Recent Developments in Foreign Tax Credits
In September 2016, the U.S. Treasury Department (Treasury) issued Notice 2016-52 (Notice), thought to be in response to the European Union’s recent move to collect €13 billion of back taxes from Apple, Inc. The Notice outlines the Treasury's intent to issue regulations that will affect the ability of U.S. companies to claim a foreign tax credit on foreign income that is not repatriated. More specifically, the Treasury will issue regulations to “address the separation of related income from foreign income taxes paid by certain foreign subsidiaries of U.S. companies pursuant to a foreign-initiated adjustment.”
The Notice specifies that “foreign-initiated adjustments” may include adjustments made under the EU’s state aid laws. However, the future regulations will not be limited to state-aid-related foreign-initiated adjustments. Any U.S. multinational that experiences a foreign-initiated adjustment could potentially be subject to the future regulation.
The Notice makes specific references to U.S. multinationals attempting to make internal corporate adjustments (i.e., a taxpayer attempting to change its ownership structure or causing the foreign subsidiary to make an extraordinary distribution) that would cause the payment of a substantial foreign tax (i.e., in the case of Apple, a foreign-initiated adjustment of €13 billion) to reduce U.S. taxes, and the U.S. multinational does not repatriate the income that gave rise to the substantial foreign tax.
The future regulation will be issued pursuant to I.R.C. § 909 (suspension of taxes and credits until related income taken into account) and will limit the “deemed paid” taxes under I.R.C § 902 (deemed paid credit where domestic corporation owns 10% or more of voting stock of foreign corporation). I.R.C. § 902 provides that in certain situations a U.S. company with an ownership interest in a foreign subsidiary will be treated as having paid the taxes that were paid by its foreign subsidiary. Without the future regulation, the tax deemed to have been paid by a U.S. company could enable it to increase its foreign tax credit.