Congress Votes to Limit Use of Foreign Tax Credits

August 10, 2010

The House of Representatives on Tuesday interrupted its August recess and passed H.R. 1586 by a vote of 247–161, sending the bill to President Barack Obama. The president signed the bill into law the same evening. The measure was passed by the Senate on Aug. 5. The bill is designed to increase funding for Medicaid and education, and to pay for that funding, it makes changes to the how corporations can use the foreign tax credit.

In addition to its foreign income and credit provisions, the bill terminates the advance refundability of the earned income credit (under IRC § 3507), effective for tax years beginning after Dec. 31, 2010

Under new IRC § 909, corporations will no longer be able to split creditable foreign taxes from the foreign income they are associated with; taxpayers will have to take that income into account in order to take the associated foreign tax credit. This provision will be effective for foreign taxes paid or accrued in tax years beginning after Dec. 31, 2010.

The bill also prevents corporations from claiming foreign tax credits where they engage in covered asset acquisitions (as defined in the act), such as qualified stock purchases under IRC § 338(d)(3). This provision is effective for covered asset acquisitions after Dec. 31, 2010.

The bill limits the amount of foreign taxes deemed paid with respect to IRC § 956 inclusions. If a domestic corporation includes in income an amount attributable to the earnings of a foreign corporation that is a member of the domestic corporation’s qualified group (under section 902(b)), the inclusion amount is limited to the amount of foreign income taxes that would have been deemed paid if cash in the amount of the inclusion had been distributed through the chain of ownership starting with the foreign corporation and ending with the domestic corporation.

The bill also imposes a special rule for redemptions under IRC § 304, where the acquiring corporation is a foreign corporation.

The bill terminates the special rules for interest and dividends received from persons meeting the 80% foreign business requirements under IRC § 861(a). Dividends and interest paid by existing 80/20 corporations are grandfathered under the act.

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