Just before leaving town for its August break, the House came back and passed legislation that the Senate approved last week. The President signed the Act, H.R. 1586, on August 10.

The new law, the Education Jobs and Medicaid Assistance Act of 2010, is basically a bailout for states that are living beyond their means and have problems meeting their payrolls. Among the “pay-fors” in the legislation are a number of provisions affecting the foreign tax credit. The provisions were pulled from the extenders bill, currently stalled in the Senate, and may make efforts to pass the extender provisions more difficult down the line.

While its proponents say it closes loopholes that encourage corporations to ship jobs overseas, those who voted against it say that it is merely a temporary fix for bloated bureaucracies and will make the United States a less attractive place for multinationals to locate.

The bill uses seven of the eight international revenue raisers originally proposed on the extenders legislation, leaving out only the provisions to amend source rules for guarantee fees, according to Mel Schwarz and Joe Calianno, partners at the Washington National Tax Office of Grant Thornton. On the positive side, the bill also includes a retroactive technical correction to an amendment to the statute of limitations rules for certain foreign reporting rules enacted earlier this year as part of the HIRE (Hiring Incentives to Restore Employment} Act. Besides the international tax provisions, the Act also repeals the advance refundability of the earned income tax credit.

“Most of the provisions modify and limit the ability to take a foreign tax credit,” said Calianno.

The foreign tax credit covered asset acquisition provision denies a foreign tax credit for the disqualified portion of any foreign income tax paid or accrued in connection with a covered asset acquisition. The provision provides details on how a taxpayer calculates the disqualified portion when there is a covered asset acquisition, and is generally effective for covered asset acquisitions after Dec. 31, 2010.

“A provision [in the new legislation] would impose a limit on the amount of foreign taxes that a U.S. shareholder is deemed to pay under the foreign tax credit rules for any deemed income inclusion resulting from a Section 956 investment in U.S. property, (a Section 956 inclusion),” said Calianno.  This provision is also effective for acquisitions of U.S. property after Dec. 31. 2010.

The Business Roundtable opines that these provisions are counterproductive and will hurt future U.S. economic growth and job creation.

“American companies with worldwide operations directly employ 22 million American workers and support an additional 41 million U.S. jobs through their supply chain and through the purchases of goods and services by their employees,” said Johanna Schneider, executive director of external relations at the Business Roundtable. “Further tax hikes will hinder the ability of these companies to protect and create American jobs and will slow our nation’s economic recovery.”

“Most of these provisions will impact U.S. corporate taxpayers, and some could also affect noncorporate taxpayers,” said Calianno. “It’s fair to say that these likely will impact U.S. multinational companies, with the exact impact varying [according to] particular facts and circumstances.”

“Looking at the big picture, they are designed to limit some of the benefits of the foreign tax credit,” he added. “If you talk to supporters, they would say the legislation is making sure the credits are only limiting the foreign tax credit to where it’s appropriate, but I don’t think the business community would view these as being beneficial to business. At the end of the day, the provisions make the U.S. multinational less competitive when compared to its foreign multinational competitors.”

So, is the legislation a payoff to public employee unions that will result in the loss of more private sector jobs? Only time will tell.

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