The Creditability of Foreign Taxes — General Issues (Portfolio 6020)
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This Portfolio discusses the rules under §901 for determining what is a creditable income tax and the rules under §903 for determining what is a creditable “in-lieu-of” tax.
Description
Tax Management Portfolio, The Creditability of Foreign Taxes – General Issues, discusses the following: rules relating to who can claim the foreign tax credit (including the §906 allowance of the credit to foreign persons doing business in the United States); rules for determining the amount of creditable foreign tax, including rules relating to refunds, subsidies, offsetting payments, and substantiation requirements; rules for determining when credits can be claimed, including the “anti-splitter” provisions of §909; special penalty provisions that reduce the foreign tax credit in the case of activities conducted in foreign countries with which the United States does not have normal diplomatic relations or in the case of participation in or cooperation with an international boycott; the holding period requirements of §901(k) and §901(l); the special rule of §901(m) relating to taxes in certain covered asset acquisitions; the anti-abuse rule for certain foreign tax credit generator transactions; and the application of the for-profit and economic substance tests to the foreign tax credit.
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Table of Contents
DETAILED ANALYSIS —
I. Introduction
A. Reducing the Burden of Double Taxation
B. Requirement that the Tax Be Imposed by a Foreign Country or a U.S. Possession
C. Persons Eligible to Claim a Foreign Tax Credit
2. Section 906
3. Other Provisions of the Code Allowing the Credit
D. Credit vs. Deduction
II. Is the Foreign Levy an Income Tax or an In-Lieu-of Tax?
A. In General
1. Background
2. Issues Presented
B. What Is the Scope of the Foreign Levy?
C. Is the Foreign Levy a Tax?
1. In General
2. Tax vs. Royalty — the “Dual Capacity” Dilemma
a. Background
b. Regulations
(1) Regulatory History
(2) Application of the 1983 Final Regulations
(a) Facts and Circumstances Method
(b) Safe Harbor Method
(i) In General
(ii) Foreign Jurisdiction Has a Generally Imposed Income Tax
(iii) Foreign Jurisdiction Has No Generally Imposed Income Tax
(iv) Multiple Levies
(v) Administrative Rules Governing the Safe Harbor Election
3. Other Industries
D. Is the Foreign Levy an Income Tax Under §901?
1. In General
2. Realization
a. Background
b. Regulations
3. Gross Receipts
a. Background
b. Regulations
4. Net Income
a. General
(1) Background
(2) Regulations
(3) U.K. Windfall Tax
b. Gross Income Taxes
(1) Background
(2) Regulations
c. Formulary Taxes
(1) Background
(2) Regulations
5. Soak-Up Taxes
6. Excise Tax Requirement Under Prior Rulings
E. Is the Foreign Levy an In-Lieu-of Tax Under §903?
1. Introduction
a. Background of §903
b. Regulations
2. Existence of a “Generally Imposed Income Tax”
3. Substitution
4. Character of the In-Lieu-of Tax — Soak-Up Tax Rule
III. Who Is the Taxpayer Subject to the Foreign Tax?
A. In General
B. Withholding Taxes
C. Tax Paid on Income of Another
D. Foreign Consolidated and Joint Tax Returns
E. Proposed 2006 Changes to the Legal Liability Standard When Income and Tax Are Split and Subsequent Regulatory and Legislative Changes
