The increasing globalization of the economy has made international tax issues more commonplace, even for smaller practitioners, since any transaction that goes across an international border has tax implications.

Significant pieces of legislation enacted during the past year, as well as proposals in the Obama administration's budget, will affect the international tax landscape in the months ahead, say experts.

"It was a huge year for developments on the international scene," said Harold Pskowski, managing editor for U.S. international tax publications at BNA. "[The Foreign Account Tax Compliance Act] in March, the foreign tax credit 'splitter' legislation in August, and now the Green Book proposals [the explanation by the Treasury of the Obama administration budget proposals] are extremely significant."

FATCA, originally enacted as a "pay-for" in last year's HIRE Act, is meant to prevent offshore tax abuses. It imposes a 30 percent withholding tax on foreign entities that won't disclose the identities of U.S. account holders, and has extensive reporting requirements.

"U.S. persons have been setting up foreign entities to siphon U.S.-sourced income overseas, and disguising themselves as foreign persons," explained Pskowski. "This legislation is designed to cure this. Now the payor will have to verify the status of the payee to make sure they are, in fact, foreign."

"FATCA is a huge issue, but it doesn't go into effect until Jan. 1, 2013," noted Remy Farag, international tax analyst at the Tax & Accounting business of Thomson Reuters. "The regulations are still in the development stage. A lot of the larger foreign financial institutions are lobbying for 'carve-outs,' for classes and sections that might not fall under the purview of the reporting requirements."

The effect of the foreign tax credit "splitter" rules is that U.S. corporations will be able to use fewer foreign tax credits than in the past, he observed. The new rules are in Code Section 909, which came into effect for transactions that begin after Dec. 31, 2010.

"The new law provides that a taxpayer can't claim a foreign tax credit until it recognizes the related income for the Section 901 credit, or an appropriate level of foreign income for U.S. tax purposes," said Farag. "It's trying to remedy situations where a U.S. entity pays foreign tax abroad but doesn't repatriate income back to the U.S. The general rule prior to this was that if you pay income tax to a foreign government, you would get a foreign tax credit under Section 901. People were trying to amass as much foreign tax credit as they could. Under this provision, the credits are not disallowed, but they are suspended until the income is brought back to the U.S." If there is an FTC splitting event, the FTC will not be taken into account before the related year, he said. "So it is suspending the credits, not disallowing them. In some instances, though, it appears that these FTCs can be suspended indefinitely. In effect, what good is a tax credit that is suspended indefinitely?"

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