A flood of enacted and proposed legislation and regulations is making the international tax arena one of particular interest to CPAs and their clients.

The Obama administration's proposed $3.8 trillion budget for 2011 includes changes to the international tax reform regime, which, if enacted, would have significant implications for multinational companies.

The budget includes proposals to defer the deduction of interest expense related to deferred income; foreign tax credit reforms; elimination of the proposal to repeal the check-the-box rules; and a proposal to tax excessive returns associated with offshore transfers of intangibles. The foreign tax credit proposals would pool consolidated earnings and profits of all foreign subsidiaries, and would prevent splitting of foreign income and foreign taxes.

"When you look at [the proposals], the interest expense deferral is what concerns them the most," said Rodney Lawrence, principal-in-charge of KPMG's international corporate services practice. That proposal would defer the deduction of interest expense that is properly allocated and apportioned to a taxpayer's foreign-source income that is not currently subject to U.S. tax. "If you borrow and incur interest expense at the U.S. level, you get a deduction," he explained. "Likewise, if a U.S. corporation borrows to buy a foreign subsidiary, the interest expense is deductible in the U.S. even if it leaves the earnings of the foreign subsidiary offshore and never brings the profits back. The administration proposal would allow the deduction if and when you bring the foreign subsidiary earnings back into the U.S. tax base."

IN THE IRS'S CROSSHAIRS

Not only multinationals, but small, privately held companies are now a key target for the IRS, observed David Gannaway, director in the Litigation and Corporate Financial Advisory Services Group at New York-based Marks Paneth & Shron.

"Companies out there engaged in international transactions need to realize these issues are on the radar screen," he said. "They should take the extra time and review positions taken on the tax return to make sure they are sustainable. Authorities are looking for unusual international transactions, parking inventory overseas, moving or leaving funds offshore for periods of time, recording items as sold when not, transfer pricing that takes advantage of tax havens - in short, schemes that businesses create through layering foreign companies that reduce taxes will be scrutinized."

FACTA AND HIRE

FATCA, the Foreign Account Tax Compliance Act of 2009, recently passed as part of the HIRE jobs creation legislation, will result in the most comprehensive gathering of U.S. taxpayer foreign financial holdings ever, according to Kevin Packman, a partner in the Miami office of Holland & Knight.

The bill would require foreign financial institutions to provide the name and tax identification number and account balances of U.S. account holders to the IRS, noted Remy Farag, international tax analyst at the Tax & Accounting business of Thomson Reuters. "Institutions that do not comply are subject to 30 percent withholding."

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