IRS Targets Foreign Tax Credit Generators

BY BOB THOMAS AND DARLENE PULLIAM

The Joint International Tax Shelter Information Centre—an organization of tax administrators from Australia, Canada, the United Kingdom and the United States—recently focused on transactions by U.S. taxpayers with foreign counterparts to generate foreign tax credits. The IRS in response proposed amendments to regulations section 1.901-2, which targets transactions involving U.S. borrowers and lenders and asset-holding transactions intentionally structured to create a foreign tax liability. The IRS also has identified foreign tax credit generators as a top-tier compliance issue within its Large and Mid-Size Business Division.

Section 901 of the Internal Revenue Code permits taxpayers to claim a credit for income taxes paid or accrued, or deemed paid, to any foreign country or U.S. possession. The proposed amendments say an amount paid to a foreign country is not a compulsory payment—and thus is not considered tax paid—if it is attributable to a structured passive investment arrangement. Such arrangements are defined by several criteria, including that a claimed credit is substantially greater than the taxpayer would reasonably expect to be eligible to claim had it directly owned its share of the arrangement’s assets.

Comments on proposed regulation 156779-06 are requested by June 28 via www.regulations.gov (search term: IRS_FRDOC_0001-0010), with a public hearing scheduled for July 30 at IRS headquarters in Washington.

Prepared by Bob Thomas , Ph.D., assistant professor of accounting, and Darlene Pulliam , CPA, Ph.D., professor of accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.

SPONSORED REPORT

How to make the most of a negotiation

Negotiators are made, not born. In this sponsored report, we cover strategies and tactics to help you head into 2017 ready to take on business deals, salary discussions and more.

VIDEO

Will the Affordable Care Act be repealed?

The results of the 2016 presidential election are likely to have a big impact on federal tax policy in the coming years. Eddie Adkins, CPA, a partner in the Washington National Tax Office at Grant Thornton, discusses what parts of the ACA might survive the repeal of most of the law.

COLUMN

Deflecting clients’ requests for defense and indemnity

Client requests for defense and indemnity by the CPA firm are on the rise. Requests for such clauses are unnecessary and unfair, and, in some cases, are unenforceable.