[Federal Register: November 7, 2007 (Volume 72, Number 215)]
[Rules and Regulations]
[Page 62771-62788]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07no07-6]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[TD 9362]
RIN 1545-BG23
Foreign Tax Credit: Notification of Foreign Tax Redeterminations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document contains temporary Income Tax Regulations
relating to a United States taxpayer's obligation under section 905(c)
of the Internal Revenue Code (Code) to notify the IRS of a foreign tax
redetermination, which is a change in the taxpayer's foreign tax
liability that may affect the taxpayer's foreign tax credit. This
document also contains temporary Procedure and Administration
Regulations under section 6689 relating to the civil penalty for
failure to notify the IRS of a foreign tax redetermination as required
under section 905(c). These temporary regulations affect taxpayers that
have paid foreign taxes which have been redetermined and provide
guidance needed to comply with statutory changes made to the applicable
law by the Taxpayer Relief Act of 1997 and the American Jobs Creation
Act of 2004. The text of the temporary regulations also serves as the
text of the proposed regulations (REG-209020-86) set forth in the
notice of proposed rulemaking on this subject published elsewhere in
this issue of the Federal Register.
DATES: Effective Date: These regulations are effective on November 7,
2007.
Applicability Dates: For dates of applicability, see Sec. Sec.
1.905-3T(a), 1.905-4T(f), and 301.6689-1T(e). These regulations
generally apply to foreign tax redeterminations occurring in taxable
years of United States taxpayers beginning on or after November 7,
2007, where the foreign tax redetermination affects the amount of
foreign taxes paid or accrued by a United States taxpayer. Where the
redetermination of foreign tax paid or accrued by a foreign corporation
affects the amount of foreign taxes deemed paid under section 902 or
960, this section applies to foreign tax redeterminations occurring in
a taxable year of a foreign corporation which ends with or within the
taxable year of the domestic corporate shareholder beginning on or
after November 7, 2007. Section 1.905-3T(b) generally applies to taxes
paid or
[[Page 62772]]
accrued in taxable years of United States taxpayers beginning on or
after November 7, 2007 and to taxes paid or accrued by a foreign
corporation in its taxable year which ends with or within the taxable
year of the domestic corporate shareholder beginning on or after
November 7, 2007. For foreign tax redeterminations occurring in taxable
years of United States taxpayers beginning before November 7, 2007 and
foreign tax redeterminations occurring in taxable years of a foreign
corporation which end with or within the taxable year of the domestic
corporate shareholder beginning before November 7, 2007, see Sec.
1.905-4T(f)(2).
FOR FURTHER INFORMATION CONTACT: Teresa Burridge Hughes, (202) 622-3850
(not a toll-free call).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These temporary regulations are being issued without prior notice
and public comment pursuant to the Administrative Procedure Act (5
U.S.C. 553). For this reason, the collections of information contained
in these regulations have been reviewed and, pending receipt and
evaluation of public comments, approved by the Office of Management and
Budget under control number 1545-1056. Responses to this collection of
information are mandatory.
The collections of information in these temporary regulations are
in Sec. 1.905-4T. This information is required in order for taxpayers
to notify the IRS of a foreign tax redetermination that may require
redetermination of the taxpayer's United States tax liability.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number.
For further information concerning these collections of
information; where to submit comments on the collections of information
and the accuracy of the estimated burden; and suggestions for reducing
this burden, please refer to the preamble of the cross-referencing
notice of proposed rulemaking published in this issue of the Federal
Register.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
Under section 905(c) and the regulations, a taxpayer that claims a
foreign tax credit for taxes paid or accrued under section 901 or
deemed paid under section 902 or 960 must notify the IRS when there has
been a change to the amount of foreign taxes paid or accrued. In
general, in the case of a foreign tax redetermination with respect to
taxes claimed as a direct credit under section 901, the taxpayer's
United States tax liability must be redetermined; and, in the case of a
foreign tax redetermination with respect to taxes included in the
computation of foreign taxes deemed paid under section 902 or 960, the
foreign corporation's pools of post-1986 undistributed earnings and
post-1986 foreign income taxes must be adjusted (subject to exceptions
described in Sec. Sec. 1.905-3T(d)(3) and (f)). If the taxpayer fails
to notify the IRS of a foreign tax redetermination, unless it is shown
that such failure is due to reasonable cause and not due to willful
neglect, section 6689 imposes a penalty of 5 percent of the deficiency
attributable to such redetermination if the failure is for not more
than 1 month, with an additional 5 percent for each additional month
during which the failure continues, but not to exceed 25 percent of the
deficiency.
On June 23, 1988, the Federal Register published proposed (53 FR
23659) (INTL-061-86) and temporary (53 FR 23611) (TD 8210) amendments
to the Income Tax Regulations (26 CFR part 1) under section 905(c) and
to the Procedure and Administration Regulations (26 CFR part 301) under
section 6689 (the 1988 proposed and temporary regulations). These
amendments reflected the changes made to the Internal Revenue Code by
section 2(c)(2) of the Revenue Act of December 28, 1980 (94 Stat. 3503,
3509) and section 1261(a) of the Tax Reform Act of 1986 (100 Stat.
2085, 2591). The IRS and the Treasury Department received several
written comments, which are discussed in this preamble. A public
hearing concerning the proposed regulations was neither requested nor
held. In response to written comments, on March 16, 1990, the IRS and
the Treasury Department issued Notice 90-26, 1990-1 CB 336 (see Sec.
601.601(d)(2)(ii)(b)), which suspended a portion of the temporary
regulations, specifically Sec. 1.905-3T(d)(2)(ii)(A) and that part of
Sec. 1.905-3T(d)(2)(ii)(C) which refers to that regulation, which
provided rules for accounting for foreign tax redeterminations that
affect the calculation of foreign taxes deemed paid with respect to
distributions or inclusions out of post-1986 undistributed earnings of
a foreign corporation. Section 1.905-3T(d)(2)(ii)(A) required that, in
the case of a foreign tax redetermination that affects the amount of
foreign taxes deemed paid by a United States corporation for a taxable
year, if the foreign tax redetermination occurs more than 90 days
before the due date (with extensions) of the taxpayer's income tax
return for such taxable year and before the taxpayer actually files
that return, then that taxpayer must adjust the foreign tax credit to
be claimed on that return for such taxable year to account for the
effect of the foreign tax redetermination.
Alternatively, if a foreign tax redetermination occurs after the
filing of the United States tax return, Sec. 1.905-3T(d)(2)(ii)(B)
provides that appropriate upward or downward adjustments are made at
the time of the foreign tax redetermination to the pools of post-1986
foreign income taxes and post-1986 undistributed earnings of the
foreign corporation. Section 1.905-3T(d)(2)(ii)(C) provides that, if
the foreign tax redetermination occurs within 90 days of the due date
of the United States tax return and before the taxpayer actually files
its tax return, then the taxpayer may elect either to adjust the
foreign tax credit to be claimed on that return in the manner described
in Sec. 1.905-3T(d)(2)(ii)(A) or adjust the pools of post-1986 foreign
income taxes and post-1986 undistributed earnings to reflect the effect
of the foreign tax redetermination in the manner described in Sec.
1.905-3T(d)(2)(ii)(B).
Comments received by the IRS and the Treasury Department concerning
the requirement in Sec. 1.905-3T(d)(2)(ii)(A) to notify the IRS of a
foreign tax redetermination by adjusting the foreign tax credit on the
return for the taxable year in which the foreign tax redetermination
occurred stated that this requirement did not take into account the
amount of time that taxpayers, especially large multinational
corporations, need to prepare their income tax returns. In cases for
which a foreign tax redetermination requires a redetermination of
United States tax liability, Sec. 1.905-4T provides rules generally
requiring taxpayers to file amended returns to notify the IRS of the
redetermination.
