Friday, June 3, 2011

Regulatory Suspense: Foreign Tax Credit Splitter Arrangements

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Even as interest in a U.S. territorial system of taxation  finds new life amid murmurs of comprehensive tax reform the IRS is occupied with issuing guidance central to a hallmark of the infamous worldwide system of taxation that the United States currently employs, i.e. the foreign tax credit. In December 2010, the IRS issued Notice 2010-92, which, under new §909, suspends credits for foreign income taxes paid or accrued until related income is taken into account. The Notice enumerated a list of transactions that qualify as splitter arrangements, but only addressed arrangements in pre-2011 taxable years.

Although the Notice indicates that the IRS expects to issue future guidance for post-2010 taxable years, it does not specify what form that guidance will take beyond mentioning that at least the splitting arrangements identified in the Notice will be included. As reported in Daily Tax Report IRS officials have not yet decided whether the prescriptive approach taken in Notice 2010-92 will be retained or if a principle-based approach would be featured in future guidance.

The adoption of one approach over another is complicated by the prospective nature of the forthcoming guidance. Retroactive guidance for pre-2011 taxable years, on the one hand, was relatively easy to issue in late December 2010, which is conceivably why the Notice enumerated specific splitter arrangements. Guidance for post-2010 taxable years, on the other hand, must be prospective, which is likely why the IRS is hesitant to commit to the approach used in Notice 2010-92. To be sure, the certainty of a finite list of splitter arrangements has its administrative appeal—from both regulatory and planning perspectives. The uncertainty of the application of §909 to arrangements that may not yet exist, however, would seem to tip the scales in favor of a more flexible regulatory approach. It seems likely, then, that in order to accommodate unforeseen splitting arrangements in the future, the IRS will likely opt for a flexible, principles-based approach built upon the already enumerated splitter arrangements.

--Benjamin A. Jung, U.S. International Tax Law Editor

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