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Congress Votes to Limit Use of Foreign Tax Credits

By Alistair M. Nevius, J.D.

Please note: This item is from our archives and was published in 2010. It is provided for historical reference. The content may be out of date and links may no longer function.

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On August 10, the House of Representatives interrupted its summer recess to pass a bill to increase funding for Medicaid and education (P.L. 111-226), which President Obama signed the same evening. As a revenue raiser, the law makes changes to how corporations can use the foreign tax credit. The act also terminates the advance refundability of the earned income credit (under Sec. 3507), effective for tax years beginning after December 31, 2010.

Under new Sec. 909, corporations will no longer be able to split creditable foreign taxes from the foreign income they are associated with; taxpayers will have to take that income into account in order to take the associated foreign tax credit. This provision will be effective for foreign taxes paid or accrued in tax years beginning after December 31, 2010.

The act also prevents corporations from claiming foreign tax credits where they engage in covered asset acquisitions (as defined in the act), such as qualified stock purchases under Sec. 338(d)(3). This provision is effective for covered asset acquisitions after December 31, 2010.

The act limits the amount of foreign taxes deemed paid with respect to Sec. 956 inclusions. If a domestic corporation includes in income an amount attributable to the earnings of a foreign corporation that is a member of the domestic corporation’s qualified group (under Sec. 902(b)), the inclusion amount is limited to the amount of foreign income taxes that would have been deemed paid if cash in the amount of the inclusion had been distributed through the chain of ownership, starting with the foreign corporation and ending with the domestic corporation.

The act also imposes a special rule for redemptions under Sec. 304, where the acquiring corporation is a foreign corporation.

The act terminates the special rules for interest and dividends received from persons meeting the 80% foreign business requirements under Sec. 861(a). Dividends and interest paid by existing 80/20 corporations are grandfathered under the act.