Sections 1102(a)(1) and 1102(a)(2) of the Taxpayer Relief Act of
1997, Public Law 105-34 (111 Stat. 788, 963-966 (1997)), amended
sections 986(a) and 905(c), respectively, effective for taxes paid or
accrued in taxable years beginning after December 31, 1997. Section
905(c)(1)(B) was added to provide that, if accrued taxes are not
[[Page 62773]]
paid before the date two years after the close of the taxable year to
which such taxes relate, the taxpayer must notify the IRS and
redetermine its United States tax liability for the year or years in
which it claimed credit for such taxes. Section 986(a)(1)(A) was
amended to provide that, for purposes of determining the amount of
foreign tax credit, in the case of a taxpayer who takes foreign income
taxes into account when accrued, the amount of any foreign income taxes
(and any adjustment thereto) generally will be translated into dollars
using the average exchange rate for the taxable year to which such
taxes relate. However, under section 986(a)(1)(B), the spot exchange
rate on the date the taxes are paid is used to translate foreign income
taxes that are paid before, or more than two years after, the taxable
year to which the taxes relate. Section 986(a)(1)(C) provides that, as
determined under regulations, the average exchange rate also will not
apply to taxes denominated in inflationary currencies.
Subsequently, section 408(a) of the American Jobs Creation Act of
2004, Public Law 108-357 (118 Stat. 1418, 1499 (2004)), modified
section 986(a) and provided, effective for taxable years beginning
after December 31, 2004, that, at the election of the taxpayer, the
average exchange rate will not apply to any foreign income taxes the
liability for which is denominated in any currency other than in the
taxpayer's functional currency. If the taxpayer so elects, taxes will
be translated into dollars using the exchange rates at the time such
taxes were paid to the foreign country. See section 986(a)(1)(D)(i).
Section 986(a)(1)(D)(ii) provides that this election is also applicable
to foreign income taxes attributable to a qualified business unit in
accordance with regulations prescribed by the Secretary. On May 15,
2006, the IRS and the Treasury Department issued Notice 2006-47, 2006-
20 IRB 892 (see Sec. 601.601(d)(2)(ii)(b)), which provides interim
rules with respect to this election. The notice provides that a
taxpayer may elect to use the payment date exchange rates to translate
all foreign income taxes, or it may elect to use the payment date
exchange rates to translate only those nonfunctional currency foreign
income taxes that are attributable to qualified business units with
United States dollar functional currencies. Section 408(b)(1) of the
American Jobs Creation Act of 2004 also added a special rule at section
986(a)(1)(E) for taxes paid by regulated investment companies.
In light of the statutory changes to sections 905(c) and 986(a) by
the Taxpayer Relief Act of 1997 and the American Jobs Creation Act of
2004, the IRS and the Treasury Department believe it is appropriate to
issue new proposed and temporary regulations. These new regulations
make several significant changes to the rules of the 1988 proposed and
temporary regulations to take into account statutory changes and the
comments received on the 1988 proposed and temporary regulations, while
leaving substantial portions of the 1988 proposed and temporary
regulations unchanged. The new temporary regulations will permit the
IRS to enforce properly sections 905(c) and 6689 without delay. The
significant comments and revisions are described in this preamble.
Explanation of Provisions
I. Currency Translation Rules
This document contains temporary Income Tax Regulations relating to
the currency translation rules that apply in determining the amount of
the foreign tax credit. Section 1.905-3T(b) has been revised to reflect
the statutory changes to sections 905(c) and 986(a) by the Taxpayer
Relief Act of 1997 and the American Jobs Creation Act of 2004. New
Sec. 1.905-3T(b)(1)(i) provides that, in the case of a taxpayer or a
member of a qualified group (as defined in section 902(b)(2)) that
takes foreign income taxes into account when accrued, the amount of any
foreign taxes denominated in foreign currency that have been paid or
accrued, additional tax liability denominated in foreign currency,
taxes withheld in foreign currency, or estimated taxes paid in foreign
currency will be translated into dollars using the average exchange
rate (as defined in Sec. 1.989(b)-1) for the United States taxable
year to which such taxes relate.
However, new Sec. 1.905-3T(b)(1)(ii) provides five exceptions to
the general rule that accrual basis taxpayers translate foreign taxes
using the average exchange rate. First, Sec. 1.905-3T(b)(1)(ii)(A)
provides that any foreign taxes denominated in foreign currency that
were paid more than two years after the close of the United States
taxable year to which they relate will be translated into dollars using
the exchange rate as of the date of payment of the foreign taxes.
Second, Sec. 1.905-3T(b)(1)(ii)(B) provides that any foreign
income taxes paid before the beginning of the United States taxable
year to which such taxes relate will be translated into dollars using
the exchange rate as of the date of payment of the foreign taxes.
Third, Sec. 1.905-3T(b)(1)(ii)(C) provides that any foreign income
taxes the liability for which is denominated in any inflationary
currency will be translated into dollars using the exchange rate as of
the date of payment of the foreign taxes. For this purpose, the term
inflationary currency means the currency of a country in which there is
cumulative inflation during the base period of at least 30 percent, as
determined by reference to the consumer price index of the country
listed in the monthly issues of International Financial Statistics, or
a successor publication, of the International Monetary Fund. For
purposes of Sec. 1.905-3T(b)(1)(ii)(C), base period means, with
respect to any taxable year, the thirty-six calendar months immediately
preceding the last day of such taxable year. See Sec. 1.985-
1(b)(2)(ii)(D).
Fourth, under the provisions of Sec. 1.905-3T(b)(1)(ii)(D), a
taxpayer that is otherwise required to translate foreign income taxes
that are denominated in foreign currency using the average exchange
rate may elect to translate foreign income taxes into dollars using the
exchange rate as of the date of payment of the foreign taxes, provided
that the liability for such taxes is denominated in nonfunctional
currency. This election may be made for all foreign income taxes or for
only those foreign income taxes the liability for which is denominated
in nonfunctional currency and that are attributable to qualified
business units with United States dollar functional currencies. This
election allows taxpayers to avoid a mismatch between the translated
dollar amount of foreign tax credit and the translated dollar amount of
the foreign income used to pay the tax. The election must be made by
attaching a statement to the taxpayer's timely filed return (including
extensions) for the first taxable year to which the election applies.
The statement must identify whether the election is made for all
foreign taxes or only for foreign taxes attributable to qualified
business units with a United States dollar functional currency. Once
made, the election will apply to the taxable year for which made and
all subsequent taxable years unless revoked with the consent of the
Commissioner.
Finally, in the case of a regulated investment company (as defined
in section 851 and the regulations under that section) which takes into
account income on an accrual basis, Sec. 1.905-3T(b)(1)(ii)(E)
provides that foreign income taxes paid or accrued with
[[Page 62774]]
respect to such income will be translated into dollars using the
exchange rate as of the date the income accrues. This exception takes
account of the special rule at section 852(b)(9) that requires a
regulated investment company to take dividends into account on the ex-
dividend date, rather than on the later date on which the dividends are
paid (and the tax is actually withheld). The translation rule permits
greater conformity between the translated dollar amount of dividends
paid in foreign currency and the translated dollar amount of taxes
withheld from such dividends. For a discussion of the effective dates
of the currency translation provisions, see the ``Effective Date''
section of this document.
Section 1.905-3T(b)(4), concerning the allocation of refunds of
foreign tax to the separate categories of income under section 904(d),
is not modified by these temporary regulations. Section 1.905-3T(b)(5),
which provides rules with respect to the basis of foreign currency that
is refunded, is revised to reflect the 1997 and 2004 changes to the
currency translation rules, as provided in Sec. 1.905-3T(b)(3).
