IRS Targets Foreign Tax Credit Generators

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.