IRS releases new foreign tax credit regulations
The Internal Revenue Service (IRS) and US Treasury Department recently released two sets of regulations addressing the foreign tax credit rules.
The first set of regulations address the application of the section 909 foreign tax credit splitter rules to post-2010 taxable years (the section 909 regulations) (T.D. 9577). The second set of regulations provide guidance on who is considered to pay a foreign income tax for purposes of the foreign tax credit rules (the Section 901 regulations) (T.D. 9576).
The section 909 regulations
The section 909 regulations, which are temporary and proposed, provide much-needed guidance on the section 909 foreign tax credit splitter rules, which Congress enacted in August 2010 (for further information, please see our October 2010 column, President Obama Signs New International Tax Provisions Into Law). The section 909 regulations are generally consistent with, and build on, IRS Notice 2010-92, which addressed the application of section 909 to foreign income taxes paid or accrued to section 902 corporations in taxable years beginning on or before December 31 2010 (for further information, please see our February 2011 column, New Guidance on Application of Foreign Tax Credit Splitter Rules to Pre-2011 Taxes). The section 909 Regulations address how to apply section 909 to foreign income taxes paid or accrued in taxable years beginning on or after January 1 2011. Most importantly, the section 909 regulations provide an exclusive list of arrangements that will be subject to the section 909 foreign tax credit splitter rules that will apply to post-2010 taxable years. The list is similar but not identical to the exclusive list provided in Notice 2010-92 for pre-2011 years:
Reverse-hybrid splitter arrangements – in which a payor pays or accrues foreign income taxes with respect to income of a reverse-hybrid (an entity treated as a corporation for US tax purposes, but as a pass-through for foreign tax purposes);
Loss-sharing splitter arrangements – in which a shared loss of a US combined group is used to offset income of another US combined group;
Hybrid-instrument splitter arrangements – in which an instrument is treated as equity for US tax purposes, but as debt for foreign tax purposes, or vice versa; and
Partnership inter-branch splitter arrangements.
The exclusive list of splitter arrangements described in the section 909 regulations applies to tax years beginning on or after January 1 2012. The section 909 Regulations also provide that the principles of Notice 2010-92 generally apply for 2011 except that the rules apply to both section 901 and section 902 taxes.
The final section 901 regulations
The section 901 regulations provide guidance on who is considered to pay a foreign income tax for purposes of the foreign tax credit rules, and thus who is eligible for the US foreign tax credit associated with that payment. The section 901 regulations finalise portions of proposed regulations that were issued in 2006 (for further information, please see our October 2006 column, IRS Proposes New Foreign Tax Credit Rules), with modifications to address the enactment of section 909.
The section 901 regulations finalise the proposed rules for situations in which foreign taxes are paid by a foreign consolidated group. The regulations also finalise proposed rules on situations where foreign taxes are paid by a hybrid partnership or disregarded entity (an entity that is treated as a pass-through for US tax purposes, but as a corporation for foreign tax purposes), and on changes in ownership of disregarded entities or hybrid partnerships. The section 901 regulations do not finalise proposed rules on withholding taxes or reverse-hybrids.
The section 901 regulations are generally effective for taxable years beginning after February 14 2012. But taxpayers can elect to apply the consolidated group rules retroactively to tax years beginning after December 31 2010.
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.
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