Presenting a live 110 ‐ minute teleconference with interactive Q&A New Foreign Tax Credit and FTC Splitting Regulations and FTC Splitting Regulations Mastering Section 909 and 901 Rules to Maximize Efficiencies in Complex FTC Planning THURSDAY, MAY 3, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Peter Daub, Partner, Baker & McKenzie , Washington, D.C. , , , g , John D. Bates, Atty, Ivins Phillips & Barker , Washington, D.C. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .
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N New Foreign Tax Credit and FTC F i T C dit d FTC Splitting Regulations Seminar May 3, 2012 Peter Daub, Baker & McKenzie John Bates, Ivins Phillips & Barker peter.daub@ bakermckenzie.com jbates@ ipbtax.com
Today’s Program Background Issues Slide 7 – Slide 14 [Pet er Daub] Final Sect. 901 Regulations Slide 15 – Slide 30 [John Bat es] Temporary Sect. 909 Regulations: Splitter Arrangements Slide 31 – Slide 57 [Pet er Daub] Slide 58 – Slide 66 Temporary Sect. 909 Regulations: Other Rules [John Bat es]
Peter Daub, Baker & McKenzie BACKGROUND ISSUES BACKGROUND ISSUES
B Background k d Congress became concerned about certain structures taxpayers Congress became concerned about certain structures taxpayers • used to claim foreign tax credits. ― Structures involved separation or “splitting” of foreign taxes from E&P based on “technical taxpayer rule” in Sect taxes from E&P based on technical taxpayer rule in Sect. 901 regulations ― Taxpayers claimed credits or deductions for foreign taxes prior to including, in income for U.S. tax purposes, the associated foreign income to which such taxes relate. ― Taxes would offset U.S. tax on unrelated foreign income. g Concerns led the Service to enact proposed Sect. 901 • regulations in 2006. I 2010 C In 2010, Congress stepped in and enacted Sect. 909. t d i d t d S t 909 • 8
Background: g Guardian Industries • Guardian Indust ries ― Under Luxembourg domestic law, the parent company of a Luxembourg combined group was solely responsible for the u e bou g co b ed g oup was solely espo s ble o t e tax on the group’s combined income, regardless of which entity earned the income. ― Accordingly, the U.S. owner of the parent company, a Accordingly the U S owner of the parent company a disregarded entity for U.S. tax purposes, was entitled to a credit under Sect. 901 for the full amount of the tax paid on the combined income, even though the income (as th bi d i th h th i ( computed under U.S. principles) earned by the subsidiaries was not subject to current U.S. tax. 9
Background: g 2006 Proposed Regulations In response to the taxpayer victory in Guardian Indust ries the In response to the taxpayer victory in Guardian Indust ries , the • Service issued proposed Reg. § 1.901-2(f)(1), which modified the definition of “taxpayer,” for purposes of determining who may claim foreign tax credits (FTCs) in situations in which more than one person could potentially have a right to claim FTCs due to differences between U.S. and foreign law. The proposed regulations created a new principle under which, when • more than one person could be considered eligible for FTCs, any h ld b d d l bl f person taking foreign income into account would be considered eligible for the FTC, in proportion to the amount of income taken into account into account. The proposed regulations were aimed specifically at FTC planning • using: ― Foreign consolidated groups Foreign consolidated groups ― Hybrid or reverse hybrid entities 10
Background: g 2006 Proposed Regulations (Cont.) Problems raised by 2006 proposed regulations: Problems raised by 2006 proposed regulations: • ― Proposed regulations would rely on foreign law for purposes of allocating the foreign tax base, rather than look to foreign law only for evidentiary purpose of identifying the facts and incidence only for evidentiary purpose of identifying the facts and incidence of tax. ― U.S. taxpayers would have to make determinations of whether foreign ownership was consistent with U.S. rules applicable to g p pp entities (e.g., hybrids) and the substance-over-form doctrine (e.g., repurchase obligations). ― Would not curtail all possible splitting transactions 11
Background: g Sect. 909 Generally Congress enacted Sect. 909 as part of P .L. 111-226 on Aug. 10, 2010. • In a “foreign tax credit splitting event,” Sect. 909 requires U.S. taxpayers to suspend taking • into account any foreign income taxes, for purposes of computing earnings and profits (E&P) and FTCs, until the tax year in which related income is taken into account by the payor of tax. and FTCs until the tax year in which related income is taken into account by the payor of tax An FTC splitting event occurs if the related income is taken into account by a covered person. • ― “Related income” is the income (or E&P) to which the tax relates. ― A “Section 902 corporation” is any foreign corporation with respect to which one or more U.S. corporations meets the ownership requirements of sections 902(a) and (b). ― A “covered person” with respect to the payor of the tax is: » An entity in which payor directly or indirectly owns 10% vote or value A i i hi h di l i di l 10% l » A person holding a direct or indirect 10% vote or value interest in payor » Any person related to the payor under sections 267(b) or 707(b) Sect. 909 applies to foreign taxes paid or accrued in tax years beginning after Dec. 31, 2010 • (and pre-2011 foreign taxes that would be taken into account after that date). 12
Background: g Sect. 909 Comparison With Technical Taxpayer Rules Sect. 909 • ― A timing rule that suspends foreign taxes and foreign tax credits from being taken into account until the related income is taken into account T Technical taxpayer rules h i l t l • ― An allocation of foreign taxes to the person that earns the income, which prevents an allowance of foreign tax credits to other entities Comparative example Comparative example • • ― Consider a foreign reverse hybrid entity (i.e., a corporation for U.S. federal tax purposes that is disregarded as an entity separate from its owners for foreign tax purposes) ― Technical taxpayer rules would treat the reverse hybrid entity as if it paid the full amount of foreign tax allocated to the income it generated. ― Sect. 909 suspends the tax until the related income is taken into account by the entity or its owners. 13
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