IRS Blocks Abusive Foreign Tax Credit Generators

by Leroy Baker, Tax-News.com, New York

02 April 2007

The US Internal Revenue Service and Treasury Department have announced the release of proposed regulations that would disallow foreign tax credits for foreign taxes purportedly paid in connection with certain artificially engineered, highly structured transactions.

Foreign tax credits are designed to relieve US taxpayers from double taxation of their foreign source income. Transactions addressed by the regulations, in contrast, are structured so that a US taxpayer voluntarily subjects itself to foreign tax where an ordinary business transaction generally would result in little or no foreign tax paid by the US taxpayer.

“The proposed regulations complement the vigorous enforcement efforts of the IRS to identify and, in appropriate cases, to challenge the tax benefits claimed in these foreign tax credit generator transactions under principles of existing law,” explained IRS Chief Counsel Donald L. Korb.

The significant impact of these transactions on the US tax base was brought to the attention of the IRS by members of the Joint International Tax Shelter Information Centre (JITSIC). JITSIC is an information exchange arrangement under which the US, the UK, Canada and Australia exchange information bilaterally on tax avoidance schemes.

The IRS said that it is aggressively pursuing cases uncovered through JITSIC or other sources involving inappropriate claims of foreign tax credits. Foreign tax credit abuse is among the IRS’s top compliance concerns for large corporate taxpayers.

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