Tax Quarry

Because of the US policy to tax worldwide income, Foreign Tax Credits (FTC) are very important as a planning tool for multinational corporations and individuals with taxable assets and earnings outside of the US.   Aside from treaties, this is one of the only ways available to reduce double taxation where the US and the foreign jurisdiction both impose tax.

Some of the questions that need to be answered to determine if the entity or individual is eligible for a credit are (i) whether the payment is an income tax; (ii) whether the jurisdiction levying the tax is a foreign country; (iii) whether the person attempting to claim the FTC is a qualified US person, as defined under the Internal Revenue Code (“IRC”), and (iv) who is the payor of the tax. 

The question that the temporary regulations is attempting to address relates to the determination of whether a US person is considered to have paid a foreign income tax for purposes of the foreign tax credit. The regulations provide additional rules for identifying the person with legal liability to pay the foreign income tax in certain circumstances. 

Specifically, the guidance introduces rules for determining the person on whom foreign law imposes legal liability for tax, including in the case of taxes imposed on the income of foreign consolidated groups and entities that have different classifications for U.S. and foreign tax law purposes

According to the IRS background summary, the statutory provision was enacted to address concerns about the inappropriate separation of foreign income taxes and related income.  It provides that there is a “foreign tax credit splitting” event if a foreign income tax is paid or accrued by a taxpayer and the related income is, or will be, taken into account by a covered person with respect to such taxpayer. In such a case, the tax is suspended until the taxable year in which the related income is taken into account by the payor of the tax.

The Regulations identify an exclusive list of arrangements that will be treated as giving rise to foreign tax credit splitting events and provides guidance on determining the amount of related income and taxes paid or accrued with respect to splitter arrangements. These splitter arrangements have been defined as:

(a) reverse hybrid structures,

(b) certain foreign consolidated groups,

(c)  disregarded debt structures in the context of group relief and other loss-sharing regimes, and

(d)  two classes of hybrid instruments.

The IRS may identify additional splitter arrangements for future tax years.  

Click here for a link to the temporary regulations.  

Written by Marsha Henry ©

On February 8^th, 2012, the Treasury Department and the Internal Revenue Service (IRS) finally released proposed regulations for what they call “the next major phase of implementing the Foreign Account Tax Compliance Act (FATCA)”.

FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. The Act and regulations once fully implemented will require FFIs to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

The regulations lay out a step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents.

According to IRS Commissioner Doug Shulman, the proposed regulations implement FATCA’s obligations in stages to minimize burdens and costs consistent with achieving the statute’s compliance objectives. The recently published rules and implementation schedule have been adjusted to allow time for resolving local law limitations to which some FFIs may be subject.

In order to avoid being withheld upon under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

• Identify U.S. accounts,
• Report certain information to the IRS regarding U.S. accounts,
• Verify its compliance with its obligations pursuant to the agreement, and
• Ensure that a 30-percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.

Registration will take place through an online system which will become available by Jan. 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

Written by

Marsha Henry ©

February 10, 2012

On January 18^th to 19^th, 2012, over forty countries came together at the Forum on Tax Administration (FTA) in Buenos Aires.  Their purpose was to address the question of whether increased co-operation with other member countries of the group would improve their own country’s tax administration efforts. 

The most heated topic of conversation was about the ongoing fight against offshore tax abuses.  According to the OECD final report, the forum concluded with “a unified and strengthened commitment to combat offshore tax abuse.”  The report states:

Our strategy includes unprecedented sharing and exchange of information and coordinated action to better identify and tirelessly pursue the promoters and users of abusive offshore schemes. Those who once felt safe concealing their money and assets overseas are now in an increasingly risky position.

Other topics discussed included the need to work smarter in times of shrinking budgets, and the necessity for each country to strengthen their relationship with large multi-national business through what the group described as “efficient and effective strategies that benefit both the taxpayer and taxing authority.”  Below is a summary of the main points from the discussion provided by the OECD:

Offshore Compliance
Although there have been some high-profile successes in the fight against offshore tax abuse, resulting in significant additional tax revenues and real improvements in transparency and exchange of information, it is far too soon to declare victory. When promoters and facilitators feel that we are tightening the net, they may simply move to a new location. We will be relentless in our pursuit of them – no matter where they may be. Our Offshore Compliance Network is building on the achievements of individual countries to improve our collective ability to deter, detect, and deal with offshore tax evasion. An early priority is to better understand the structures used to hide offshore wealth. We further agreed that collaboration must now include coordinated actions by countries to finally put an end to offshore non-compliance.

Taking the Relationship between Tax Administrations and Large Business Taxpayers Further
The FTA has worked hard in recent years to foster a more constructive relationship between large businesses and tax administrations. An adversarial relationship between tax administrations and multinational corporate taxpayers serves neither of our purposes well and is contrary to our common goals, which are earlier and greater certainty, consistency, and efficiency. To this end, we agreed that we need to create innovative strategies for issue resolution that are less time and resource intensive for both, while still promoting a climate that encourages compliance with tax laws. We will pay particular attention to the process of conducting and resolving transfer pricing cases. Overall, we intend to move away from a hide and seek approach to one based on greater transparency on the part of both taxpayers and tax administrations. As more companies put good tax compliance at the heart of their corporate governance, this will be easier to achieve.

Tax Administration in the Current Climate
The continued fragility that permeates the global economy demands that we work smarter.  In this context, it is important for tax administrations to be efficient and effective in carrying out the roles entrusted to them. We are committed to sharing best practices among ourselves and with developing countries to continually improve the quality of tax administration across the world. We also recognize that high quality customer service is essential to nurture high levels of voluntary compliance.

For more information about the topics discussed at the meeting and to view the FTA’s latest reports please visit www.oecd.org/tax/fta.