The Internal Revenue Service and Treasury Department announced the release of proposed regulations that would disallow foreign tax credits for foreign taxes purportedly paid in connection with certain artificially engineered, highly structured transactions.
Foreign tax credits are designed to relieve U.S. taxpayers from double taxation of their foreign source income. Transactions addressed by the regulations, in contrast, are structured so that U.S. taxpayers voluntarily subject themselves to foreign tax where an ordinary business transaction generally would result in little, or no, foreign tax paid by the U.S. taxpayer.
“The proposed regulations complement the vigorous enforcement efforts of the IRS to identify and, in appropriate cases, to challenge the tax benefits claimed in these foreign tax credit generator transactions under principles of existing law,” said IRS Chief Counsel Donald L. Korb, in a statement
Members of the Joint International Tax Shelter Information Center brought the significant impact of these transactions on the U.S. tax base to the attention of the IRS. The center is an information exchange arrangement under which the United States, the U.K., Canada and Australia exchange information on tax avoidance schemes.
Foreign tax credit abuse is among the IRS’s top compliance concerns for large corporate taxpayers.
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