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

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§ 905(c) because of the “relation back doctrine” that is applied to accrual foreign taxes and the “contested taxes” doctrine. Unlike other liabilities, a contested tax liability is accrued for the underlying foreign assessment year, not the year in which the tax is finally determined. See Rev. Rul. 70- 290, 1970-1 C.B. 160, clarified by Rev. Rul. 84-125, 1984-2 C.B. 125; see also, e.g., IBM Corp. v. United States, 38 Fed. Cl. 661 (1997). However, when the liability ultimately is fixed, it “relates back” to the year of the original assessment and is deemed to arise as a foreign income tax expense in the original assessment year. Similarly, if a tax that has paid is refunded, the refund is treated as reducing foreign tax expense in the earlier year. Under § 905(c), the amount of the § 901 credit for the earlier year generally must be adjusted up or down for amended return, rather than accruing an adjustment to the § 901 credits in the current year. The overall purpose for this rule appears to be sync up the amount of FTC claimed in the year with the foreign income on which the tax is imposed. This prevents the mismatching of credits with the § 904 limitation to which the credits relate. b) Status of § 905(c) Regulations. In late 2007, § 905(c) regulations were issued in temporary and proposed form. Under the 3-year sunset rule, the Temporary Regulations expired in December 2010. However, since the regulations were issued in proposed form, it is appropriate to continue to rely on the Temporary Regulations. It appears that the IRS will provide transitional relief to the extent the Final Regulations differ from the current Proposed Regulations. See CCA 201145015. c) Rules for Accrual of Foreign Tax as a Liability. i) To be accrued as a liability, a foreign tax must satisfy the three-pronged test of § 461(h): (1) fixed in fact; (2) determinable in amount; and (3) economic performance. Economic performance of a tax liability generally occurs when the tax is paid. However, for foreign taxes that are creditable under § 901, this requirement is waived and economic performance is deemed to occur in the assessment year to match taxes with the related § 904 income. See Reg. § 1.461-4(g)(6)(ii)(B). ii) The contested taxes doctrine determines the year for which the tax accrues, but does not determine when the tax meets the requirements of § 461. Thus, a contested tax is not accrued as a creditable tax until it is finally determined. See Rev. Rul. 84-125, amplifying Rev. Rul. 58-55. However, the U.S. year may be closed to refund under § 6511(d)(3) at the time of the final settlement. Rev. Rul. 84-125 allows the taxpayer to pay the tax under protest, subject to later redetermination under § 905(c) if the refund claim succeeds. iii) Generally, the accrual date is the end of the foreign taxable period in which the relevant © 2013, William R. Skinner, Esq. Fenwick & West LLP wrskinner@fenwick.com 4
income is computed. (Until the end of that year, the existence of a tax liability is uncertain). See A.M. 2008-005 (citing Rev. Rul. 61-93). This is the case if no further event after the close of the foreign computation year could remove the liability. See Universal Winding Co. v. Commissioner, 39 BTA 962 (1939). In some cases, where the assessment is delayed from the income year, and depends, e.g., on the foreign corporation remaining in business in the assessment year, the IRS has ruled that the taxes do not accrue until the end of the later assessment year. See Rev. Rul. 76-39. iv) The accrual of foreign taxes on the foreign year end can create difficulties in cases where the foreign year end differs from the U.S. year-end: (1) Section 338 election. Foreign T’s year is deemed to close. For FTC purposes, T’s taxes for the year of the election are allocated under Reg. § 1.1502-76(b) between the two short periods. See Reg. § 1.338-9(d). (2) Incorporation or sale of a DRE / Hybrid Entity. Treas. Reg. § 1.901-2(f)(4) (Feb. 2012) prevents the separation of income from credits in cases where a hybrid entity undergoes a midyear change of status. The new Regulation prorates taxes in that case under principles of Reg. § 1.1502-76(b). (3) Section 898. If the CFC does not conform to the US shareholder’s year for foreign tax purposes, or its 1-month deferral election year under § 898, then the CFC’s US year will not include its foreign year. Prop. Reg. § 1.898-4(c)(2) provides rules to compute income and E&P across the short years. However, it does not address foreign tax accruals. Chief Counsel Advice 03681 ruled that sub F income in an § 898 year would not include foreign taxes associated with the same income accruing in the later foreign year. The CCA viewed the IRS and Treasury as concluding it lacked authority to pro rate taxes in this case. d) Events Constituting Foreign Tax Redeterminations. i) Taxes, when paid, differ from taxes accrued. ii) Accrued taxes are not paid within two years of the end of the year to which the tax relates. (1) If the taxes accrued are not paid within this two year period, the foreign tax is redetermined to eliminate any accrued, but unpaid, tax. (2) Subsequent payments of the tax that was eliminated under this rule are treated as additional redeterminations of the tax. In the case of a foreign tax directly paid by the U.S. taxpayer, the redetermination is made with respect to the year to which the tax originally relates. If the tax was paid by a CFC, then the subsequent payment is treated as an additional foreign tax in the year for which § 902 / § 960 credits were claimed. © 2013, William R. Skinner, Esq. Fenwick & West LLP wrskinner@fenwick.com 5
Page 1 and 2: Foreign Tax Redeterminations under
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Page 7 and 8: (1) Rev. Rul. 83-80 & underlying GC
Page 9 and 10: maximum penalty is 25% of the defic
Page 11 and 12: (iv) In 2011, the carry-back of the
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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