Determining the Amount of Taxes Paid for Purposes of the Foreign Tax Credit, 42036-42037 [2011-17916]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 76, Number 137 (Monday, July 18, 2011)]
[Rules and Regulations]
[Pages 42036-42037]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17916]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9536]
RIN 1545-BK40


Determining the Amount of Taxes Paid for Purposes of the Foreign 
Tax Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
providing guidance relating to the determination of the amount of taxes 
paid for purposes of the foreign tax credit. These regulations address 
certain highly structured arrangements that produce inappropriate 
foreign tax credit results. The regulations affect individuals and 
corporations that claim direct and indirect foreign tax credits. The 
text of these temporary regulations also serves as the text of the 
proposed regulations (REG-126519-11) published in the Proposed Rules 
section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on July 18, 
2011.
    Applicability Date: For dates of applicability, see Sec.  1.901-
2T(h)(3).

FOR FURTHER INFORMATION CONTACT: Jeffrey P. Cowan, at (202) 622-3850.

SUPPLEMENTARY INFORMATION: 

Background

    On March 30, 2007, the Federal Register published proposed 
regulations

[[Page 42037]]

(72 FR 15081) under section 901 of the Internal Revenue Code relating 
to the amount of taxes paid for purposes of the foreign tax credit. The 
IRS and the Treasury Department received written comments on the 2007 
proposed regulations and a public hearing was held on July 30, 2007. On 
July 16, 2008, a notice of proposed rulemaking by cross-reference to 
temporary regulations and temporary regulations (TD 9416) (the ``2008 
temporary regulations'') were published in the Federal Register at 73 
FR 40792 and 73 FR 40727, respectively. Final regulations were 
published in the Federal Register in July 2011, and adopted the 
proposed regulations with the changes discussed in the preamble to the 
final regulations.

Explanation of Provision

    Section 1.901-2(e)(5)(iv) of the final regulations provides that an 
amount paid to a foreign country is not a compulsory payment, and thus 
is not an amount of tax paid for purposes of the foreign tax credit, if 
such amount is attributable to a structured passive investment 
arrangement. An arrangement that satisfies the six conditions described 
in Sec.  1.901-2(e)(5)(iv) is treated as a structured passive 
investment arrangement. One of the conditions is that the arrangement 
utilizes an entity that meets two requirements (the ``SPV condition''). 
See Sec.  1.901-2(e)(5)(iv)(B)(1).
    The first requirement of the SPV condition is that substantially 
all of the entity's gross income, as determined under U.S. tax 
principles, is attributable to passive investment income and 
substantially all of the entity's assets are held to produce such 
passive investment income. The second requirement is that there is a 
putative foreign tax payment (a ``foreign payment'') attributable to 
income of the entity, as determined under the laws of the foreign 
country to which such foreign payment is made. The foreign payment may 
be paid by the entity itself or by the owner(s) of the entity. Under 
the 2008 temporary regulations, a foreign payment attributable to 
income of the entity does not include a withholding tax imposed on a 
distribution or payment from the entity to a U.S. party. See Sec.  
1.901-2T(e)(5)(iv)(B)(1)(ii) of the 2008 temporary regulations.
    The IRS and the Treasury Department have become aware that 
taxpayers can enter into arrangements that generate duplicative 
benefits involving foreign withholding taxes imposed on distributions 
made by an entity to a U.S. party. For example, if the parties 
undertake a transaction in which interests in an SPV are transferred by 
the U.S. party to a counterparty subject to a repurchase obligation, 
withholding taxes imposed on distributions from the SPV may be claimed 
as creditable in both jurisdictions. Accordingly, the exception for 
withholding taxes imposed on distributions or payments to U.S. parties 
was eliminated in the 2011 final regulations. These temporary 
regulations clarify the provisions of Sec.  1.901-2(e)(5)(iv)(B)(1) by 
providing in a new paragraph Sec.  1.901-2(e)(5)(iv)(B)(1)(iii) that a 
foreign payment attributable to income of an entity includes a 
withholding tax imposed on a dividend or other distribution (including 
distributions made by a pass-through entity or an entity that is 
disregarded as an entity separate from its owner for U.S. tax purposes) 
with respect to the equity of the entity.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that these regulations will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that these regulations will primarily affect 
affiliated groups of corporations that have foreign operations which 
tend to be larger businesses. Moreover the number of taxpayers affected 
and the average burden are minimal. Therefore, a Regulatory Flexibility 
Analysis is not required. Pursuant to section 7805(f) of the Code, the 
notice of proposed rulemaking preceding this regulation has been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Jeffrey P. Cowan, 
Office of Associate Chief Counsel (International). However, other 
personnel from the IRS and the Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *



0
Par. 2. Section 1.901-2 is amended by revising paragraphs (e)(5)(iii) 
and (iv) and adding paragraph (h)(3) to read as follows:


Sec.  1.901-2  Income, war profits, or excess profits tax paid or 
accrued.

* * * * *
    (e) * * *
    (5) * * *
    (iii) through (iv)(B)(1)(ii) [Reserved] For further guidance, see 
Sec.  1.901-2T(e)(5)(iii) through (e)(5)(iv)(B)(1)(ii).
    (iii) [Reserved]. For further guidance, see Sec.  1.901-
2T(e)(5)(iv)(B)(1)(iii).
* * * * *
    (h) * * *
    (3) [Reserved]. For further guidance, see Sec.  1.901-2T(h)(3).

0
Par. 3. Section 1.901-2T is revised to read as follows:


Sec.  1.901-2T  Income, war profits, or excess profits tax paid or 
accrued.

    (a) through (e)(5)(iv)(B)(1)(ii) [Reserved]. For further guidance, 
see Sec.  1.901-2(a) through (e)(5)(iv)(B)(1)(ii).
    (iii) A foreign payment attributable to income of the entity 
includes a withholding tax (within the meaning of section 901(k)(1)(B)) 
imposed on a dividend or other distribution (including distributions 
made by a pass-through entity or an entity that is disregarded as an 
entity separate from its owner for U.S. tax purposes) with respect to 
the equity of the entity.
    (e)(5)(iv)(B)(1)(2) through (h)(2) [Reserved]. For further 
guidance, see Sec.  1.901-2(e)(5)(iv)(B)(2) through (h)(2).
    (h)(3) Effective/applicability date. This section applies to 
foreign payments that, if such payments were an amount of tax paid, 
would be considered paid or accrued under Sec.  1.901-2(f) on or after 
July 14, 2014.
    (h)(4) Expiration date. The applicability of this section expires 
on July 14, 2014.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: July 11, 2011.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-17916 Filed 7-14-11; 8:45 am]
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