The American Institute of CPAs has written to the Internal Revenue Service and the Treasury Department requesting them to revise their proposed regulations on foreign tax credits.

On March 29, 2007, the IRS and the Treasury issued proposed regulations that provided guidance on whether a payment is compulsory for an increase in a foreign subsidiary’s foreign tax liability due to the sharing of losses or because of a combined settlement with a foreign taxing authority. Section 901 of the Tax Code permits taxpayers to claim a credit for income taxes paid or accrued (or deemed paid under Section 902) during the tax year to any foreign country or to any possession of the United States. The tax is defined as a “compulsory payment pursuant to the authority of a foreign country to levy taxes.”

The AICPA believes the definition of “compulsory” under the current regulations (unchanged by the proposed regulations) requires foreign taxpayers to interpret and apply foreign law reasonably to reduce the taxpayer’s reasonably expected tax liability over time. The AICPA complained about a lack of clarity in how the proposed regulations would apply in several situations, and said the proposed regulations might be applied in a manner inconsistent with current U.S. tax policy.

For example, the proposed regulations do not address situations in which foreign income taxes are paid or accrued by a member of a U.S.-owned group following its surrender of its losses to a foreign group member.  Also, the proposed regulations do not address when an entity that is not a member of the U.S.-owned group surrenders a loss to a U.S.-owned group member. 

The proposed regulations do not include guidance about the consequences when a member of the U.S.-owned group carries forward its current year loss rather than surrendering such loss to another group member with income. The AICPA noted that foreign consolidation regimes and group relief regimes appear to receive inconsistent treatment. The AICPA recommended that the IRS draft new language for the proposed regulations and provided its preferred wording.

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