Key US developments from 2022 – and their impact in 2023

A slew of tax changes for international investors took place in 2022 and many of these changes will have ripple effects far into 2023.

Changes in 2022

Beneficial ownership transparency: The US Department of the Treasury’s (the Treasury’s) Financial Crimes Enforcement Network (FinCEN) issued a final rule, establishing a beneficial ownership information reporting requirement pursuant to the bipartisan Corporate Transparency Act. The rule, in effect from January 1, 2024, requires most corporations, limited liability companies and other entities created in or registered to do business in the US to report information about their beneficial owners (the individuals who ultimately own or control the company) to FinCEN. Reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports. Reporting companies created or registered after January 1, 2024, will have 30 days to file initial reports.

FTC regulations: New final foreign tax credit (FTC) regulations were set at the end of 2021 and published early in 2022 in the Federal Register. Effective from the 2022 tax year, these regulations can potentially make previously creditable foreign income taxes become non-creditable for US purposes.

The regulations address, among other issues, foreign income tax and a tax in lieu of an income tax; disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a Section 245A deduction; the allocation and apportionment of interest expense, foreign income tax expense and certain deductions of life insurance companies; foreign branch category income; and the accrual of foreign taxes that can be claimed as a credit.

Strengthened crypto-enforcement: The federal Inflation Reduction Act 2022, passed in August 2022, pledged USD80 billion to the Internal Revenue Service (IRS) over the next ten years, more than half of that money for intensified enforcement, including of cryptocurrency transactions.

Also in 2022, a federal court gave the IRS authorisation for a John Doe summons on a Los Angeles-based crypto-dealer for information about US taxpayers who conducted at least USD20,000 in crypto-transactions between 2016 and 2021.

New schedules: IRS Schedule K2 and Schedule K3 became effective for the 2021 tax year for foreign transaction information formerly reported on Form 1065, Schedule K. Schedule K2 reports items of international tax relevance for certain businesses. Schedule K3 breaks down an individual’s share of global income, credits and deductions. These forms aim to make federal income tax liability more transparent for partners and shareholders who share ownership in companies.

FATCA ‘loophole’: Investigation by the US Senate Finance Committee uncovered that the ‘shell bank loophole’ in the Foreign Account Tax Compliance Act (FATCA) allows banks offshore to accept funds from US persons without reporting them to the IRS. The Committee is working on legislation to close this loophole.

Falling short: A provision in the Tax Cuts and Jobs Act of 2017 (the 2017 Act) that aimed to raise hundreds of billions of dollars in taxes on deferred earnings from multinational companies and their shareholders is bringing in less than a third of the projected revenue, according to a report by the Treasury Inspector General for Tax Administration.

The repatriation tax provision (Section 965 of the Tax Code) aimed to generate USD338.8 billion for the federal government for fiscal years 2018 – 2027. Companies and their shareholders have paid only around USD94 billion in taxes to the government on the taxes owed by foreign subsidiaries and their shareholders on the profits previously stockpiled abroad. Companies reported USD251 billion in tax liability but USD157 billion of that was deferred, to be paid in installments.

Before passage of the 2017 Act, taxpayers could defer US tax on certain foreign-sourced net income by keeping the assets in a foreign jurisdiction. Section 965 removed that option and required taxpayers to pay this new tax on their previously untaxed post-1986 earnings and profits.

The outlook for 2023

Foreign currency delay: The IRS and the Treasury plan to defer for one year the effective date of final regulations pertaining to foreign currency used by multinational companies’ business units abroad (Notice 2022-34).

Crypto-development: The US has committed multiple agencies to a framework for engagement with foreign counterparts regarding development of digital assets. President Biden’s Executive Order earlier in 2022 also directs development of digital asset and central bank digital currencies technologies.

The OECD has a new global tax transparency framework to provide for the reporting and exchange of information with respect to crypto-assets. The framework aims for transparency in crypto-asset transactions through automatically exchanging information with the jurisdictions of residence of taxpayers annually. Entities or individuals offering services that provide exchange transactions in crypto-assets will have to report under the framework.

AML: US lawmakers have introduced a Bill to expand anti-money laundering (AML) due-diligence by finance professionals. Authorities hope that the Establishing New Authorities for Businesses Laundering and Enabling Risks to Security Act will combat money laundering and other similar crimes.

Tax specialists need to be able to field these and many other questions in an ever-changing tax environment.

Written by Alicea Castellanos TEP, CEO at Global Taxes