Regs. curb artificially generated foreign tax credits.

• Author: Schreiber, Sally P.

The IRS issued final regulations on determining the amount of taxes paid for purposes of the foreign tax credit (T.D. 9634). The regulations are designed to curb certain transactions that the IRS says "produce inappropriate foreign tax credit results." They finalize proposed regulations issued in 2011 with no substantive change (REG-126519-11) and remove the temporary regulations issued at the same time (T.D. 9536). A portion of the regulation specifically added in the final regulations clarifies the treatment of withholding taxes.

The regulations provide that amounts paid to a foreign taxing authority that are attributable to a "structured passive investment arrangement" are not treated as an amount of tax paid for purposes of the foreign tax credit. Structured passive investment arrangements are generally designed to exploit differences between U.S. and foreign tax law by artificially creating a foreign tax liability that allows the...