Tax Advisers - Deloitte

United States
A year in US international tax
Dan Lange
Deloitte
Milwaukee
The year 2006 saw the passage of the Tax Increase
Prevention and Reconciliation Act (TIPRA) and the
introduction of a slew of major tax regulatory changes and
accounting for income tax changes. The changes introduced
and proposed reflect a trend towards heightened regulatory
scrutiny, pressure for transparency and accuracy in financial
reporting, and more demanding compliance burdens, the
combination of which creates tremendous new pressures for
tax and finance departments.
The news isn’t all bad, however. TIPRA provides for a threeyear
exclusion from Subpart F income for related party
dividends, interest, rents and royalties, provided the
underlying earnings of the parties are not Subpart F income.
The temporary exception will afford multinationals more
freedom to move cash among their controlled foreign corporations (CFCs) without
creating Subpart F income. However, Congress subsequently passed legislation
(awaiting the President’s signature) to add the requirement that payments also not be
attributable or properly allocable to the payor’s US effectively connected income.
The bulk of the year’s most significant developments, however, are at the regulatory
level.
FIN 48
The Financial Accounting Standards Board (FASB) issued new rules (known as FIN
48) that radically change how companies account for uncertain income tax positions in
their financial statements. FIN 48, effective for tax years beginning after December 15
2006, changes the threshold that tax benefits must meet before they can be recognized
in a company’s financial statements. FIN 48 will substantially increase the disclosure/
documentation burden on companies. The impact of FIN 48 in the international
context, where uncertainty is often the norm, will be considerable and will result in
multinationals changing the amount of their reserves for tax liabilities.
Calculation of branch income
The IRS issued highly anticipated proposed regulations governing the translation of
income of foreign branches, disregarded entities and partnerships, and the calculation of
gains/losses upon remittances from such entities where they carry out business in a
currency other than the taxpayer’s functional currency. The regulations completely alter
the prescribed approach of rules proposed in 1991, adopting a foreign exchange exposure
pool method for computing exchange gains and losses on remittances, a method that will
result in more complexity and an increased compliance burden. The proposed
regulations, however, generally provide favourable transition rules.
Interest deduction of foreign banks
Temporary regulations were issued dealing with the determination of deductible
interest expense of a US branch of a foreign bank. The regulations liberalize the
election in the branch profits tax rules to reduce US liabilities, so that the election can
be used to entirely eliminate branch profits tax liability in many instances.
Services regulations
Final and temporary regulations were issued relating to the treatment of inter-company
service transactions and the allocation of income from intangibles, as well as rules
relating to stewardship expenses. The regulations replace 1968-era guidance, and
include many changes to 2003 proposed regulations. A particularly negative effect is the
restricted definition of stewardship costs, potentially increasing the expenses that will
have to be charged out. Although the intent of the rules is to reduce the documentation
requirement burden on taxpayers, they likely will have the opposite effect.
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