IRS plans regs. on sec. 909 foreign tax credit splitter arrangements.

• Author: Hailey, Sean

In Notice 2016-52, the IRS describes regulations it intends to issue under Sec. 909 identifying as foreign tax credit splitter arrangements certain transactions or restructurings undertaken by Sec. 902 corporations in anticipation of foreign-initiated income tax adjustments. The regulations the IRS is planning to issue would apply to foreign income taxes paid on or after Sept.

IS, 2016. The notice mentioned that the impetus for the new rules is the recent development of foreign-initiated adjustments in European Union (EU) state-aid cases, and the notice was issued after it was announced that the EU had ordered Apple Inc. to repay $14.5 billion in Irish tax breaks.

Background

Sec. 909 was enacted in 2010 to prevent the separation of creditable foreign taxes from related income, generally by deferring the right to claim the credits until the related income is included in U.S. taxable income. Current regulations set forth an exclusive list of "splitter arrangements" that are subject to Sec. 909. Notice 2016-52 adds two types of transactions or restructurings (each in connection with foreign-initiated tax adjustments) that Treasury intends to treat as splitter arrangements in future amendments to the Sec. 909 regulations.

Under Sec. 905(c), certain foreign income taxes paid by a "Section 902 corporation" after the tax year to which the taxes relate generally are taken into account by adjusting Sec. 902 pools of post-1986 foreign income taxes in the tax year in which the taxes are paid, rather than accounting for the taxes in the prior tax year to which the taxes relate. A Sec. 902 corporation, defined in Sec. 909(d)(5), is any foreign corporation for which one or more domestic corporations meet the ownership requirements of Sec. 902(a) or (b) (a foreign corporation at least 10% of the voting stock of which is owned by a domestic corporation).

Under certain circumstances, Sec. 909 is intended to suspend foreign income taxes until those taxes are "matched" with the income to which they relate (related income). Specifically, Sec. 909(a) provides that, if there is a "foreign tax credit splitting event" for a foreign income tax paid or accrued by a taxpayer, then the foreign income tax will not be taken into account before the tax year in which the taxpayer takes the related income into account. Sec. 909(b) provides that, if there is a foreign tax credit splitting event for a Sec. 902 corporation, foreign income taxes paid or accrued are not taken...