Congress Votes to Limit Use of Foreign Tax Credits – H.R. 1586

The House of Representatives on Tuesday interrupted its August recess and passed H.R. 1586 by a vote of 247–161, sending the bill to President Barack Obama. The president signed the bill into law the same evening. The measure was passed by the Senate on August 5. The bill is designed to increase funding for Medicaid and education, and to pay for that funding, it makes changes to the how corporations can use the foreign tax credit.

In addition to its foreign income and credit provisions, the bill 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 bill 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 bill 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 bill also imposes a special rule for redemptions under Sec. 304, where the acquiring corporation is a foreign corporation.

The bill 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.