Washington (Feb. 25, 2004) -- Two notices just issued by the Treasury Department and the Internal Revenue Service aim to cut down several foreign tax credit abuses.
Notice 2004-19 describes the administrative and regulatory approaches the Treasury and the IRS are using to address foreign tax credit transactions that create results inconsistent with the purpose of the foreign tax credit rules. Notice 2004-20 halts a specific transaction designed to generate credits for foreign taxes paid on gain that is not subject to tax in the United States. The claimed result of the transaction is a foreign tax credit but no corresponding income and U.S. tax for the U.S. taxpayer.
"Notice 2004-19 withdraws Notice 1998-5, which used the economic profit test to address abusive tax-motivated transactions that generate the foreign tax credit," said Selva Ozelli, a tax expert with RIA, a Thomson business. "It abandons the economic profit test. It uses a wider approach, so now the IRS can challenge abusive tax avoidance transactions on various grounds, including the substance over form doctrine, the step transaction doctrine, debt-equity principles, the partnership anti-abuse rules, and the substantial economic effect rules under Code Section 704."
"Notice 2004-20 shuts down stock acquisitions intended to generate foreign tax credits for foreign taxes paid on gains not subject to U.S. tax," Ozelli explained. "These transactions are now identified as 'listed transactions' that are subject to disclosure, list-keeping and registration requirements."
“The foreign tax credit serves the important purpose of eliminating potential double taxation. It was never intended to eliminate tax altogether,” said Pam Olson, Treasury assistant secretary for tax policy. “Transactions structured so the taxpayer incurs foreign taxes without any corresponding U.S. tax liability because the underlying income is not recognized for U.S. tax purposes do not give rise to the double taxation that is the economic basis for the foreign tax credit. These types of transactions should not generate foreign tax credits.”
-- Roger Russell
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