Computation of overpayment interest for certain large corporate overpayments (GATT interest).

• Author: Heffernan, James V.

In connection with the General Agreement on Tariffs and Trade (GATT), the Uruguay Round Agreement Act, Public Law No. 103-465, was passed in the fall of 1994. That law included, as a revenue raiser, an amendment to section 6621(a)(1) of the Internal Revenue Code that provided for a reduced rate of interest on certain overpayments of tax by a corporation (hereinafter referred to as "GATT interest" . As if the computation of interest on tax underpayments and overpayments was not complicated enough already, the 1994 GATT amendment materially increased the difficulty of computing interest on the overpayments to which it applies. This article reviews, with illustrations, the mechanics of making such computations.

As amended, section 6621(a)(1) provides that, to the extent that an overpayment of tax by a corporation for any taxable period (as defined by section 6621(c)(3) - meaning, in the case of an overpayment of income tax, a taxable year) exceeds $10,000, the interest rate payable on the excess is 1.5 percentage points below the normal overpayment rate for interest periods after December 31, 1994. Thus, for periods after 1994, the interest rate differential between the rate payable on normal underpayments and the rate payable on overpayments to which the new GATT interest provision applies is 2.5 percent (instead of the normal I percent) and the interest rate differential between the rate payable on "large corporate underpayments" and such GATT interest overpayments is 4.5 percent.(1)

The legislative history of the GATT interest amendment is rather sparse, and the wording of the law itself creates some uncertainties. For example, the law refers to an "overpayment of tax" in excess of $10,000, but it is not clear what is meant by a "tax." For example, does the word "tax" include interest assessed and paid on a tax deficiency? Does it include additions to the tax, additional amounts, and assessable penalties prescribed by Chapter 68 (sections 6651 through 6724)? The National Office of the Internal Revenue Service has issued guidance stating that, when a refund is paid owing to the abatement of tax, penalty, or interest previously paid by the taxpayer, then the "principal" amount, for purposes of determining whether section 6621(c)(2)'s $10,000 threshold is exceeded, consists of the entire amount the taxpayer paid (not merely the tax).(2) Hence, in the case of a corporate taxpayer that paid a $9,000 deficiency consisting of tax and penalty, along with $1,500 in interest, after the effective date of the GATT interest provision and subsequently filed a claim for refund, the reduced GATT interest rate would apply to $500 of the refund.(3)

On the other hand, the National Office instructions to the field make it clear that overpayment interest accrued through December 31, 1994, on any part of an overpayment in excess of $10,000 will not be subject to the GATT interest rates after rather, the amount of such interest as of the end of 1994 will continue compound at the normal overpayment interest rates. Furthermore, the first $10,000 of an overpayment will continue to accrue interest at the...