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

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adjustment, rather than as additional § 960 credits in years 2 – 5. However, the pools no longer existed, since Corp B was now a branch of the U.S. parent. To avoid the FTCs disappearing, the IRS allowed the taxpayer to make an adjustment to the pools of post-86 E&P and taxes in Years 1 – 5 for purposes of calculating the § 960 credit in those years. See also FSA 200035019 (seeming to require that an increase to a CFC’s foreign tax be treated as a forward pooling adjustment, rather than a correction to the § 902 / § 960 credit in the prior year). (4) The redetermination of taxes deemed paid would create a deficit in a foreign corporation’s tax pools. This rule is essentially the same as the rule concerning upper-tier and lower-tier CFCs discussed above. A deficit in a foreign tax pool is untenable and must be immediately corrected. (a) Temp. Treas. Reg. § 1.905-3T(d)(2), Ex. 3. This example illustrates the effect of redetermination when earnings and taxes are distributed to a higher-tier CFC. Both examples assume that a lower-tier CFC (CFC2) distributes earnings to a higher-tier CFC (CFC1). CFC2 then receives a refund of the distributed taxes. (i) Situation 1. The refund is small enough that it does not cause CFC2’s tax pool to go negative after making the redetermination. Thus, CFC2 adjusts its pools to take into account the redetermination and there is no effect on CFC1. (ii) Situation 2. The refund is large enough that it causes CFC2’s remaining tax pool (after distribution to CFC1) to become negative. Since this situation cannot be maintained, CFC1 must also make an adjustment to its E&P and tax pools. Specifically, the regulations redetermine CFC1’s tax pools to reflect the amount of credits that would have been deemed paid by CFC1 if CFC2 had never paid the refunded tax. This amount of foreign taxes is removed from CFC1’s pools. There is no effect on CFC1’s earnings pool (since the redetermination does not affect the amount of CFC1’s dividend. (iii)CFC2 must adjust its earnings pool to reflect the full amount of the increase due to the refund. CFC2’s tax pools are decreased solely by the amount of tax refund not already allocated to CFC1. (5) Redetermination is triggered by distribution of PTI. If corporate tax is refunded on a distribution by the CFC, and the distribution is made out of PTI, then the U.S. shareholder must re-determine its U.S. tax liability. © 2013, William R. Skinner, Esq. Fenwick & West LLP wrskinner@fenwick.com 12
h) Acquisitions. i) Consider possible inequity – separation of FTC from economic liability for the tax in the case of a CFC that is sold, and then has an FTR for a pre-closing period. (1) Acquisition agreement likely requires US Seller to indemnify buyer for CFC’s pre-closing taxes. US seller may also be entitled to any refund of CFC’s preclosing taxes received in a post-closing period. (2) § 905(c) regulations always require an increase to foreign tax credits to be accounted for as a pooling adjustment, effective during the Buyer’s post-closing ownership period. Thus, the Buyer obtains an FTC funded by the Seller. (3) § 905(c) regulations may also cause a refund to be reflected as a detriment to the Buyer’s pools, or even if accounted for through a reduction of the FTC, will the Buyer notify the seller of the redetermination. (4) TD 9362 (2007 Temp. Regs.) – IRS acknowledged receipt of comments on this issue, and is studying whether to require mandatory pooling adjustments in this case. However, still no action on this point. (5) Caren Shein, in her 2002 Article on § 905(c), considers some other permutations here, including application of PLR 200217002’s “disappearing pools” rationale in the case of a sale without a § 338 election. i) Currency translation rules. i) General rule. Translate foreign taxes, and any adjustments thereto, at the average exchange rate for the year to which the foreign taxes relate. § 986(a)(1)(A). Thus, payments of foreign tax are generally translated at the average exchange rate for the assessment of year. The payment, therefore, does not cause a change in Foreign Tax that must be reported under § 905(c). (1) Exception – two-year rule. If foreign taxes are not paid within two years of the end of the assessment year, they must be reversed under § 905(c) until paid. The payment of the taxes then becomes a new foreign tax redetermination that is translated at the spot rate on the date of payment. See § 986(a)(1)(B)(i) & § 986(a)(2). (2) Exception – estimated tax payments. Estimated tax payments made before the beginning of the foreign tax year to which they relate are translated at the spot rate on the date of payment. See § 986(a)(1)(B)(ii). In this case, the actual accrual of liability will give rise to an adjustment to foreign tax under § 905(c) to the extent exchange rates differ. This may fall into the de minimis rule for direct © 2013, William R. Skinner, Esq. Fenwick & West LLP wrskinner@fenwick.com 13
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 and 10: maximum penalty is 25% of the defic
Page 11: (iv) In 2011, the carry-back of the
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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