II. Definition of Foreign Tax Redetermination
The term ``foreign tax redetermination'' in Sec. 1.905-3T(c) has
been revised to reflect the statutory changes made to section 905(c) in
the Taxpayer Relief Act of 1997 and the American Jobs Creation Act of
2004. New Sec. 1.905-3T(c) provides that, for purposes of Sec. Sec.
1.905-3T and 1.905-4T, a foreign tax redetermination means a change in
the foreign tax liability that may affect a taxpayer's foreign tax
credit. A foreign tax redetermination includes: (1) Accrued taxes that
when paid differ from the amounts added to post-1986 foreign income
taxes or claimed as credits by the taxpayer (such as corrections to
overaccruals and additional payments); (2) accrued taxes that are not
paid before the date two years after the close of the taxable year to
which such taxes relate; (3) any tax paid that is refunded in whole or
in part; and (4) for taxes taken into account when accrued but
translated into dollars on the date of payment, a difference between
the dollar value of the accrued tax and the dollar value of the tax
paid attributable to fluctuations in the value of the foreign currency
relative to the dollar between the date of accrual and the date of
payment.
Section 1.905-3T(d)(1) has been revised to reflect the modified
definition in new Sec. 1.905-3T(c) of a foreign tax redetermination
that results from currency fluctuations, but new Sec. 1.905-3T(d)(1)
otherwise adopts without amendment the rule in Sec. 1.905-3T(d)(1) of
the 1988 regulations that provides that no redetermination of United
States tax liability is required with respect to such foreign tax
redetermination if the amount of such redetermination is less than the
lesser of ten thousand dollars or two percent of the total dollar
amount of the foreign tax initially accrued with respect to that
foreign country for the United States taxable year. Comments requested
that this exception be broadened by eliminating the $10,000 limitation
and by increasing the percentage ceiling from 2 percent to 5 percent,
in order to increase the number of taxpayers eligible for the
exception, therefore minimizing the administrative burden of filing
amended returns for both taxpayers and the IRS. Since the 1988
temporary regulations were published, the administrative burdens of
accounting for exchange rate fluctuations have been substantially
reduced by the change in law allowing taxpayers claiming credits on the
accrual basis to use annual average exchange rates rather than date of
payment exchange rates to translate foreign tax. In addition, the IRS
and Treasury Department believe that it is appropriate to limit the
exception to a dollar threshold. Accordingly, this comment was not
adopted.
III. Adjustments to Pools of Post-1986 Undistributed Earnings and Post-
1986 Foreign Income Taxes
On March 16, 1990, Notice 90-26, 1990-1 CB 336 (see Sec.
601.601(d)(2)(ii)(b)), suspended Sec. 1.905-3T(d)(2)(ii)(A) and that
part of Sec. 1.905-3T(d)(2)(ii)(C) which refers to Sec. 1.905-
3T(d)(2)(ii)(A). Prior to its suspension, Sec. 1.905-3T(d)(2)(ii)(A)
required taxpayers to recompute the foreign tax credit claimed on their
current year income tax return to account for foreign tax
redeterminations that affect the amount of foreign tax deemed paid
under section 902 or 960 and that occurred more than 90 days before the
due date (with extensions) of the United States tax return for that
taxable year and before the actual filing date. Section 1.905-
3T(d)(2)(ii)(C) permitted taxpayers to elect to apply Sec. 1.905-
3T(d)(2)(ii)(A) to a foreign tax redetermination occurring within 90
days of the due date (with extensions) of the tax return for that
taxable year and before the actual filing date.
Section 1.905-3T(d)(2)(ii)(B) of the 1988 regulations requires
that, if a foreign tax redetermination occurs after the filing of the
United States tax return for such taxable year, then appropriate upward
or downward adjustments will be made at the time of the foreign tax
redetermination to the foreign corporation's pools of post-1986 foreign
taxes and post-1986 earnings and profits to reflect the effect of the
foreign tax redetermination in calculating foreign taxes deemed paid
with respect to distributions and inclusions (and the amount of such
distributions and inclusions) that are includible in taxable years
subsequent to the taxable year for which such tax return is filed. The
part of Sec. 1.905-3T(d)(2)(ii)(C) not suspended by Notice 90-26
allows a taxpayer to elect to adjust the pools of post-1986 foreign
taxes and post-1986 earnings and profits to reflect the effect of the
foreign tax redetermination in the manner described in Sec. 1.905-
3T(d)(2)(ii)(B). Notice 90-26 also provided that, pending the issuance
of final regulations under section 905(c), redeterminations otherwise
subject to Sec. 1.905-3T(d)(2)(ii)(A) or (C) were required to be
accounted for through adjustment to the appropriate pools of post-1986
earnings and profits and post-1986 foreign taxes in the manner
described in Sec. 1.905-3T(d)(3) and subject to the exceptions set
forth in Sec. 1.905-3T(d)(4).
A comment concerning Sec. 1.905-3T(d)(2) of the 1988 regulations
was received, suggesting that taxpayers be allowed to elect to adjust
earnings and profits and tax pools or file an immediate claim for
refund, in the case of an additional assessment of foreign tax which
generates a potential refund of U.S. tax. Because the taxpayer must
wait for a subsequent distribution to benefit from the additional
credits, the comment stated that the taxpayer is inappropriately denied
an immediate benefit, that is, making a claim for an immediate refund,
provided by section 6511(d)(3)(A). Subsequently, the Taxpayer Relief
Act of 1997 confirmed the Secretary's regulatory authority to prescribe
appropriate adjustments to a foreign corporation's pools of post-1986
foreign income taxes and post-1986 undistributed earnings in lieu of a
redetermination, and amended section 905(c)(2) explicitly to provide
that no redetermination of U.S. tax shall be made by reason of
additional taxes paid more than two years after the year to which they
relate. In light of the statutory changes, this comment was not
adopted.
Section 1.905-3T(d)(2) of the 1988 regulations has been revised to
reflect the provisions of Notice 90-26. New Sec. 1.905-3T(d)(2)(i)
provides that appropriate upward or downward adjustments will be made
at the time of the foreign tax redetermination to the
[[Page 62775]]
foreign corporation's pools of post-1986 undistributed earnings and
post-1986 foreign income taxes, in accordance with Sec. 1.905-
3T(d)(2)(ii), to reflect the effect of the foreign tax redetermination
in calculating foreign taxes deemed paid with respect to subsequent
distributions and inclusions (and the amount of such distributions and
inclusions).
Section 1.905-3T(d)(2)(iii) of the 1988 regulations, which provides
rules with respect to the reporting requirements for adjustments to the
appropriate pools of post-1986 undistributed earnings and post-1986
foreign income taxes has been revised. The 1988 regulations require
that the domestic corporate shareholder attach notice of such
adjustments to its return on a yearly basis. In the interest of
reducing the reporting requirement burden, this notification
requirement has been eliminated. New Sec. 1.905-3T(d)(2)(i) refers to
Sec. 1.905-4T(b)(2), which provides that, where a redetermination of
foreign tax paid or accrued by a foreign corporation affects the
computation of foreign taxes deemed paid under section 902 or 960, and
the taxpayer is required to adjust the foreign corporation's pools of
post-1986 undistributed earnings and post-1986 foreign income taxes
under Sec. 1.905-3T(d)(2), the taxpayer is required to notify the IRS
of such redetermination by reflecting the adjustments to the foreign
corporation's pools of post-1986 undistributed earnings and post-1986
foreign income taxes on a Form 1118 for the taxpayer's first taxable
year with respect to which the redetermination affects the computation
of foreign taxes deemed paid.
The 1988 regulations provide four exceptions to the general rule in
Sec. 1.905-3T(d)(2) requiring pooling adjustments in lieu of a
redetermination of United States tax liability to account for the
effect of a redetermination of foreign tax paid or accrued by a foreign
corporation on foreign taxes deemed paid under section 902 or 960. A
shareholder-level redetermination of United States tax liability is
required where the foreign tax liability is denominated in a
hyperinflationary currency (see Sec. 1.905-3T(d)(4)(i)); where the
foreign tax redetermination occurs with respect to foreign taxes deemed
paid with respect to a subpart F inclusion or an actual distribution
which has the effect of reducing the foreign corporation's pool of
post-1986 foreign income taxes below zero (see Sec. 1.905-
3T(d)(4)(iv)); or where a domestic corporate shareholder of a
controlled foreign corporation receives a distribution out of
previously taxed earnings and profits and a foreign country imposes tax
on the foreign corporation's income, which tax is subsequently reduced
(see Sec. 1.905-3T(f)). These exceptions are adopted without amendment
and have been moved to Sec. 1.905-3T(d)(3)(i), (iv), and (vi),
respectively, in the new temporary regulations.
