US Treasury Issues Guidance On Foreign Tax Credit Partnership Transactions

by Mike Godfrey, Tax-News.com, Washington

22 April 2004

The US Treasury Department and the Internal Revenue Service on Tuesday issued temporary regulations requiring partnerships to allocate foreign taxes in the same manner as they allocate the income to which those taxes relate.

According to the Treasury, the regulations target certain transactions in which US partners (or US shareholders of partners that are controlled foreign corporations) attempt, through special partnership allocations, to claim foreign tax credits that are not matched by income subject to US tax.

Explaining the reasoning behind the changes, Acting Assistant Secretary for Tax Policy, Greg Jenner announced that:

"As we discussed in Notice 2004-19, we will use all of the tools available to us to address inappropriate foreign tax credit transactions."

He continued:

"Allocations by partnerships of foreign taxes without the corresponding income do not give rise to the double taxation that is the economic basis for the foreign tax credit. These types of allocations should not be allowed."

The temporary regulations generally apply to taxable years beginning on or after Tuesday.

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