F. Shifting the Tax by Contractual Agreement
IV. What Is the Amount that Is Paid or Accrued?
A. In General
B. Refunds and Credits
C. Withholding Taxes and Advance Payments
D. Subsidies
1. In General
2. Early Revenue Rulings and Other Administrative Pronouncements
3. Mexican Railroad Cases
4. The Regulations
5. The Brazilian Subsidy Litigation
7. Post-§901(i) Administrative Guidance Relating to Subsidies
E. Multiple Levies — Offsetting Payments
1. Background
2. Case Law and Prior Rulings
3. Regulations
4. Advance Corporate Taxes — Integration Systems
F. Compulsory vs. Voluntary Payments
1. In General
2. Reasonable Interpretation and Application of Foreign Law
3. Exhaustion of All Effective and Practical Remedies
4. IRS Expansion of the Voluntary Tax Doctrine
a. In General
b. Rulings
c. Regulations on Structured Passive Investment Arrangements
(1) The SPV Condition
(2) The U.S. Party Condition
(3) The Direct Investment Condition
(4) The Foreign Tax Benefit Condition
(5) The Counterparty Condition
(6) The Inconsistent Treatment Condition
(7) Examples
G. Substantiation
V. Translation Rules and §905(c)
A. Translation of Foreign Taxes
1. Treatment of Accrual Basis Taxpayers
a. In General
b. Exceptions
(1) Taxes Paid More Than 24 Months After the Accrual Year
(2) Taxes Paid Before the Accrual Year
(3) Inflationary Currency
(4) Spot Rate Election Under §986(a)(1)(D)
(5) Special Rule for RICs
2. Treatment of Cash Basis Taxpayers
3. Other Rules
B. Section 905(c) Redeterminations
1. In General
a. Redetermination and Pooling — Pre-2017
b. The TCJA
c. Definition of Foreign Tax Redetermination
d. Direct Credits
e. Indirect Credits (Pre-2018)
f. Deemed Paid Credits (Post-2017)
2. Notification Requirements
3. Interest and Penalties
4. Special Rules Applicable to RICs
a. Netting Method
b. Closing Agreements
c. Effective Dates
VI. When Can the Foreign Tax Credit Be Claimed?
A. In General
B. Contested Taxes
C. Carrybacks and Carryovers
1. In General
2. Limitations on the Use of Carrybacks and Carryovers
D. Section 909 — Foreign Tax Credit Splitter Arrangements
1. Foreign Tax Credit Splitting Events
2. The Matching Rule
3. Special Rules with Respect to Certain Foreign Corporations Owned by U.S. Corporations
4. Section 909 Regulations and Administrative Guidance
a. Notice 2010-92
b. Section 909 Regulations
(1) Reverse Hybrid Splitter Arrangements
(2) Loss Sharing Splitter Arrangements
(3) Hybrid Instrument Splitter Arrangements
(4) Partnership Inter-Branch Splitter Arrangements
(5) Special Rule for Certain Disregarded Payments
c. Notice 2016-52
(1) Successor Entity Splitter Arrangements
(2) Distribution Splitter Arrangements
5. Interaction with Other Code Sections
6. Effective Dates
VII. Denial of Credits for Otherwise Creditable Foreign Taxes
A. Statutory Denials
a. Key Terms
(1) Covered Asset Acquisitions
(2) Relevant Foreign Assets
b. Mechanics of §901(m)
(1) Disqualified Portion — Statutory Rules
(2) Disqualified Tax Amount
(a) Foreign Income Tax Amount
(b) Foreign Country Creditable Tax
(c) Aggregate Basis Difference
(i) Basis Difference
(A) In General
(B) Foreign Basis Election
(C) Basis Difference for §743(b) CAAs
(ii) Allocated Basis Difference
(A) Cost Recovery Amounts — General Rule
(B) Disposition Amounts — General Rule
(C) Rules for Fiscally Transparent Entities
(D) Other Special Rules
(iii) Allocated Basis Difference Adjustments
(iv) Aggregate Basis Difference Carryovers
(d) Allocable Foreign Income
(3) Examples
c. Successor Rules
d. De Minimis Rule and Safe Harbor
e. Applicability Dates
5. Section 908
6. Other Statutory Disallowances of All or a Portion of the Credit
B. Judicial and Administrative Denials — For-Profit, Business Purpose, and Economic Substance
1. Applying the For-Profit and Business Purpose Tests to Foreign Tax Credit Transactions
a. The Relevance of a For-Profit Test
b. The For-Profit Test as Formulated in Case Law
2. Notice 98-5
3. The Codification of the Economic Substance Doctrine
VIII. Limitations Applicable to Oil and Gas Income — Section 907 and Related Provisions
A. Section 907 — Before TEFRA
B. Section 907 After TEFRA
C. Other Limitations Applicable to Oil and Gas Income
D. Section 907 — Post-2008
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