The fourth exception, at Sec. 1.905-3T(d)(4)(ii) in the 1988
regulations, provides that if the foreign tax liability of a United
States taxpayer is in a currency other than a hyperinflationary
currency and the amount of foreign tax accrued for the taxable year to
a foreign country, as measured in units of foreign currency, exceeds
the amount of foreign tax paid to that foreign country for the taxable
year by at least two percent, then the IRS, in its discretion, may
require a redetermination of United States tax liability, in lieu of an
adjustment of the pools of post-1986 undistributed earnings and post-
1986 foreign income taxes. Section 1.905-3T(d)(2)(iii) of the 1988
regulations provides that, if a taxpayer may be required to redetermine
its United States tax liability under Sec. 1.905-3T(d)(4)(ii), the
taxpayer must attach a notice of such adjustment to its return for the
year with or within which ends the foreign corporation's taxable year
during which the foreign tax redetermination occurs. Comments were
received with respect to these provisions, requesting that the
regulations set forth the factors the IRS would take into account in
determining whether to exercise such discretion; the percentage
limitation be increased to ten percent; the IRS not enforce this
provision if the deficiency resulting from the overaccrual of foreign
tax is less than $25,000; and the provision only be used in specific
situations, such as consistent overaccrual of foreign taxes. Further,
in order to avoid taxpayers being subject to the penalty under section
6689 for failure to notify the IRS within 180 days of the foreign tax
redetermination, as required by Sec. 1.905-4T(b)(2) of the 1988
regulations, a comment requested that, when the IRS exercises its
discretion under Sec. 1.905-3T(d)(4)(ii), the date on which such
redetermination occurs should be deemed to be the date on which the IRS
notifies the taxpayer that a redetermination of U.S. tax liability is
required.
In lieu of the discretionary rule in the 1988 temporary
regulations, Sec. 1.905-3T(d)(3)(ii) of the new regulations requires a
redetermination of United States tax liability for all affected years
if a foreign tax redetermination occurs with respect to foreign taxes
paid by a foreign corporation and such foreign tax redetermination, if
taken into account in the taxable year of the foreign corporation to
which the foreign tax redetermination relates, has the effect of
reducing by ten percent or more the foreign taxes deemed paid by the
domestic corporate shareholder under section 902 or 960 in the taxable
year of the shareholder with or within which ends the taxable year of
the foreign corporation to which the foreign tax redetermination
relates or in any intervening taxable year. Thus, a redetermination of
the United States taxpayer's deemed paid credit under section 902 or
960 is required by reason of a foreign tax redetermination at the
foreign subsidiary level only if the overstatement of the foreign tax
credit is substantial in amount, taking into account the effect of the
redetermination on the entire tax pool of the foreign subsidiary and
not just the tax attributable to the year to which the redetermination
relates. This new rule is more consistent with the other three
exceptions to pooling adjustments in Sec. 1.905-3T(d)(4)(i) and (iv)
and Sec. 1.905-3T(f) of the 1988 temporary regulations, which are at
new Sec. 1.905-3T(d)(3)(i), (iv), and (vi). Further, Sec. 1.905-
3T(d)(3)(ii) of the new regulations provides consistent treatment among
taxpayers, adds certainty as to when adjustments to prior-year section
902 or 960 credits are required, and reduces the administrative burden
associated with yearly notification of such foreign tax
redeterminations.
A comment requested that the regulations be revised to address the
situation where a controlled foreign corporation is sold. In a typical
case, the seller of the controlled foreign corporation contracts to
indemnify the buyer for any tax deficiencies arising with respect to
taxable periods occurring prior to the date of the sale and will be
entitled to any refunds relating to such periods. The additional
assessments or refunds of tax are reflected as adjustments to the pools
of the foreign corporation in the hands of the buyer but accrue
economically to the seller. However, the seller derives no U.S. tax
benefit or detriment from those additional payments or refunds because
it no longer has an economic interest in the foreign corporation. It
was suggested that the regulations should provide an additional
exception to the pooling rules allowing recomputation of the seller's
U.S. tax liability as if the foreign tax redetermination occurred
immediately prior to the sale. The IRS and Treasury Department are
continuing to study this issue and request comments on the
[[Page 62776]]
potential scope of an additional exception to the pooling adjustment
rules in the context of various types of acquisitions.
Comments are also solicited on other changes that should be made to
the 1988 temporary regulations, including changes relating to the
statutory changes made by the Taxpayer Relief Act of 1997 and the
American Jobs Creation Act of 2004.
IV. Time and Manner of Notification
A. Overview of New Rules
New Sec. 1.905-4T(a) provides that if, as a result of a foreign
tax redetermination (as defined in Sec. 1.905-3T(c)), a
redetermination of United States tax liability is required under
section 905(c) and Sec. 1.905-3T(d), the taxpayer must provide
notification of the foreign tax redetermination. Section 1.905-4T(b)(1)
of the new temporary regulations provides rules with respect to the
time and manner of notifying the IRS of a foreign tax redetermination
that necessitates a redetermination of United States tax liability. New
Sec. 1.905-4T(b)(1)(i) sets forth the general rule that, where a
redetermination of United States tax liability is required, the
taxpayer must notify the IRS by filing an amended return, Form 1118
(Foreign Tax Credit--Corporations) or 1116 (Foreign Tax Credit), and
the statement required under Sec. 1.905-4T(c) for the taxable year
with respect to which a redetermination of United States tax liability
is required. However, where a foreign tax redetermination requires an
individual to redetermine the individual's United States tax liability,
and as a result of such foreign tax redetermination the amount of
creditable taxes paid or accrued by such individual during the taxable
year does not exceed the applicable dollar limitation in section 904(k)
(currently $300, or $600 in the case of a joint return), the individual
will not be required to file Form 1116 with the amended return for such
taxable year if the individual satisfies the requirements of section
904(k).
B. Revision of 1988 Temporary Regulations in Response to Comments
The 1988 temporary regulations at Sec. 1.905-4T(b)(2) require
taxpayers to notify the IRS of a foreign tax redetermination that
reduced the amount of foreign taxes paid or deemed paid by filing an
amended return for the affected year or years within 180 days after the
date that the foreign tax redetermination occurred. The IRS and the
Treasury Department received several comments suggesting that this rule
was unduly burdensome to taxpayers. The comments noted that multiple
foreign tax redeterminations requiring a redetermination of United
States tax liability for the same taxable year would require the filing
of multiple returns for such year, and that filing an amended Federal
tax return would trigger additional state tax notification and amended
return filing requirements.
In light of these comments, the new temporary regulations at Sec.
1.905-4T(b)(1)(ii) provide that, if a foreign tax redetermination
reduced the amount of foreign taxes paid or accrued, or included in the
computation of foreign taxes deemed paid, a taxpayer must file a
separate notification for each taxable year with respect to which a
redetermination of United States tax liability is required by the due
date (with extensions) of the original return for the taxable year in
which the foreign tax redetermination occurred. With respect to a
foreign tax redetermination that increased the amount of foreign taxes
paid or accrued, or included in the computation of foreign taxes deemed
paid, new Sec. 1.905-4T(b)(1)(iii) adopts the rule provided in the
1988 temporary regulations at Sec. 1.905-4T(b)(2) and provides that
the taxpayer must file a separate notification for each taxable year
with respect to which a redetermination of United States tax liability
is required within the period provided by section 6511(d)(3)(A).
