The U.S. Department of the Treasury revealed on September 15, 2016 that it is drafting rules to curb US Multinationals from obtaining US foreign tax credits as a result of foreign government's audits resulting in foreign tax adjustments for US Multinationals.
In Notice 2016-52, 2016-40 IRB, the IRS has announced that it intends to issue regs under Code Sec. 909 to address the separation of related income from foreign income taxes paid by a “section 902 corporation” pursuant to a foreign-initiated adjustment. The regs will identify two new “splitter arrangements,” one of which involves a change to ownership structure made in anticipation of the foreign-initiated adjustment, and the other of which involves making an extraordinary distribution before paying the adjustment so as to generate substantial amounts of foreign taxes deemed paid without a corresponding U.S. income inclusion.
The commission ordered Ireland to collect a staggering $14.5 billion in back taxes from Apple, and the Treasury said on September 15, 2016 that it now wants to prevent companies from taking steps to separate their foreign income tax for prior taxable years from the income the tax relates to.
“Such foreign-initiated adjustments may arise under European Union state aid law, to the extent EU state aid payments result in creditable foreign taxes,” the department said.
Corporations may also make extraordinary distributions, so that undistributed earnings can be used to inflate the amount of foreign taxes paid, without repatriating the earnings and including them in U.S. taxable income, the Treasury said.
On order to prevent so-called splitter arrangements, or the separation of creditable foreign taxes from the underlying related income, the IRS is considering deferring the right to claim credits until the related income is included in U.S. taxable income.
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