Filing protective claims following redetermination of foreign tax liability.

• Author: Curran, Kevin

U.S. multinationals that have undergone a tax audit in a foreign jurisdiction resulting in additional foreign tax liability may be able to file an amended U.S. return with the IRS to claim a credit under Sec. 901(b) for foreign taxes paid. A special 10-year period of limitation L under Sec. 6511(d)(3)(A) applies to refunds resulting from these claims. The 10-year period starts on the due date of the tax return (excluding extensions) for the year for which the additional foreign taxes were paid or accrued.

An accrual-basis U.S. company that decides to challenge a foreign income tax examination assessment must claim a foreign tax credit related to that assessment in an amended return filed for the year to which the assessment related, even though the claim amount may not be known until the additional foreign tax liability is finally determined (see Rev. Rul. 84-125 (allowance of credit for year may precede credit's being accrued for that year)).

Foreign governments apply their own laws when determining when an additional assessment of tax may be made. As a result, in some situations for U.S. companies, the 10-year period for filing a claim could expire before the additional foreign tax liability is finally determined. Accordingly, a U.S. company that has been notified by a foreign jurisdiction that it has been selected for examination should act promptly to protect against the possible expiration of the limitation period for filing a timely claim for refund with the IRS.

Preventing Expiration of the Refund Statute

When a foreign affiliate of a U.S. company is selected for examination by a foreign tax authority, the U.S. company first should determine whether 10 years have passed since the due date of the U.S. return (excluding extensions) for the year the foreign jurisdiction is examining. The relevant U.S. tax year is the year for which any additional tax must be paid or accrued and not the year to which a credit would be carried back or carried forward (Chrysler Corp., 436 F.3d 644 (6th Cir. 2006) (10-year period under Sec. 901(a) is measured from year for which claiming credit for foreign taxes paid relates and not from year to which foreign tax credit is carried forward)).

If the year is open under Sec. 6511(d) (3)(A) and the foreign government conducting the examination has entered into a tax treaty with the United States, then the U.S. company should notify the U.S. competent authority that the company has been selected for examination...