C. Special Rules for Certain Redeterminations
The new temporary regulations at Sec. 1.905-4T(b)(1)(iv) provide
that, where more than one foreign tax redetermination requires a
redetermination of United States tax liability for the same taxable
year and those redeterminations occur within two consecutive taxable
years of the taxpayer, the taxpayer may file for such taxable year one
amended return, Form 1118 or 1116, and the statement required under
Sec. 1.905-4T(c) that reflect all such foreign tax redeterminations.
If the taxpayer chooses to file one notification for such foreign tax
redeterminations, the due date for such notification is the due date of
the original return (with extensions) for the year in which the first
foreign tax redetermination that reduced foreign tax liability
occurred. However, because foreign tax redeterminations with respect to
the taxable year for which a redetermination of United States tax
liability is required may occur after the due date for providing such
notification in the later of the two consecutive years, more than one
amended return may be required with respect to that taxable year.
Section 1.905-4T(b)(1)(v) of the new temporary regulations provides
that, where a foreign tax redetermination requires a redetermination of
United States tax liability that would otherwise result in an
additional amount of United States tax due, but such amount is
eliminated as a result of a carryback or carryover of an unused foreign
tax under section 904(c), the taxpayer may, in lieu of applying the
general notification rule described in Sec. 1.905-4T(b)(1)(i) or (ii),
notify the IRS by attaching a statement to the original return for the
taxable year in which the foreign tax redetermination occurs. The
statement must be filed by the due date (with extensions) of such
return and contain the information described in Sec. 1.904-2(f),
including the amounts carried back or over to the year with respect to
which a redetermination of United States tax liability is required.
The 1988 temporary regulations at Sec. 1.905-3T(d)(2)(iii) provide
rules concerning the time, manner, and contents of the notification
statement for an adjustment of a foreign corporation's pools of post-
1986 undistributed earnings and post-1986 foreign income taxes due to a
foreign tax redetermination. The new temporary regulations, at Sec.
1.905-4T(b)(2), modify the reporting requirement with respect to such
pooling adjustments by providing that where a redetermination of
foreign tax paid or accrued by a foreign corporation affects the
computation of foreign taxes deemed paid under section 902 or 960, and
the taxpayer is required to adjust the foreign corporation's pools of
post-1986 undistributed earnings and post-1986 foreign income taxes
under Sec. 1.905-3T(d)(2), the taxpayer must notify the IRS of the
redetermination by reflecting the adjustments to the foreign
corporation's pools of post-1986 undistributed earnings and post-1986
foreign income taxes on a Form 1118 for the taxpayer's first taxable
year with respect to which the redetermination affects the computation
of foreign taxes deemed paid. New Sec. 1.905-4T(b)(2) requires the
taxpayer to file the Form 1118 by the due date (with extensions) of the
original return for such taxable year. In the case of multiple
redeterminations that affect the computation of foreign taxes deemed
paid for the same taxable year and that are required to be reported
under new Sec. 1.905-4T(b)(2), a taxpayer may file one notification
for all such redeterminations in lieu of filing a separate notification
for each such redetermination.
[[Page 62777]]
D. Large and Mid-Size Business Taxpayers
Section 1.905-4T(b)(2) of the 1988 temporary regulations requires a
taxpayer to notify the IRS of a foreign tax redetermination that
reduced the amount of foreign taxes paid or accrued, or included in the
computation of foreign taxes deemed paid, by filing an amended return
for the affected year within 180 days after the date that the foreign
tax redetermination occurred. The IRS and the Treasury Department
received several comments with respect to such rule suggesting that, in
lieu of filing an amended return, taxpayers that are under continuous
examination in a program such as the Coordinated Examination Program
should be permitted to provide notice of foreign tax redeterminations
to the examiner during an examination.
Taking into account these comments, the new temporary regulations
at Sec. 1.905-4T(b)(3) provide that, where a redetermination of United
States tax liability is required by reason of a foreign tax
redetermination that occurs while a taxpayer is under the jurisdiction
of the Large and Mid-Size Business Division and that results in a
reduction in the amount of foreign taxes paid or accrued, or included
in the computation of foreign taxes deemed paid, the taxpayer must
provide notice of such redetermination as part of the examination
process in lieu of filing an amended return for the affected year as
otherwise required by Sec. 1.905-4T(b)(1)(i) and (ii). If the taxpayer
is required under Sec. 1.905-4T(b)(3) to provide notice as part of the
examination process, the taxpayer must satisfy the requirements of
Sec. 1.905-4T(b)(3) (in lieu of the generally applicable rules of
Sec. 1.905-4T(b)(1)(i) or (ii)) in order not to be subject to the
penalty under section 6689 and the regulations under that section.
Section 1.905-4T(b)(3) of the new regulations requires a taxpayer
to notify the IRS of the foreign tax redetermination by providing to
the examiner a statement described in Sec. 1.905-4T(c) during an
examination of the return for the taxable year for which a
redetermination of United States tax liability is required by reason of
the foreign tax redetermination. The taxpayer must provide the
statement to the examiner no later than 120 days after the latest of
the date the foreign tax redetermination occurs, the opening
conference, or the hand-delivery or postmark date of the opening letter
concerning the examination. If, however, the foreign tax
redetermination occurs more than 180 days after the latest of the
opening conference or the hand-delivery or postmark date of the opening
letter, the taxpayer may, in lieu of applying the rules of Sec. 1.905-
4T(b)(1)(i) and (ii), provide to the examiner a statement which
complies with the requirements of Sec. 1.905-4T(b)(3), and the IRS, in
its discretion, may accept such statement or require the taxpayer to
comply with the rules of Sec. 1.905-4T(b)(1)(i) and (ii).
This exception in Sec. 1.905-4T(b)(3) to the generally applicable
notification requirements of Sec. 1.905-4T(b)(1) is not permitted to
extend the length of the notification period set forth in Sec. 1.905-
4T(b)(1). In addition, no notification under Sec. 1.905-4T(b)(3) will
be due before May 5, 2008.
V. Notification Contents
Section 1.905-4T(c)(1) of the new temporary regulations requires
the taxpayer to furnish a statement that contains information
sufficient for the IRS to redetermine the taxpayer's United States tax
liability where such a redetermination is required under section
905(c). The taxpayer must provide such information in a form that
enables the IRS to verify and compare the original computations of the
claimed foreign tax credit, the revised computations resulting from the
foreign tax redetermination, and the net changes resulting therefrom.
The statement must include the taxpayer's name, address, identifying
number, and the taxable year or years of the taxpayer that are affected
by the foreign tax redetermination. If the written statement is
submitted to the IRS under Sec. 1.905-4T(b)(3), which provides rules
with respect to taxpayers under the jurisdiction of the Large and Mid-
Size Business Division, the statement must also include a declaration
under penalties of perjury.
Where a redetermination of United States tax liability is required
by reason of a foreign tax redetermination, new Sec. 1.905-4T(c)(2)
requires that the taxpayer provide, in addition to the information
described in new Sec. 1.905-4T(c)(1), specific information concerning
the foreign tax redetermination. To take into account the amendment of
section 986(a) (concerning translation rates for foreign taxes) by the
Taxpayer Relief Act of 1997 and the American Jobs Creation Act of 2004,
the new temporary regulations require the taxpayer to provide the
exchange rates used to translate the amount of foreign taxes paid,
accrued, or refunded in accordance with Sec. 1.905-3T(b) (as the case
may be). These new temporary regulations also include the requirement
of the 1988 temporary regulations that taxpayers provide information
relating to the interest paid by foreign governments or owing to the
United States due to a foreign tax redetermination.
If, as a result of a redetermination of foreign tax paid or accrued
by a foreign corporation, adjustments to the pools of post-1986
undistributed earnings and post-1986 foreign income taxes are required
under Sec. 1.905-3T(d)(2) of the 1988 temporary regulations in lieu of
a redetermination of a domestic corporate shareholder's United States
tax liability, Sec. 1.905-3T(d)(2)(iii) of the 1988 temporary
regulations requires that the taxpayer provide certain information
concerning the foreign tax redetermination and the pooling adjustments.
