (or other triggering event) during the certification period, the taxpayer must recapture the DCL as ordinary income and pay an interest charge. § 1.1503(d)-6(e)(1). However, among other exceptions, a foreign use is not considered to occur if the laws of a foreign country provide an election that would enable a foreign use and such election is not made. § 1.1503(d)-3(c)(2). Under this domestic use election, a taxpayer effectively has the choice to put a DCL to a domestic use or a foreign use (but not both).

.02 Interaction with GloBE Model Rules .

Under the GloBE Model Rules, an MNE Group whose ETR for a jurisdiction is below the 15% Minimum Rate must compute the amount of Jurisdictional Top-up Tax owed with respect to the jurisdiction. That Jurisdictional Top-up Tax is based on, among other factors such as Adjusted Covered Taxes, the Net GloBE Income of Constituent Entities within the jurisdiction. For this purpose, the GloBE Model Rules take a jurisdictional blending approach under which all income and loss of Constituent Entities in the same jurisdiction are generally aggregated. This aggregation can be viewed as giving rise to double dipping concerns that the DCL rules were intended to address. For example, if, in determining Net GloBE Income of a jurisdiction, a loss giving rise to a DCL is aggregated with items that under U.S. tax principles are items of a foreign corporation in that jurisdiction, the loss would be available to reduce both U.S. tax (if a domestic use election were permitted) and the Jurisdictional Top-up Tax. These concerns could exist with respect to a DCL incurred in a taxable year ending before the time at which the GloBE Model Rules are anticipated to be effective (for instance, a taxable

year ending on December 31, 2023) if timing differences between U.S. tax law and applicable financial accounting standards result in a portion of the loss comprising the DCL being taken into account as an expense under the GloBE Model Rules in a later year.

Additionally, the GloBE Model Rules include certain features that may differ from traditional foreign income tax systems. For example, the GloBE Model Rules do not include a mechanism through which a taxpayer can decline aggregation, with the result that the taxpayer might effectively be required to put a DCL to a foreign use (thereby removing what otherwise may have been a choice between a domestic use and a foreign use). In addition, a loss may never produce a benefit under the Jurisdictional Top-up Tax, for example, if the ETR in the jurisdiction is at or above the Minimum Rate (without regard to the loss) and the loss is not carried over in determining Jurisdictional Top-Up Tax in another year.

Accordingly, the Treasury Department and the IRS are studying the extent to which the DCL rules should apply with respect to the GloBE Model Rules, including the extent to which aggregation should result in a foreign use of a DCL, and the extent to which the GloBE Model Rules should cause an entity that is not otherwise subject to an income tax of a foreign jurisdiction to be a dual resident corporation or a hybrid entity under § 1.1503(d)-1(b)(2) or (3), or should prevent such an entity from being a transparent entity under § 1.1503(d)-1(b)(16). The Treasury Department and the IRS are also studying similar issues in the context of other provisions (for example, the interaction of the anti-hybrid rules under §§ 245A(e) and 267A with the GloBE Model Rules).

.03 Treatment of Legacy DCLs . In the interest of providing certainty while the Treasury Department and the IRS develop guidance addressing the interaction of the DCL rules with the GloBE Model Rules, the Treasury Department and the IRS intend to issue proposed regulations with respect to DCLs incurred in (i) taxable years ending on or before December 31, 2023, or (ii) provided the taxpayer’s taxable year begins and ends on the same dates as the Fiscal Year of the

MNE Group that could take into account as an expense any portion of a deduction or loss comprising such a DCL, taxable years beginning before January 1, 2024, and ending after December 31, 2023 (collectively, legacy DCLs). Under this proposed rule, a foreign use would not be considered to occur with respect to a legacy DCL solely because all or a portion of the deductions or losses that comprise the legacy DCL are taken into account in determining the Net GloBE Income for a particular jurisdiction. However, this proposed rule would not apply to any DCL that was incurred or increased with a view to reducing the Jurisdictional Top-Up Tax or qualifying for the proposed rule described in this notice.

.04 Reliance . Taxpayers may rely on the guidance described in this section 3 until proposed regulations are published in the Federal Register.