United States: IRS Issues Regulations Limiting Creditability Of Foreign Income Taxes Following Covered Asset Acquisitions

On Dec. 6, 2016, the IRS and Treasury issued temporary (T.D. 9800) and proposed (REG-129128-14) regulations under Section 901(m). The new guidance addresses the creditability of foreign income taxes following certain transactions that are considered "covered asset acquisitions," as described below.  

Section 901(m) was enacted in 2010 and limits taxpayers' ability to claim foreign tax credits associated with "covered asset acquisitions." Generally, a covered asset acquisition is a transaction that is treated as an asset acquisition for U.S. federal income tax purposes, but is either treated as a stock acquisition or is disregarded for foreign income tax purposes. These types of transactions may result in an increase in tax basis for U.S. federal income tax purposes, but not for foreign tax purposes. The resulting basis differences may generate deductions (e.g., amortization or deprecation) for U.S. federal income tax purposes that exceed those afforded for foreign tax purposes. The result of this basis difference is often a higher income tax base and higher taxes paid for foreign tax purposes, and thus excess foreign tax credits on income that may never be recognized for U.S. federal tax purposes.

Section 901(m)(1) provides that, in the case of a covered asset acquisition, the disqualified portion of any foreign income tax determined with respect to the income or gain attributable to certain foreign assets will not be taken into account in determining the foreign tax credit allowed under various provisions of the tax code. Instead, the disqualified portion of any foreign income tax is permitted only as a deduction. Section 901(m)(3)(A) provides that the term "disqualified portion" means, with respect to any covered asset acquisition, the ratio of (i) the aggregate basis differences allocable to such taxable year, divided by (ii) the income on which the foreign income tax is determined.  

In July 2014, the government issued Notices 2014-44 and 2014-45 announcing that Treasury will issue regulations addressing the application of Section 901(m) to certain dispositions of assets following covered asset acquisitions. The notices were issued in response to certain taxpayers engaging in transactions shortly after a covered asset acquisitions with the intention of invoking the application of the statutory disposition rule under Section 901(m)(3)(B)(ii) to avoid the purposes of Section 901(m).

The temporary regulations recently issued implement these notices and provide guidance specifically excluding withholding taxes from the scope of Section 901(m). The preamble to the temporary regulations provides that a withholding tax should not be subject to disallowance under Section 901(m) because a withholding tax is a gross basis tax that is generally unaffected by changes in asset basis.  The exclusion of withholding tax represents a welcome clarification from the IRS.

As the temporary regulations relate back to the issuance of Notices 2014-44 and 2014-45, they generally apply to covered asset acquisitions occurring on or after July 21, 2014, and to covered asset acquisitions occurring before that date resulting from an entity classification election that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014. The temporary regulations also apply to certain covered asset acquisitions occurring on or after Jan. 1, 2011, and before July 21, 2014 under certain transition period rules.

The proposed regulations provide much needed guidance for computing the disqualified portion of foreign income taxes under Section 901(m) and also provide several anti-abuse rules. The proposed regulations set forth numerous definitions and complex operating rules and introduce three new categories of transactions that will be treated as covered asset acquisitions and therefore be subject to Section 901(m). The three new categories of transactions consist of:

  • Any transaction (or series of transactions occurring pursuant to a plan) to the extent it is treated as an acquisition of assets for purposes of U.S. income tax and as the acquisition of an interest in a fiscally transparent entity for purposes of a foreign income tax
  • Any transaction (or series of transactions occurring pursuant to a plan) to the extent it is treated as a partnership distribution that causes either the U.S. basis of the partnership's remaining assets or distributed assets to be adjusted without a corresponding increase in the foreign basis of such assets
  • Any transaction (or series of transactions occurring pursuant to a plan) to the extent it is treated as an acquisition of assets for purposes of both U.S. income tax and a foreign income tax, provided the transaction results in an increase in the U.S. basis without a corresponding increase in the foreign basis of one or more assets.

Other notable guidance in the proposed regulations include:

  • Simplification of statutory rules regarding the computation of disallowed taxes by allowing combined income taxes, thus avoiding the administrative and compliance burdens that would result from a requirement to trace amounts of income and identify the portion of foreign income taxes imposed on that income
  • Addition of de minimis rules under which certain basis differences are not taken into account for purposes of Section 901(m)
  • Addition of the "foreign basis election," pursuant to which the basis difference is equal to the U.S. basis in the relevant foreign asset less the foreign basis in the relevant foreign asset immediately after the covered asset acquisition (i.e., prevents the need for recomputing U.S. tax basis immediately prior to the covered asset acquisition on acquired assets).

These proposed regulations will apply to covered asset acquisitions occurring on or after the date of publication of the regulations adopting these rules as final regulations in the Federal Register. Taxpayers may, however, rely on the proposed regulations prior to the date the regulations are applicable provided that they are consistently applied.

The proposed regulations provide a substantial amount of clarity with regard to the calculations required under Section 901(m). However, with the additional clarity comes additional complexity. Taxpayers should be aware of the implications of making acquisitions subject to the rules under Section 901(m), and perform a thorough review to ensure the rules are being applied appropriately.  

Read Grant Thornton LLP's previous coverage on Notice 2014-44 here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.