Tax News & Views International Weekly: The Substance of the Matter

Former Missouri Rep. Billy Long is finally in office as commissioner of the Internal Revenue Service as of last week, eight months after he was first nominated on Dec. 4, 2024 by Donald Trump, who at the time was the president-elect.

But while Long served in Congress for 12 years, his background in taxes specifically is light--except for business dealings with credits that Democrats tried to put under a spotlight. There are still a lot of questions about how he'll operate as the 51st IRS commissioner.

There's one matter which he could soon take up--the bureau's use of the "economic substance doctrine" in tax cases. How he chooses to handle it could have a wide impact on international taxes.

On July 23, 20 Republican members of the House Ways and Means Committee (though not its chairman, Long's fellow Missourian Rep. Jason Smith) signed a letter to the commissioner, asking that the agency overturn a revenue ruling which, they claim, used an overly aggressive interpretation of the doctrine not grounded in statutory language.

The economic substance doctrine was only codified into law in 2010, but it has existed as a judicial principle since a 1935 court case. The idea may seem simple--if a tax structure or transaction doesn't reflect real economics, the IRS can disregard it and look to the substance beneath the legal form. But decades of practice have shown that it's anything but clear, as interpreting what is or isn't “real” can often be a subjective determination.

In practice, it’s sometimes operated similar to other countries’ general anti-abuse rules, which allow them to negate transactions or structures which are deemed to be abusive.

The revenue ruling highlighted by the Republicans' letter dealt with basis adjustments between related parties in a partnership. But the doctrine is also often used in international cases, due to the complexity of cross-border transactions. For instance, in October 2023 the IRS and Justice Department won a major victory in Liberty Global Inc. v. United States, a case involving the international tax rules enacted by the 2017 Tax Cuts and Jobs Act. The U.S. District Court for the District of Colorado sided with the government, ruling that the economic substance doctrine could be used to disregard a series of transactions which had created a tax benefit.

Republicans noted that Treasury has already rescinded some of the Biden Administration regulations that dealt with similar issues as the revenue ruling, and argued that it should go further and reverse the ruling as well, which would signal an overall change in philosophy for the IRS.

If Long follows through, it could be an important development for the U.S. tax law regarding international transactions.

EU Trade Agreement

President Trump announced Monday a trade agreement with the European Union, with EU officials agreeing to a 15% U.S. tariffs on most European exports. There will be a lot more to say once the details of the deal come out–but one thing to note is that it still leaves digital services taxes as an outstanding issue to be resolved, according to U.S. Commerce Secretary Howard Lutnick.

This isn’t too surprising, since the DSTs which many countries have enacted to tax online activities–especially activity from U.S.-based tech firms, U.S. officials claim–are not an EU policy, although they’re used by many EU member states. (The EU considered a DST but couldn’t reach consensus on the issue—the failed proposal became the model for many of the national laws.) While the trade agreement and the Trump administration’s agreement with the G7 and Organization for Economic Cooperation and Development over the 15% global minimum tax have both resolved potential trade disputes, the DST issue is still one which could provoke potential retaliatory measures or even a full-fledged trade war.

Noteworthy Items This Week

EU-U.S. Tariff Deal Saddles Promised Relief With Open Questions – Sophie Petitjean, Tax Notes ($):

The EU will be subject to a single 15 percent tariff rate for most of its exports to the United States starting August 1 after reaching a deal that is not to everyone's liking.

After months of negotiations and several warning shots from U.S. President Trump, the EU and the United States finally agreed on the main terms of a trade deal July 27. The new relationship includes three main pillars: a single 15 percent tariff ceiling for most EU exports, $750 billion in strategic purchases, and an additional $600 billion in anticipated private investments into the U.S. economy.

U.S. Exporters Get Welcome Surprise in Trump Tax Law – Richard Rubin, The Wall Street Journal:

Companies are digesting the new law’s complex details as they prepare and disclose rough estimates of its effects on tax payments and rates. The restructured deduction for Foreign-Derived Intangible Income comes as a welcome surprise to many executives. Companies poised to gain include those with research expenses and tangible U.S. assets like factories.

Major capital-intensive companies expect significant benefits, said Pat Brown, a partner at accounting firm PwC who has been hearing from pleased clients. On the margins, they’ll have reasons to invest more in the U.S., especially combined with the new law’s faster write-offs for research, equipment and factory construction.

“This is like morning in America for these guys,” Brown said. “Just a completely different incentive structure from what they had previously.”

OECD Publishes Status Message Template for Global Tax Return – Lauren Vella, Bloomberg Tax ($):

The OECD on Wednesday released a template countries can use to communicate the status of a company’s global minimum tax return with other jurisdictions and the taxpayer itself.

The status template for the GLoBE Information Return allows tax administrations to report filing or record errors, including when there are fundamental issues with the quality of data sent between jurisdictions. The information return is a data intake form companies need to fill out to comply with the 15% global minimum tax.

Trump to End Tariff Break for Low-Value Goods, Hitting Travelers – Jennifer A. Dlouhy and Josh Wingrove, Bloomberg Tax ($):

US President Donald Trump on Wednesday applied tariffs to low-value imports from all trading partners, a change that could raise costs for American travelers bringing goods into the US after travels abroad.

The move, made in an executive order, will become effective on Aug. 29 and apply to all goods valued at or under $800 that previously qualified for the tax-free treatment, according to a White House fact sheet.

The OBBBA’s International Revenue Raisers, Losers, and Fixes – Mindy Herzfeld, Tax Notes ($):

The changes to the U.S. international tax rules introduced by the OBBBA — in particular, the modifications to the U.S. regime for taxing foreign earned income of controlled foreign corporations (formerly known as global intangible low-taxed income) — highlight the complexities in the U.S.-based regime and the ways in which it imposes a more onerous burden on U.S. multinationals than the pillar 2 regime does on foreign companies. Modifications that bring the regime closer to the OECD global anti-base-erosion, or GLOBE, model rules — including an important name change — should make it easier for other countries to accept the G7 agreement to treat the U.S. system as existing side-by-side with pillar 2.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: Captain Wizard

Debut Year:1945

Debut Publication: Red Band Comics #3

Origin Story: A war veteran unjustly accused of murder, he was given a magic cloak by a mysterious magician giving him vast, mystical powers.

Superpowers: Aside from flight, invulnerability and super-strength, he can also instantly change into his costume by yelling "Abracadabra!"

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.

Tax News & Views International Weekly: The Substance of the Matter

EU Trade Agreement

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Alex Parker