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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
