EisnerAmper International Tax Alert
August 16, 2010
Significant changes to International Tax included in the Education Jobs and Medicaid Assistance Act of 2010
On August 10, 2010, President Obama signed into law H.R. 1586, the Education Jobs and Medicaid Assistance Act of 2010 (the "Bill"). The estimated $26 billion cost of the bill is offset in part by international tax revenue raisers which make significant changes to foreign tax credit and other international tax rules and affect many multinational companies. These international tax revenue raisers were previously part of the “tax extenders bill” (H.R. 4213) that stalled in the Senate. The Bill contains significant alterations to cross-border tax planning and raises many new questions for multinational taxpayers.
Some of the most significant changes include:
- Foreign tax credit splitting — preventing the use of hybrid entities and instruments to generate credits for foreign taxes on income that is not subject to US tax;
- Foreign tax credit covered asset acquisitions — disallowing enhanced foreign tax credits that can result when a US acquirer of shares of a foreign target treats the acquisition as an asset purchase for US tax purposes;
- Repeal of 80/20 companies — repealing the present-law rule that treats as foreign-source all or a portion of any interest paid by a resident alien individual or domestic corporation that meets the 80/20 test and repealing the present-law rule that reduces or eliminates withholding on dividends and interest paid by US corporations that conduct most of their business outside the United States;
- Foreign tax credit and resourcing of income under tax treaty — applying a separate foreign tax credit limitation basket to ”re-sourced” income, i.e., any item of income for which; (i) the income, without regard to any treaty obligations of the United States, would be treated as derived from sources within the United States, (ii) the income would be treated as arising from sources outside the United States under a treaty obligation of the United States, and(iii) the taxpayer chooses the benefits of such treaty;
- "Hopscotch" Section 956 limit for foreign tax credit — limiting deemed paid foreign tax credits for Section 956 inclusions;
- Foreign subsidiary redemptions — imposing an additional limitation on the extent to which E&P of a foreign acquiring corporation is taken into account in determining the amount and source of a distribution that is treated as a dividend in the Section 304 redemption transaction; and
- Modification of affiliation rules for purposes of rules allocating interest expense — including foreign corporation as a member of an affiliated group for interest allocation and apportionment purposes if: (1) more than 50 percent of the gross income of such foreign corporation for the taxable year is effectively connected income, and (2) at least 80 percent of either the vote or value of all outstanding stock of such foreign corporation is owned directly or indirectly by members of the affiliated group (determined with regard to this sentence).
The Bill does contain one favorable provision which is a technical correction to statute of limitations provision in the HIRE Act (Hiring Incentives to Restore Employment Act , P.L. 111-147) which provides for an exception from the three-year statute of limitations arising from the failure to comply with certain foreign information provisions.. The bill clarifies the circumstances under which the statute of limitations will be tolled for corporations that fail to provide certain information on cross-border transactions or foreign assets. Under the technical correction, the statute of limitations period will not be tolled if the failure to provide such information is shown to be due to reasonable cause and not willful neglect.
Companies should diligently review and evaluate their multi-national organizational structures to determine the impact of the above changes to their foreign tax credit planning and Subpart F planning, as well as acquisition planning.
Please contact Richard Sackin or Jim Alajbegu to evaluate the impact of these changes to your client’s facts and circumstances.