Pandemic Adds to Worries About Foreign Tax Credit Availability

Multinational companies are facing worldwide declines in income and final guidance on foreign tax credits could make things worse.

That’s because proposed tax rules could potentially reduce the foreign tax credits companies use to offset their U.S. taxes, all while they grapple with reduced liquidity due to the coronavirus outbreak.

“The pandemic creates the likelihood of more losses being incurred whether in the U.S. and offshore, and the interaction with international rules is mainly around foreign tax credits,” said Jose Murillo, EY Americas director of international tax and transaction services.

The IRS released proposed guidance (REG-105495-19) in December before the pandemic hit. The agency will hear from groups such as the National Foreign Trade Council, which has concerns about how the proposed rules could increase companies’ tax bills, during a public hearing Wednesday.

“Anytime there is an economic downturn, administrability of tax law has to be chief among concerns of administrators because easy laws make it easy to pay and collect tax,” said David Sites, leader of the international tax practice at Grant Thornton LLP in Washington.

Calculating Credits

Multinationals count on foreign tax credits to offset investment management costs, called stewardship expenses—like CEO salaries and separate books and records for investment purposes—which amount to millions of dollars of lost foreign tax credits.

But the proposed rules only allow a foreign tax credit calculation method that, in many cases, results in allocating all stewardship expenses to foreign operations, which results in fewer foreign tax credits.

“Large multinationals have significant expenses so the methodology really matters, and they matter more as taxpayers’ taxable income is under pressure,” said Pat Brown, U.S. international tax policy leader for PwC LLP in Washington. Brown formerly worked at the Treasury Department as an associate international tax counsel.

The 2017 tax law changed tax rules on how companies must calculate and apportion their expenses to domestic and foreign income. Under prior tax rules, companies had several options when it came to calculating foreign tax credits after allocating certain expenses to domestic and foreign operations.

“That flexibility was taken away from companies and in doing so it adds pressure on the government to come up with rules that fit across all company fact patterns,” Brown said.

Companies will likely bring up this issue to the IRS at the upcoming hearing.

“There is a hope that there will be a clarification that gives people a more equitable answer,” Sites said.