TIPRA: what it does ... and does not cover; The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) was signed into law this May. Financial Executives Research Foundation (FERF) summarizes the Act's key elements and its impact on and implications for corporations.

• Author: de Mesa Graziano, Cheryl
• Position: Tax regulation

Despite changes at all taxpayer levels, what seems to be most noteworthy about the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)--signed into law on May 17, 2006 by President Bush--is what was not addressed. Though TIPRA became law--following months of deliberation--a number of planned provisions were excluded in order to keep the tax-cut package within the five-year, $70 billion limit in the budget resolution.

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Instead, extensions to expire or expiring tax provisions will be addressed in a separate "trailer" tax bill to be tied to pending pension-reform legislation. The provisions that were included in the final Act, however, include $91 billion in tax relief offset by $21 billion in revenue-raising provisions over a 10-year span. Analysis of the law's main provisions are discussed below.

Extraterritorial Income and Controlled Foreign Corporations. Some of the most significant business tax changes introduced by TIPRA are in the international arena. The first of these modify existing provisions relates to the foreign sales corporation and extraterritorial income regimes.

In previous years, Congress had repealed these regimes, since the World Trade Organization (WTO) ruled that they provided prohibited subsidies for exports, but provided some transition relief for transactions that were subject to binding contracts.

However, the WTO has recently ruled that this transition relief also constitutes prohibited export subsidies. The European Union (EU) had threatened to re-introduce sanctions if the transition relief continued. Consequently, effective for taxable years beginning after May 17, 2006, TIPRA has eliminated this relief. According to PricewaterhouseCoopers, this will impact manufacturers producing goods under what they thought were grandfathered long-term sales contracts.

FEI member Michael P. Reilly, vice president, Taxation for Johnson & Johnson and chairman of Financial Executive International's (FEI) Committee on Taxation (COT) agrees, noting that many companies had likely entered into long-term contracts with the hope that they would be able to continue to take advantage of the past relief provisions in future years. Additionally, financial services companies that priced equipment leases based on the benefits will also be hurt, notwithstanding the fact that the EU hinted that the transition relief for leases might be acceptable.

Another change for business applies to controlled foreign corporations (CFCs). Under subpart F of the Internal Revenue Code, 10 percent of U.S. shareholders of a CFC are subject to U.S. tax on certain income earned, whether or not it is distributed to the shareholders. For taxable years beginning after Dec. 31, 2005 through Jan. 1, 2009, TIPRA provides look-through treatment for payments between related controlled foreign corporations under the foreign personal holding company income rules.

This creates an exception from subpart F for cross-border...