Regs, on foreign tax credit splitter arrangements.

• Author: Nevius, Alistair M.

The IRS issued final regulations on determining who has the legal liability to pay the foreign tax for foreign tax credit purposes (T.D. 9576) and temporary regulations on the application of the "anti-splitter" rules of Sec. 909 (T.D. 9577). The rules are related because the legal liability to pay foreign tax affects the determination of whether foreign income has been inappropriately split off from the tax under Sec. 909.

The issues are so intertwined that the IRS withdrew the part of the proposed regulations governing who the taxpayer is for purposes of a reverse hybrid arrangement (an entity treated as a corporation for U.S. tax purposes and as a branch or fiscally transparent entity for foreign purposes) (Prop. Regs. Sec. 1.901-2(f)(2)(iii)).

Who is the taxpayer?

T.D. 9576 explains that, if foreign tax is imposed on the combined income of two or more persons (e.g., a husband and wife or a corporation and its subsidiary), the tax is considered to be apportioned pro rata based on each person's portion of the combined income, regardless of who is obligated to pay the tax under foreign law. Foreign tax is imposed on combined income if the persons compute their taxable income on a combined basis under foreign law and foreign tax would other wise be imposed on each such person on its separate taxable income (Regs. Sec. 1.901-2(f)(3)).

For partnerships that are taxed at the entity level under foreign law, the partnership is considered to be legally liable and thus is considered to pay the tax for federal income tax purposes. For disregarded entities that are taxed under foreign law at the entity level, the person who is treated for federal tax purposes as owning the as sets of the entity is treated as having legal liability for the foreign tax. Again, these rules apply regardless of who is obligated to pay the tax under foreign law (Regs. Sec. 1.901-2(f)(4)).

The rules under T.D. 9576 apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012, but taxpayers may choose to apply Regs. Sec. 1.901-2(f)(3) to foreign taxes paid or accrued in tax years beginning after December 31, 2010, and on or before February 14...