In order to reduce the notification requirement burden, the new
temporary regulations modify this reporting requirement, as discussed
above in section IV.C., ``Special Rules for Certain Redeterminations.''
If, as a result of a redetermination of foreign tax paid or accrued by
a foreign corporation, a redetermination of United States tax liability
is required under new Sec. 1.905-3T(d)(3) in lieu of a pooling
adjustment, the new temporary regulations at Sec. 1.905-4T(c)(3)
specify the information that the taxpayer must provide.
VI. Payment or Refund of United States Tax, and Application of Interest
and Penalties
Section 1.905-4T(d) of the new temporary regulations adopts without
amendment that portion of the 1988 temporary regulations at Sec.
1.905-4T(b)(1) which provides that the amount of tax, if any, due upon
a redetermination of United States tax liability will be paid by the
taxpayer after notice and demand has been made by the IRS. The
regulation also clarifies that deficiency procedures under Subchapter B
of chapter 63 of the Internal Revenue Code will not apply with respect
to the assessment of the amount due upon such redetermination, meaning
that the IRS is not required to send a statutory notice of deficiency
to a taxpayer, and the taxpayer does not have an opportunity to
petition the Tax Court, prior to the IRS' assessment and collection of
the amount of additional tax due. In accordance with sections 905(c)
and 6501(c)(5), the statute of limitations under section 6501(a) will
not apply to the assessment and collection of the amount of additional
tax due. The amount of tax, if any, shown by a redetermination of
United States tax liability to have been overpaid will be credited or
refunded to the
[[Page 62778]]
taxpayer in accordance with section 6511(d)(3)(A) and the provisions of
Sec. 301.6511(d)-3. Accordingly, the taxpayer must file a claim for
credit or refund within ten years from the last date (without
extensions) prescribed for filing the return for the taxable year in
which the foreign taxes were actually paid or accrued.
Similarly, Sec. 1.905-4T(e) of the new temporary regulations
adopts without amendment the interest and penalties provisions of the
1988 temporary regulations at Sec. 1.905-4T(c). First, new Sec.
1.905-4T(e)(1) provides that interest on the underpayment or
overpayment resulting from a redetermination of United States tax
liability will be computed in accordance with sections 6601 and 6611
and the regulations under those sections. No interest will be assessed
or collected on any underpayment resulting from a refund of foreign tax
for any period before the receipt of the refund, except to the extent
interest was paid by the foreign country or possession of the United
States on the refund for the period. In no case, however, will interest
assessed and collected pursuant to the preceding sentence for any
period before receipt of the refund exceed the amount that otherwise
would have been assessed and collected under section 6601 and the
regulations under that section for that period. Interest will be
assessed from the time the taxpayer (or the foreign corporation of
which the taxpayer is a shareholder) receives a foreign tax refund
until the taxpayer pays the additional tax due the United States.
Second, new Sec. 1.905-4T(e)(2) provides that, if an adjustment to
the foreign corporation's pools of post-1986 undistributed earnings and
post-1986 foreign income taxes under Sec. 1.905-3T(d)(2) is required
in lieu of a redetermination of United States tax liability, no
underpayment or overpayment of United States tax liability will result
from a foreign tax redetermination. Consequently, no interest will be
paid by or to a taxpayer as a result of adjustments to a foreign
corporation's pools of post-1986 undistributed earnings and post-1986
foreign income taxes where required under Sec. 1.905-3T(d)(2).
Third, Sec. 1.905-4T(e)(3) of the new temporary regulations
provides that failure to comply with the provisions of Sec. 1.905-4T
of the new temporary regulations will subject the taxpayer to the
penalty provisions of section 6689 and the regulations under that
section.
VII. Foreign Tax Redeterminations With Respect to Pre-1987 Accumulated
Profits
Section 1.905-5T of the 1988 regulations provides rules relating to
foreign tax redeterminations occurring in pre-1987 taxable years, and
those occurring in post-1986 taxable years with respect to pre-1987
accumulated profits. The new temporary regulations amend the cross-
references to Sec. Sec. 1.905-3T and 1.905-4T and clarify that these
rules apply to foreign tax redeterminations with respect to pre-1987
accumulated profits that are accumulated in taxable years of a foreign
corporation beginning after December 31, 1986, but before the first
taxable year in which the ownership requirements of section 902 are
met. See Sec. 1.902-1(a)(10)(i).
VIII. Penalty Under Section 6689
Under section 6689, a taxpayer that fails to notify the IRS of a
foreign tax redetermination in the time and manner prescribed by
regulations for giving such notice is subject to a penalty unless it is
shown that such failure is due to reasonable cause and not due to
willful neglect. Section 6689(a) provides that the penalty is
calculated by adding to the deficiency attributable to the foreign tax
redetermination an amount equal to 5 percent of the deficiency if the
failure is for not more than 1 month, plus an additional 5 percent of
the deficiency for each month (or fraction thereof) during which the
failure continues. The total amount of the penalty is not to exceed 25
percent of the deficiency.
Section 301.6689-1T(a) has been revised to clarify that deficiency
proceedings under Subchapter B of chapter 63 of the Code will not apply
with respect to the amount of such penalty, meaning that the IRS is not
required to send a statutory notice of deficiency to a taxpayer, and
the taxpayer does not have an opportunity to petition the Tax Court,
prior to the IRS' assessment and collection of the amount of such
penalty.
Comments were received suggesting that, in computing the amount of
the penalty, an overpayment resulting from one foreign tax
redetermination should offset an underpayment resulting from another
foreign tax redetermination where both foreign tax redeterminations
arise from the same foreign taxing jurisdiction and require a
redetermination of United States tax liability for the same taxable
year. Thus, the commentators suggested, where the underpayment is
completely offset by one or more overpayments, the section 6689 penalty
should not apply. Because the penalty is determined with respect to a
deficiency attributable to such redetermination, there must be some
deficiency for the penalty to apply. Where underpayments and
overpayments offset each other to reduce or eliminate a deficiency, any
penalty under section 6689 would also be reduced or eliminated. The IRS
and Treasury Department do not believe an amendment to the regulations
is necessary to clarify this rule.
Another comment was received suggesting that the section 6689
penalty generally should be inapplicable to Coordinated Exam Program
taxpayers, provided that a notice of foreign tax redeterminations is
submitted by the taxpayer at the commencement of the audit. Such a
suggestion is generally adopted at Sec. 1.905-4T(b)(3). A further
comment requested that the definition of reasonable care under the
regulations be revised. The 1988 regulations provide that, if a
taxpayer exercised ordinary business care and prudence and was
nevertheless unable to file the notification within the prescribed
time, then the delay will be considered to be due to reasonable cause
and not willful neglect. The comment recommended instead adopting a
more objective test based on substantial compliance. This comment is
rejected because ordinary business care and prudence is the general
standard for reasonable care that is used in the regulations for other
penalties.
Effective/Applicability Date
The new temporary regulations of Sec. Sec. 1.905-3T(c) and (d) and
1.905-4T are generally applicable for foreign tax redeterminations
occurring in taxable years of United States taxpayers beginning on or
after November 7, 2007 where the redetermination affects the amount of
foreign taxes paid or accrued by a United States taxpayer. Where the
redetermination of foreign tax paid or accrued by a foreign corporation
affects the computation of foreign taxes deemed paid under section 902
or 960 with respect to post-1986 undistributed earnings (or pre-1987
accumulated profits) of the foreign corporation, the new temporary
regulations of Sec. Sec. 1.905-3T(c) and (d), 1.905-4T, and 1.905-5T
are generally effective for foreign tax redeterminations occurring in
taxable years of a foreign corporation which end with or within a
taxable year of the domestic corporate shareholder beginning on or
after November 7, 2007. See Sec. 1.905-4T(f)(1). In no case, however,
will Sec. 1.905-4T(f) operate to extend the statute of limitations
provided by section 6511(d)(3)(A).
