New Temp. Regs. under Sec. 905(c).

• Author: Dash, Roopesh
• Position: Foreign Income & Taxpayers

On November 6, 2007, the IRS issued new temporary and proposed regulations under Secs. 905(c) and 6689, which update the 1988 temporary regulations governing a taxpayer's obligations with respect to a foreign tax redetermination (FTR) (T.D. 9362 and REG-209020-86). The 2007 temporary regulations address problems under the 1988 regulations and promulgate rules to account for statutory changes made to Secs. 905(c) and 986(a) in 1997 and 2004. Specifically, the new regulations provide for updates and changes in the following areas:

* Definition of an FTR;

* Foreign currency translation rules;

* Determination of U.S. tax adjustments;

* Timing and manner of filing IRS notifications; and

* Interest and penalty provisions.

Foreign Tax Credit Overview

In general, Sec. 905(c) defines a foreign tax redetermination as a change in a foreign tax liability that may affect the U.S. tax liability resulting from a foreign tax credit claimed by a U.S. taxpayer. The foreign tax credit may be claimed as a direct tax credit under Sec. 901, subject to certain limitations under Sec. 904, when a U.S. taxpayer pays or accrues foreign taxes. In addition, under Secs. 902 or 960, an eligible U.S. corporation may claim a foreign tax credit for taxes paid or accrued by a foreign subsidiary when a dividend or a deemed dividend under subpart F is included in taxable income by the U.S. corporate shareholder.

Rules Under the 1988 Regulations

The 1988 regulations provide guidelines regarding the occurrence of an FTR and the applicable notification requirements and associated interest and penalties, if any, that arise on the occurrence of an FTR. Under the 1988 regulations, an FTR arises with the following events:

1. The refund of foreign taxes;

2. The differences occurring between the amounts for foreign taxes accrued and foreign taxes actually paid; and

3. The differences between the amount of foreign taxes accrued and actually paid arising due to foreign currency fluctuations (1988 Temp. Regs. Sec. 1.905-3T(c)).

   The 1988 regulations include two notification procedures related to the occurrence of an FTR. If an FTR arises with respect to direct foreign tax credits under Sec. 901, the 1988 regulations require a taxpayer to notify the IRS by filing an amended return for the year to which the foreign tax liability relates to reflect the correct foreign tax credit claimed for that year (1988 Temp. Regs. Sec. 1.905-4T(b)).

   There is an exception that applies for FTRs arising from currency fluctuations in which the change in the foreign tax liability is less than the lesser of $10,000 or 2% of the foreign tax initially accrued. When an FTR arises under Secs. 902 or 960 (deemed paid taxes), as a general rule the 1988 regulations require the U.S. corporation to make an adjustment to the pools of post-1986 undistributed earnings and post-1986 foreign income taxes for the year the FTR occurs, subject to certain exceptions (1988 Temp. Regs. Secs. 1.905-3T(d)(2)-(4) and (f)).

   In 1997 and 2004, the IRS added new rules under Sec. 905(c). The first substantial rule was added to conform Sec. 905(c) to the rule in Sec. 986(a)(1) (as amended in 1997), to allow the...