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Sept. 28 — Guidance on the interaction between tax code Section 267(a)(3)(B), the foreign tax credit and Subpart F look-through rules isn't likely in the near future, although issues raised by practitioners do merit answers, a Treasury Department official said.
Brett York, an attorney-adviser in the department's office of the international tax counsel, acknowledged the complex issues raised by the subparagraph, which was added under the American Jobs Creation Act of 2004.
He said, however, speaking on a Sept. 28 International Tax Institute panel, that a guidance project on the subparagraph isn't likely as long as the government continues to grapple with higher-priority international issues.
York appeared with Joseph Calianno, international tax practice leader with BDO USA LLP, and Paul J. Crispino, international tax services principal in the Washington National Tax practice of Deloitte Tax LLP.
Crispino was among the drafters of a May American Bar Association Section of Taxation comment letter on the subparagraph, which Calianno reviewed as chairman of the section's Committee on Foreign Activities of U.S.
The ABA tax section letter recommended that payments between controlled foreign corporations should be exempt from Section 267(a)(3)(B), which was intended to limit taxpayers' ability to deduct payments to related CFCs or passive foreign investment companies (91 DTR G-7, 5/12/15).
That code section prohibits deductions until the payment is made or until amounts can be included in the income of a U.S. shareholder of the CFC or PFIC, whichever is earlier.
The ABA letter urged further that, if the government continues to apply the rule to payments between CFCs, it should clarify the interaction between Section 267(a)(3)(B) and the foreign tax credit and Subpart F look-through rules.
‘Trap for the Unwary.’
In the panel discussion, Crispino and Calianno echoed the letter's references to “difficult conceptual issues” and warned that the lack of guidance could be a “trap for the unwary.”
The issues have been overlooked to some degree, but practitioners need to be aware of them, they said.
Payments between CFCs, can lead to “odd mismatches” in timing and Subpart F treatment, Crispino said in running through a series of hypothetical fact patterns.
Calianno similarly pointed to “mismatches in character” in the subparagraph and foreign tax credit look-through rules, warning of fact patterns involving payments between CFCs that have been accrued but not paid.
If such issues arise on audit, Calianno said, “we have the statute and the legislative history,” but no regulations.
“The government has to think about how to apply these rules,” Crispino said.
Rules are also needed on the questions of what constitutes a payment under the subparagraph and whether an exemption would be set for transactions entered into by a payor in the ordinary course of a trade or business under certain accrual and payment conditions, Calianno said.
The 2004 law gives the Treasury Department the authority to make such an ordinary-course exception, but there's been no exercise of that authority, he noted.
While York said it is his opinion that guidance should be issued on the points raised in the panel discussion, he said that “at the moment” other international projects had higher priority and that the project isn't on the current business plan.
AICPA Also Seeking Guidance
In a May comment letter on the government's 2015-2016 Priority Guidance Plan, the American Institute of CPAs also called for guidance under section 267(a)(3)(B).
Issues recommended for clarification by the AICPA included the timing of deduction for interest, rental and royalty payments to CFCs that qualify for exclusion under tax code Section 954(c)(6) or the same-country exception.
The group also sought guidance regarding exceptions for appropriate transactions pursuant to Section 267(a)(3)(B)(ii).
It further sought guidance “relating to when an item payable to a CFC, and subject to section 267(a)(3)(B), that is included in the gross income of a U.S. person by reason of section 956 or the payment of an actual dividend (i.e., other than by reason of section 951(a)(1)(A)), will be considered an amount attributable to such item that is includible in the gross income of such U.S. person.”
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