[[Page 62779]]
Section 1.905-3T(b), which provides rules with respect to currency
translation, generally is applicable for taxes paid or accrued in
taxable years of United States taxpayers beginning on or after November
7, 2007 and to taxes paid or accrued by a foreign corporation in its
taxable years which end with or within a taxable year of the domestic
corporate shareholder beginning on or after November 7, 2007. For
taxable years beginning after December 31, 1997, and before November 7,
2007, section 986(a), as amended by the Taxpayer Relief Act of 1997 and
the American Jobs Creation Act of 2004, shall apply. For taxable years
beginning after December 31, 1986, and prior to the effective date of
the Taxpayer Relief Act of 1997 (January 1, 1998), Sec. 1.905-3T of
the 1988 temporary regulations shall apply.
Section 1.905-3T(b)(1)(ii)(D), which provides taxpayers otherwise
required to translate foreign income taxes using the average exchange
rate an election to translate taxes using the exchange rate for the
date of payment, is applicable for taxable years beginning on or after
November 7, 2007. For taxable years beginning after December 31, 2004,
and before November 7, 2007, the rules of Notice 2006-47, 2006-20 IRB
892 (see Sec. 601.601(d)(2)(ii)(b)), shall apply.
Although all foreign tax redeterminations occurring in taxable
years beginning after December 31, 1986, are subject to the
requirements of section 905(c) and the regulations under that section,
the 1988 temporary regulations did not specify the date by which the
required notifications must be made in order to avoid a penalty under
section 6689. The IRS and the Treasury Department recognize the burden
associated with requiring notification by a specific date of all
previously-unreported foreign tax redeterminations that require a
United States tax redetermination with respect to post-1986 taxable
years. Consequently, the new temporary regulations at Sec. 1.905-
4T(f)(2) provide a specific due date only for notifications of foreign
tax redeterminations that occurred in a taxpayer's three taxable years
preceding the first taxable year identified in Sec. 1.905-4T(f)(1),
and taxable years of foreign corporations ending with or within such
taxable years of their domestic corporate shareholders. However, the
unlimited statute of limitations under section 905(c) and deficiency
interest provisions continue to apply to any underpayment of United
States tax attributable to a foreign tax redetermination.
Section 1.905-4T(f)(2)(ii) provides notification requirements for
any foreign tax redetermination which occurred in the last taxable year
of a United States taxpayer beginning before November 7, 2007 and the
two immediately preceding taxable years and which reduced the amount of
foreign taxes paid or accrued by the taxpayer for any taxable year.
This section also requires notification of any redetermination of
foreign taxes paid or accrued by a foreign corporation which occurred
in a taxable year of the foreign corporation which ends with or within
a taxable year of a domestic corporate shareholder described in the
preceding sentence and which requires a redetermination of United
States tax liability under Sec. 1.905-3T(d)(3) for any taxable year.
If, as of November 7, 2007, the taxpayer has not satisfied the notice
requirements described in Sec. Sec. 1.905-3T and 1.905-4T of the 1988
temporary regulations with respect to such foreign tax
redeterminations, the new temporary regulations at Sec. 1.905-
4T(f)(2)(ii) generally require the taxpayer to notify the IRS of such
foreign tax redetermination no later than the due date (with
extensions) of its original return for the taxable year following the
taxable year in which these regulations are first effective.
New Sec. 1.905-4T(f)(2)(ii) sets forth the time and manner of the
notification, which must contain the previously-unreported information
described in new Sec. 1.905-4T(c). The temporary regulations do not
require notification of previously-unreported foreign tax
redeterminations of a foreign corporation that occurred in taxable
years of the foreign corporation that ended with or within a domestic
corporate shareholder's taxable year beginning before November 7, 2007,
if the foreign tax redetermination does not require a redetermination
of United States tax liability but is accounted for by adjusting the
foreign corporation's pools of post-1986 undistributed earnings and
post-1986 foreign income taxes.
New Sec. 1.905-4T(f)(2)(iii) provides that a taxpayer under the
jurisdiction of the Large and Mid-Size Business Division that is
otherwise required to file an amended return, Form 1118, and the
statement required under Sec. 1.905-4T(c) as required in new Sec.
1.905-4T(f)(2)(ii) may, in lieu of applying Sec. 1.905-4T(f)(2)(ii),
notify the IRS in the course of an examination of the return for the
taxable year for which a redetermination of United States tax liability
is required. In such case, the notification must contain the
information described in new Sec. 1.905-4T(c) and must be provided
within 120 days after the latest of the opening conference or the hand-
delivery or postmark date of the opening letter concerning an
examination of the return for the taxable year for which a
redetermination of United States tax liability is required or May 5,
2008, whichever is later. However, if November 7, 2007 is more than 180
days after the latest of the opening conference or the hand-delivery or
postmark date of the opening letter, the IRS, in its discretion, may
accept such statement or require the taxpayer to comply with the rules
of paragraph (f)(2)(ii) of this section. In addition, this exception to
the notification requirements of Sec. 1.905-4T(f)(2)(ii) is not
permitted to extend the length of the notification period set forth in
Sec. 1.905-4T(f)(2)(ii). Therefore, Sec. 1.905-4T(f)(2)(iii) will not
apply if the last day for providing notice of the foreign tax
redetermination under Sec. 1.905-4T(f)(2)(ii) precedes the latest of
the opening conference or the hand-delivery or postmark date of the
opening letter concerning an examination of the return for the taxable
year for which a redetermination of United States tax liability is
required.
Section 1.905-4T(f)(2)(iv) provides that interest will be computed
in accordance with Sec. 1.905-4T(e), and that the taxpayer must
satisfy the requirements of Sec. 1.905-4T(f)(2) in order not to be
subject to the penalty provisions of section 6689 and the regulations
under that section.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. For the
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6),
refer to the Special Analyses section of the preamble of the cross-
referenced notice of proposed rulemaking published in this issue of the
Federal Register. Pursuant to section 7805(f) of the Internal Revenue
Code, this regulation has been submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small businesses.
Drafting Information
The principal author of these regulations is Teresa Burridge Hughes
of the Office of Associate Chief Counsel (International). However,
other personnel from the IRS and Treasury
[[Page 62780]]
Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 301 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.905-3T is amended as follows:
0
1. Revise the section heading and paragraphs (a), (b)(1), (b)(2),
(b)(3), (b)(5), (c), and (d)(2)(i).
0
2. Revise the second and third sentences in paragraph (d)(1).
0
3. Remove paragraphs (d)(2)(ii), (d)(2)(iii), (d)(2)(iv), the heading
for paragraph (d)(3), and paragraph (d)(3)(i).
0
4. Redesignate paragraphs (d)(3), (d)(3)(ii), (d)(3)(iii), (d)(3)(iv),
and (d)(3)(v) as paragraph (d)(2)(ii), (d)(2)(ii)(A), (d)(2)(ii)(B),
(d)(2)(ii)(C), and (d)(2)(ii)(D), respectively.
0
5. Add a new paragraph heading to newly-designated paragraph
(d)(2)(ii).
0
6. Revise newly-designated paragraphs (d)(2)(ii)(A), (d)(2)(ii)(B), and
(d)(2)(ii)(D).
0
7. Remove the language ``(d)(3)(iv)'' from the second to last sentence
of newly-designated paragraph (d)(2)(ii)(C) and add the language
``(d)(2)(ii)(C)'' in its place. Remove the language ``Sec. 1.905-
3T(d)(4)(iv)'' from the last sentence of newly-designated paragraph
(d)(2)(ii)(C) and add the language ``paragraph (d)(3)(iv) of this
section'' in its place.
0
8. Redesignate paragraph (d)(4) as paragraph (d)(3).
0
9. Remove the language ``(d)(4)'' from newly-designated paragraph
(d)(3) and add the language ``(d)(3)'' in its place.
0
10. Revise newly-designated paragraphs (d)(3)(ii), (d)(3)(iii), and
(d)(3)(v).
