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IRS Limits Foreign Tax Credits Companies Can Claim in Rules (3)

March 20, 2020, 12:50 PMUpdated: March 20, 2020, 8:33 PM

Final rules that limit how multinationals claim foreign tax credits will be challenging for companies that hoped the IRS would target the rule at abusive transactions.

The rules (T.D. 9895), released Friday, prevent companies from benefiting from extra write-offs following certain asset acquisitions that are eligible for tax benefits under U.S. law but not abroad. The rules are largely adopted from the temporary (T.D. 9800) and proposed (REG-129128-14) version of the rules, which have been in effect since December 2016.

U.S. companies acquiring foreign entities were previously able to structure mergers and acquisitions in a way that brought them a disproportionate foreign tax credit benefit in the U.S.

Companies had complained the 2016 rules were overly broad and burdensome, significantly increasing costs for taxpayers and pulling in non-abusive deals. But Treasury said the statute is similarly broad.

“Rather than having a broad definition, taxpayers wanted specific delineated transactions and for the rule to be more of a targeted anti-abuse rule,” said Brett Bloom, manager of international tax at KPMG’s Washington national tax practice.

The rules under tax code Section 901(m) clarify a law enacted in 2010 as part of a broader anti-abuse effort.

The law targeted “covered asset acquisitions” by reversing the effects of a U.S. tax basis step-up that lacked a corresponding foreign tax step-up in basis. These types of transactions can reduce companies’ taxable income for U.S. tax purposes relative to their taxable income for foreign tax purposes, allowing them to reduce or eliminate their U.S. tax liability through foreign tax credits.

Companies said the rules should have addressed the intent to get a step-up in basis, rather than when the step-up is an intention result of a covered asset acquisition.

That will make administering the rule difficult for practitioners who will now need to calculate all possibilities for basis-step up in transactions involving foreign tax credits, practitioners said.

“From a practical standpoint it would be nice to have clearer lines on what is subject to these rules and what is not, but I understand Treasury doesn’t want people to plan so they’re coming close to that line,” said John Harrington, a partner at Dentons US LLP in Washington.

—With assistance from Allyson Versprille.

(Updates with comments starting in fifth paragraph.)

To contact the reporter on this story: Siri Bulusu in Washington at sbulusu@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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