United States

Treasury to tighten foreign tax credit rules


The Treasury Department recently announced their intent to publish regulations that would limit the availability of certain foreign tax credits resulting from foreign-initiated adjustments. The announcement, Notice 2016-52, comes only a few weeks after European regulators have ordered Apple Inc. to pay Ireland over $14 billion as part of a state aid investigation into allegedly preferential tax treatment. There is no coincidence as the notice targets, “foreign-initiated adjustment [that] may arise under European Union (EU) State aid law.” This notice highlights the growing battle over the right to tax an estimated $2 trillion in offshore earnings that U.S. multinationals have sitting abroad.

Notice 2016-52 outlines guidance that will be issued under a statute passed several years ago to prevent U.S. corporations from entering into specific transactions that create a foreign tax timing mismatch that would otherwise artificially inflate available foreign tax credits (so-called splitter transactions). If these statutory rules do not apply, foreign income taxes paid, even though related to income from prior years, may generally be taken into account in the current year. In anticipation of large foreign-initiated adjustments as a result of the EU state aid investigations, the Treasury noted that a taxpayer may attempt to separate the additional payment of foreign income tax from its related (prior year) income through a change in corporate structure or an extraordinary distribution. Such transactions may allow the U.S. taxpayer to repatriate foreign earnings with little U.S. tax due, or even claim foreign tax credits without bringing any money back to the United States. These transactions would now be considered splitter transactions under existing statutory rules, and therefore, foreign tax credits would be limited.

The regulations, once issued, would apply to foreign income taxes paid on or after Sept. 15, 2016.


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