US Outbound: Fiscal Cliff Bill extends key international tax provisions

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US Outbound: Fiscal Cliff Bill extends key international tax provisions

foley.jpg

mcgrew.jpg

Sean Foley


Landon McGrew

On January 2 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, averting tax elements of the fiscal cliff. In addition to permanently extending the Bush-era tax cuts for individuals with income of less than $400,000 and joint filers with income of less than $450,000, the legislation also temporarily extended two key international tax provisions. These international tax extenders provide important exceptions to the current taxation of a foreign subsidiary's earnings under the subpart F rules.

Subpart F income

In general, US multinationals are not subjected to US tax on the earnings of their foreign subsidiaries until those earnings are repatriated to the US. However, there are certain types of income, such as interest, dividends, rents, and royalties, that are subject to current taxation in the US when earned by a foreign subsidiary under the subpart F rules found in sections 951 through 964 of the Internal Revenue Code. There are a number of exceptions to current taxation under the subpart F rules, including the controlled foreign company (CFC) look-through rule of section 954(c)(6) and the active financing exception of section 954(h). These two exceptions had expired at the end of 2011.

The fiscal cliff extenders

The American Taxpayer Relief Act of 2012 retroactively to January 1 2012 extended the CFC look-through rule of section 954(c)(6) and the active financing exception of section 954(h) to December 31 2013 for calendar year taxpayers. Without these extensions, US multinationals would have been subject to US tax on these types of subpart F income during the 2012 taxable year. A brief description of these two international tax extenders is included below.

Under the CFC look-through rule of section 954(c)(6), dividends, interest, rents, and royalties received by a CFC from another CFC that is a related person (as defined in section 954(d)(3)) are generally excluded from the definition of subpart F income to the extent allocable to income of the related CFC that is not subpart F income. The Joint Committee on Taxation (JCT) has estimated that the two-year extension of the CFC look-through rule will cost approximately $1.5 billion over 10 years.

Under the active financing exception of section 954(h), income earned by a foreign subsidiary that is derived from the active conduct of a banking, financing, or similar business is generally excluded from the definition of subpart F income. The JCT has estimated that the extension of the active financing exception will cost approximately $11.2 billion over 10 years.

In light of the extension of these rules, US multinationals should consider revisiting situations where planning may have been deferred or postponed because of the uncertainty of whether these provisions would be further extended. Moreover, given the retroactivity of the legislation, and the fact that the legislation was enacted in January 2013 (and not by the end of 2012), multinationals should also consider its impact on financial accounting.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

Sean Foley (sffoley@kpmg.com) and Landon McGrew (lmcgrew@kpmg.com), Washington DC

KPMG

Tel: +1 202 533 5588

Fax: +1 202 315 3087

Website: www.us.kpmg.com

more across site & shared bottom lb ros

More from across our site

The US president has raised India’s tariff rate to 50% because of its importation of Russian oil; in other news, firms made key international tax partner hires
Tax auditors themselves had not been aware of the new TP ‘transaction matrix’ requirements, ITR hears as five German partners share their client experiences
Its features include a built-in AI assistant as well as expert insights and commentary from Deloitte specialists
AI is rapidly finding its way into tax advisory services. But how can AI be deployed responsibly, reliably, and in compliance with legal standards?
Specified taxpayers will have to apply a 19% VAT rate on services offered by third parties through their platforms; in other news, Donald Trump imposed 30% South African tariffs
A ‘quiet revolution’ in HMRC’s compliance strategy has caused Adam Craggs to rethink how to advise clients, he tells ITR
If the Reform leader becomes UK prime minister then he may follow the direction of the US in at least one significant way
Trump declared a new national emergency in issuing the order; in other news, Grant Thornton Germany is up for sale and the subject of interest from both its UK and US counterparts
The judgment, which saw Denmark's Supreme Court rely on OECD TP guidance, sets aside more than 15 years of consistent administrative practice, experts have told ITR
Belgium’s new coalition government has gone ahead with a new exit tax regime that could land it in the courts
Gift this article