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

credits, or may be treated as a pooling adjustment at a CFC level.
(3) Exception – Spot Rate Election (§ 986(a)(1)(D)). For years after 2004, the
taxpayer may elect to make a one time election to translate all foreign income
taxes into dollars at the spot rate on the date of payment. See § 1.905-
3T(b)(1)(ii)(D). The election may apply to all foreign income taxes of the
taxpayer, or only for foreign taxes attributable to QBUs with a dollar functional
currency. The election is binding and may be revoked only with consent of the
Commissioner.
(a) The election can be beneficial to tie withholding taxes on royalties, dividends,
etc. paid to the U.S. taxpayer to the rate on which the dividend, royalty, etc., is
translated into dollars. This sort of use of the election would be limited to
“the dollar QBUs only” approach.
(b) The election could also apply more broadly to all § 901 and § 902 credits.
However, since a non-dollar QBU’s profit and loss is translated at the average
exchange rate for the year under § 987, it typically would be better to use the
default rule that translates the QBU’s taxes at the same average exchange rate.
ii) Translation of Refunds (§ 1.905-3T(b)(3)). Refunds of foreign tax are translated at the
exchange rate for the year to which the refunds relate (including deemed refunds as a
result of the two-year rule). Thus, a refund received many years after the fact will be
translated at the exchange rate of the original assessment year. This rate may be far
different from the exchange rate in the current year. E&P is also adjusted at the same
exchange rate.
iii) § 988 consequences of receiving the refunded currency (§ 1.905-3T(b)(5)).
(1) If the tax is denominated in a non-functional currency, then the units of refunded
currency take a tax basis equal to their translated value under the rules above.
Thus, the refunded units have a built-in currency gain or loss under § 988. This
gain or loss would typically be recognized as the units are disposed of – reversing
some of the currency effects of receiving a refund at a non-market exchange rate.
(2) Query whether the business needs exception should apply to the § 988 gain or loss
on the refunded units of currency.
j) Interesting private rulings applying § 905(c).
i) TAM 9817001 (Sept. 30, 1997) (issues #3 and 4).
(1) Simplified facts of TAM. The TAM concerns the application of the U.K.
Advance Corporation Tax (“ACT”) rules. In the TAM, UK Holding (Parent)
surrendered a Year 2 ACT refund to UK Sub 1. UK Sub 1, in part, used this
© 2013, William R. Skinner, Esq.
Fenwick & West LLP
wrskinner@fenwick.com
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