Foreign Tax Redeterminations under Â§ 905(c) - Fenwick & West LLP

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Temp. Treas. Reg. § 1.905-3T(d)(3)(iii) Example 1: (i) At the beginning of 2008, CFC had E&P of 500u and taxes of $200 in the general basket. (ii) During the year, at an average exchange rate of $1:1u, CFC earned 500u of E&P and accrued 100u ($100) of additional foreign taxes in the general basket. CFC’s cumulative totals at the end of 2008 were 1,000u of E&P and $300 of taxes, respectively. (iii) During 2008, CFC distributed 100u. USP is deemed to pay $30 in foreign taxes. (iv) In 2009, CFC makes payment of its 2008 taxes in the amount of 80u. This corrects the overaccrual of 20u in taxes. This is a redetermination that reduces CFC’s 2008 taxes by $20. (Note: per Temp. Treas. Reg. § 1.905- 3T(b)(3), the correction of the overaccrual is translated at the 2008 exchange rate). (v) § 905(c) reduction calculation: If 2008 taxes had been only 80u, the tax pool in 2008 would have been $280. This would have resulted in deemed paid credits of $28. The reduction in 902 credits ($2) is less than 10% of the amount of credits originally claimed ($30). Therefore, no triggering event has occurred. (vi) As a result, as of 2009, CFC’s taxes are decreased by $20 from $270 to $250. CFC’s remaining general basket E&P are increased by 20u from 900u to 920u. (3) In the case of multiple redeterminations, the effect of the redeterminations is rolled forward cumulatively to determine whether a triggering event has occurred. Consider Reg. § 1.905-3T(d)(2), Example 2: (i) In 2009, when the exchange rate is 1.5u:$1, CFC earns general basket E&P of 350u and accrues taxes of 150u ($100). Therefore, at end of the 2009, its cumulative totals are 1,270u and $350. (ii) In 2009, CFC distributes 100u. This distribution carries a deemed paid credit of $27.55. This reduced its E&P to 1,170u and its tax pool to $322.45. (iii)In 2010, the CFC lost 500u in the general basket and paid no foreign tax. Its closing balances were, therefore, 670u and $322.45 of E&P and taxes, respectively. © 2013, William R. Skinner, Esq. Fenwick & West LLP wrskinner@fenwick.com 10
(iv) In 2011, the carry-back of the loss for foreign purposes triggers a refund of 2008 taxes of 80u. This is analyzed in the following manner: 1. In 2008, E&P would have been increased by 80u to a total of 1,100u. This is equal to 500u opening balance + 500u current E&P as originally calculated + 20u corrected overaccrual + 80u carryback refund. 2. Foreign taxes available for credit in 2008 would have been reduced to $200. This is equal to the opening balance in the tax pool in 2008, since, as finally determined, there were no 2009 taxes. 3. The dividend in 2008 would have carried 902 credits of only $18.18 (100u/1,100u x $200), instead of $30. This $11.82 cumulative reduction is more than 10% of the amount of 902 credits originally claimed ($30). Therefore, the U.S. shareholder must file an amended return and § 905(c) notice for 2008 to report a reduction in § 902 credits of $11.82. 4. The CFC’s E&P and tax pools for 2008 are correspondingly adjusted for the refund. 5. The effect on 2009 also must be analyzed. Had the redetermination occurred and the 2008 distribution carried $18.18 of foreign tax credits, the CFC’s E&P and tax pools in 2009 (after including current E&P and taxes) would have been 1,350u and $281.82, respectively. 6. Had the taxes for 2009 been so affected, the 2009 distribution of 100u would have carried deemed paid taxes of $20.87, rather than $27.55. Since the resulting difference is greater than a 10% reduction, 2009 tax liability must also be redetermined. (b) Note that the 10% reduction rule only goes one way—i.e., it only applies if the redetermination would net an underpayment of U.S. tax. While a foreign tax assessment resulting in additional post-’86 foreign income tax would never “require” a redetermination under the 10% rule, is the taxpayer nonetheless permitted to make an adjustment at the U.S. parent level In PLR 200127011, the IRS addressed a case where a CFC (Corp B) paid additional taxes in year X relating back to Years 2 -5. In years 2 – 5, the CFC’s U.S. shareholder had included all of the CFC’s income under subpart F and claimed all of the credits under § 960. After year 5, the CFC liquidated into the U.S. group as a result of a Form 8832 election. Generally, an increase to foreign taxes paid would be reflected as a pooling © 2013, William R. Skinner, Esq. Fenwick & West LLP wrskinner@fenwick.com 11
Page 1 and 2: Foreign Tax Redeterminations under
Page 3 and 4: In the alternative, the IRS cited L
Page 5 and 6: income is computed. (Until the end
Page 7 and 8: (1) Rev. Rul. 83-80 & underlying GC
Page 9: maximum penalty is 25% of the defic
Page 13 and 14: h) Acquisitions. i) Consider possib
Page 15 and 16: efund to reduce its Year 2 corporat

Foreign Tax Redeterminations under Â§ 905(c) - Fenwick & West LLP

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