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IRS Issues Guidance on Foreign Tax Credits

February 16, 2012

The Internal Revenue Service issued guidance last week on how to apply the Section 909 foreign tax credit splitter rules, which were enacted in August 2010 as part of the Education Jobs and Medicaid Assistance Act.

The temporary regulations apply to tax years starting after Jan. 1, 2011 and expire on Feb. 9, 2015.

The Section 909 regulations follow and build upon Notice 2010-92, which was issued on Dec. 6, 2010, and which primarily addressed the application of Section 909 to foreign income taxes paid or accrued in tax years beginning on or before Dec. 31, 2010. Importantly, the regulations maintain the approach of the Notice by providing an exclusive list of splitter arrangements, but expand upon that list, according to Ernst & Young.

Generally, the new list of splitter arrangements will be effective for foreign income taxes paid or accrued in tax years beginning on or after Jan. 1, 2012. However, the regulations provide that foreign income taxes paid or accrued by any person in a tax year beginning on or after Jan. 1, 2011 and before Jan. 1, 2012, in connection with a splitter arrangement as identified in the Notice, are treated as splitter arrangements.

The Treasury Department and the IRS also have just issued final Section 901 regulations providing guidance for determining who is considered to pay a foreign income tax for purposes of the foreign tax credit. The Section 901 regulations provide rules for identifying the person with legal liability to pay the foreign income tax in some circumstances.

The final regulations are generally effective for foreign taxes paid or accrued in tax years beginning after the date of publication in the Federal Register, subject to a taxpayer election to apply the combined income rules retroactively.

“The final and temporary regulations released under section 909 provide much needed guidance to taxpayers,” said Barbara Angus, a partner in Ernst & Young’s International Tax Services practice. “The continuation of an exclusive list approach for identifying FTC splitting events provides a degree of certainty in an area where the new statutory rules enacted in 2010 are somewhat vague. The use of a generally prospective effective date provides some advance notice to taxpayers as they contemplate the potential for realigning basic corporate structures that involve complex interactions between US and foreign tax law. However, there are retroactive aspects to the new guidance and the exclusive list sweeps in some arrangements that many believe should not be captured by section 909. Moreover, there are mechanical and computational aspects of the treatment as an FTC splitting event that still need to be fleshed out in more detail. As the process moves forward, taxpayers and tax practitioners will be seeking refinements and further elaboration in the guidance.”

On Friday, Feb. 17, she and a pair of other Ernst & Young professionals will discuss Section 909 and Section 901. To register for the live webcast, visit

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