Translation date for indirect foreign income taxes.

• Author: Bernard, Michael J.
• Position: Letter to Ronald A. Pearlman

Translation Date for Indirect Foreign Income Taxes

On September 19, 1990, Tax Executives Institute filed comments concerning the translation of indirect foreign income taxes under section 986 of the Internal Revenue Code. The comments took the form of a letter from Institute President Michael J. Bernard to Ronald A. Pearlman, Chief of Staff of the Joint Committee on Taxation. The letter, reprinted below, was prepared under the aegis of the Institute's International Tax Committee, whose chair is Raymond G. Rossi of Intel Corporation.

Background

This letter supplements our previous discussions with you and your staff with respect to the translation of foreign income taxes under section 986(a)(1) of the Internal Revenue Code. You have requested the Institute's suggestions for a workable solution to the compliance burdens imposed by section 986.

As we previously discussed, section 986(a)(1) provides that, for purposes of determining the foreign tax credit, foreign income taxes are translated into dollars using the exchange rate in effect when the taxes are paid. Prior to the enactment of section 986 in 1986, deemed-paid taxes were translated at the exchange rate in effect, on the date of distribution, in accordance with the decision in Bon Ami Co., 39 B.T.A. 825 (1939).

Section 986 places considerable administrative burdens on taxpayers to collect and analyze the information on foreign income tax payments necessary to compute the dollar value for each tax payment and refund using multiple rates. Multinational corporations may have hundreds of foreign subsidiaries and operate in countries (such as Japan) requiring multiple payments of separate creditable income taxes. In addition, the application of section 986 in respect of foreign income taxes paid after the end of the U.S. taxpayer's taxable year will retroactively affect the calculation of the U.S. pool of earnings and profits. For example, some jurisdictions provide that a corporation's taxes in respect of a given...