Lapse of IRC Section 954(c)(6)  

On January 1, 2010, several taxpayer-favorable provisions of the Internal Revenue Code expired. One of the most significant provisions for International Tax is IRC Section 954(c)(6), Look-Thru Rule for Related Controlled Foreign Corporations. The Look-Thru Rule is effective for taxable years of a foreign corporation beginning after December 31, 2005, and before January 1, 2010^[1]. For calendar year-end foreign corporations, this provision lapsed on December 31, 2009. While a proposal to extend the look-thru rule retroactively to January 1, 2010, was included in recent House and Senate bills, the extension has not been enacted.

Section 954(c)(6) allowed U.S. multinational corporations to exclude from Subpart F income recognition, certain dividends, interest, rents, and royalties received or accrued by one controlled foreign corporation (“CFC”) of a U.S. multinational from a related CFC. Accordingly, the look-thru rule operates to reduce the global effective tax rate for many multinational companies.

Income Tax Accounting for 2010 First Quarter Tax Provisions  

Reporting entities must consider any expired tax provisions in determining the first quarter financial reporting for income taxes and the determination of the estimated effective tax rate for 2010. In the first quarter of 2010 for a calendar-year end corporation, the U.S. company should include in its estimated annual effective tax rate the tax expected on the amount of subpart F income that would be recognized for the current year assuming the look-thru rule is not extended.

If the extension of the look-thru rule is not enacted before the balance sheet date, an entity should consider including in the financial report a discussion related to the impact of the lapse, as well as the impact expected if the proposal is later enacted. If the extension of the look-thru rule is enacted after March 31, 2010, but before the first quarter financial report is issued, the entity should disclose its expected revised estimated effective tax rate in the second quarter, the amount of benefit expected from amending prior tax periods to the extent applicable and any expected change in deferred taxes.

Please contact Rich Sackin at 732-287-1000 Ext 1316 or Jim Alajbegu at 732-287-1000 Ext 1501 if you have any questions.

[1] Enacted by the Tax Increase Prevention and Reconciliation Act of 2005 and amended by the Tax Relief and Health Care Act of 2006, the Tax Technical Corrections Act of 2007, and the Tax Extenders and Alternative Minimum Tax Relief Act of 2008.