
Impact of House passed legislation on health industries organizations
Summary of the impact of House passed legislation on the pharmaceutical, life sciences, medtech and health services sectors including PwC key observations.
January 2025
Treasury and the IRS, on January 10, released final regulations, Treas. Reg. sec. 1.861-18 and -19 (2025 Final Regulations) regarding ‘digital content’ and ‘cloud transactions’. For this purpose, digital content means a computer program or any other content, such as books, movies, and music, in digital format that is protected by copyright law or no longer so protected solely due to the passage of time or because the creator dedicated the content to the public domain. A cloud transaction is a transaction through which a person obtains on-demand network access to computer hardware, digital content, or other similar resources.
The 2025 Final Regulations generally follow the framework of proposed regulations released in 2019 (2019 Proposed Regulations) with certain key revisions, and generally are effective for tax years beginning on or after their date of publication in the Federal Register (i.e., January 14, 2025). Taxpayers may elect to apply the 2025 Final Regulations to taxable years beginning on or after August 14, 2019, and all subsequent taxable years, if (1) all related persons (within the meaning of Sections 267(b) and 707(b)) also apply the 2025 Final Regulations to taxable years beginning on or after August 14, 2019 and all subsequent taxable years, (2) the period of limitations on assessment for each taxable year of the taxpayer and all related parties (within the meaning of Sections 267(b) and 707(b)) is open under Section 6501, and (3) the taxpayer would not be required under the 2025 Final Regulations to change its method of accounting as a result of such election.
Treasury and the IRS also released long-awaited proposed regulations (2025 Proposed Regulations) to determine the source of income from cloud transactions, based on a taxpayer-by-taxpayer approach that looks to the location of the taxpayer’s employees and assets (both tangible and intangible). Comments on the 2025 Proposed Regulations are due by April 14, 90 days from the date the regulations were published in the Federal Register.
The characterization and source of income are fundamental because they affect the application of various substantive rules, including withholding tax, foreign tax credit, subpart F, and effectively connected income (ECI) rules. The new guidance applies not only to companies in the software and cloud transaction space but also can apply to companies in virtually all industries given the prevalence of digital and cloud transactions.
The 2025 Final Regulations finalize Prop. Reg. sec. 1.861-18 to expand the application of the income classification rules for computer programs to other digital content and revise certain existing income characterization rules. The 2025 Final Regulations also finalize, with certain modifications, Prop. Reg. sec.1.861-19 to characterize income from cloud transactions.
The 2025 Proposed Regulations represent the first set of regulatory and administrative guidance on the source of income from cloud transactions. The Proposed Regulations would apply to tax years beginning on or after the date the final rules are published in the Federal Register.
Taxpayers engaging in computer software, other digital content, and cloud transactions should consider the extent to which the 2025 Final Regulations may affect their business. Taxpayers should consider submitting comments on the 2025 Proposed Regulations on the income sourcing rules for cloud transactions.
Summary of the impact of House passed legislation on the pharmaceutical, life sciences, medtech and health services sectors including PwC key observations.
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