0
11. Redesignate paragraph (f) as paragraph (d)(3)(vi).
0
12. Add a new paragraph (f).
The revisions and additions read as follows:
Sec. 1.905-3T Adjustments to United States tax liability and to the
pools of post-1986 undistributed earnings and post-1986 foreign income
taxes as a result of a foreign tax redetermination (temporary).
(a) Effective/applicability dates--(1) Currency translation. Except
as provided in Sec. 1.905-5T, paragraph (b) of this section applies to
taxes paid or accrued in taxable years of United States taxpayers
beginning on or after November 7, 2007 and to taxes paid or accrued by
a foreign corporation in its taxable years which end with or within a
taxable year of the domestic corporate shareholder beginning on or
after November 7, 2007. For taxable years beginning after December 31,
1997, and before November 7, 2007, section 986(a), as amended by the
Taxpayer Relief Act of 1997 and the American Jobs Creation Act of 2004,
shall apply. For taxable years beginning after December 31, 1986, and
before January 1, 1998, Sec. 1.905-3T (as contained in 26 CFR part 1,
revised as of April 1, 2007) shall apply.
(2) Foreign tax redeterminations. Paragraphs (c) and (d) of this
section apply to foreign tax redeterminations occurring in taxable
years of United States taxpayers beginning on or after November 7, 2007
where the foreign tax redetermination affects the amount of foreign
taxes paid or accrued by a United States taxpayer. Where the
redetermination of foreign tax paid or accrued by a foreign corporation
affects the computation of foreign taxes deemed paid under section 902
or 960 with respect to post-1986 undistributed earnings of the foreign
corporation, paragraphs (c) and (d) of this section apply to foreign
tax redeterminations occurring in taxable years of a foreign
corporation which end with or within a taxable year of the domestic
corporate shareholder beginning on or after November 7, 2007. For
corresponding rules applicable to foreign tax redeterminations
occurring in taxable years beginning before November 7, 2007, see
Sec. Sec. 1.905-3T and 1.905-5T (as contained in 26 CFR part 1,
revised as of April 1, 2007).
(b) Currency translation rules--(1) Translation of foreign taxes
taken into account when accrued--(i) In general. Except as provided in
paragraph (b)(1)(ii) of this section, in the case of a taxpayer or a
member of a qualified group (as defined in section 902(b)(2)) that
takes foreign income taxes into account when accrued, the amount of any
foreign taxes denominated in foreign currency that have been paid or
accrued, additional tax liability denominated in foreign currency,
taxes withheld in foreign currency, or estimated taxes paid in foreign
currency shall be translated into dollars using the average exchange
rate (as defined in Sec. 1.989(b)-1) for the United States taxable
year to which such taxes relate.
(ii) Exceptions--(A) Taxes not paid within two years. Any foreign
income taxes denominated in foreign currency that are paid more than
two years after the close of the United States taxable year to which
they relate shall be translated into dollars using the exchange rate as
of the date of payment of the foreign taxes. To the extent any accrued
foreign income taxes denominated in foreign currency remain unpaid two
years after the close of the taxable year to which they relate, see
paragraph (b)(3) of this section for translation rules for the required
adjustments.
(B) Taxes paid before taxable year begins. Any foreign income taxes
paid before the beginning of the United States taxable year to which
such taxes relate shall be translated into dollars using the exchange
rate as of the date of payment of the foreign taxes.
(C) Inflationary currency. Any foreign income taxes the liability
for which is denominated in any inflationary currency shall be
translated into dollars using the exchange rate as of the date of
payment of the foreign taxes. For this purpose, the term inflationary
currency means the currency of a country in which there is cumulative
inflation during the base period of at least 30 percent, as determined
by reference to the consumer price index of the country listed in the
monthly issues of International Financial Statistics, or a successor
publication, of the International Monetary Fund. For purposes of this
paragraph (b)(1)(ii)(C), base period means, with respect to any taxable
year, the thirty-six calendar months immediately preceding the last day
of such taxable year (see Sec. 1.985-1(b)(2)(ii)(D)). Accrued but
unpaid taxes denominated in an inflationary currency shall be
translated into dollars at the exchange rate on the last day of the
United States taxable year to which such taxes relate.
(D) Election to translate taxes using exchange rate for date of
payment. A taxpayer that is otherwise required to translate foreign
income taxes that are denominated in foreign currency using the average
exchange rate may elect to translate foreign income taxes described in
this paragraph (b)(1)(ii)(D) into dollars using the exchange rate as of
the date of payment of the foreign taxes, provided that the liability
for such taxes is denominated in nonfunctional currency. A taxpayer may
make an election under this paragraph
[[Page 62781]]
(b)(1)(ii)(D) for all foreign income taxes, or for only those foreign
income taxes that are denominated in nonfunctional currency and are
attributable to qualified business units with United States dollar
functional currencies. The election must be made by attaching a
statement to the taxpayer's timely filed return (including extensions)
for the first taxable year to which the election applies. The statement
must identify whether the election is made for all foreign taxes or
only for foreign taxes attributable to qualified business units with
United States dollar functional currencies. Once made, the election
shall apply for the taxable year for which made and all subsequent
taxable years unless revoked with the consent of the Commissioner.
Accrued but unpaid taxes subject to an election under this paragraph
(b)(1)(ii)(D) shall be translated into dollars at the exchange rate on
the last day of the United States taxable year to which such taxes
relate. For taxable years beginning after December 31, 2004, and before
November 7, 2007, the rules of Notice 2006-47, 2006-20 IRB 892 (see
Sec. 601.601(d)(2)(ii)(b)), shall apply.
(E) Regulated investment companies. In the case of a regulated
investment company (as defined in section 851 and the regulations under
that section) which takes into account income on an accrual basis,
foreign income taxes paid or accrued with respect to such income shall
be translated into dollars using the exchange rate as of the date the
income accrues.
(2) Translation of foreign taxes taken into account when paid. In
the case of a taxpayer that takes foreign income taxes into account
when paid, the amount of any foreign tax liability denominated in
foreign currency, additional tax liability denominated in foreign
currency, or estimated taxes paid in foreign currency shall be
translated into dollars using the exchange rate as of the date of
payment of such foreign taxes. Foreign taxes withheld in foreign
currency shall be translated into dollars using the exchange rate as of
the date on which such taxes were withheld.
(3) Refunds or other reductions of foreign tax liability. In the
case of a taxpayer that takes foreign income taxes into account when
accrued, a reduction in the amount of previously-accrued foreign taxes
that is attributable to a refund of foreign taxes denominated in
foreign currency, a credit allowed in lieu of a refund, the correction
of an overaccrual, or an adjustment on account of accrued taxes
denominated in foreign currency that were not paid by the date two
years after the close of the taxable year to which such taxes relate,
shall be translated into dollars using the exchange rate that was used
to translate such amount when originally claimed as a credit or added
to post-1986 foreign income taxes. In the case of foreign income taxes
taken into account when accrued but translated into dollars on the date
of payment, see paragraph (d) of this section for required adjustments
to reflect a reduction in the amount of previously-accrued foreign
taxes that is attributable to a difference in exchange rates between
the date of accrual and date of payment. In the case of a taxpayer that
takes foreign income taxes into account when paid, a refund or other
reduction in the amount of foreign taxes denominated in foreign
currency shall be translated into dollars using the exchange rate that
was used to translate such amount when originally claimed as a credit.
If a refund or other reduction of foreign taxes relates to foreign
taxes paid or accrued on more than one date, then the refund or other
reduction shall be deemed to be derived from, and shall reduce, the
last payment of foreign taxes first, to the extent of that payment. See
paragraphs (d)(1) (redetermination of United States tax liability for
foreign taxes paid directly by a United States person) and (d)(2)(ii)
(method of adjustment of a foreign corporation's pools of post-1986
undistributed earnings and post-1986 foreign income taxes) of this
section.
* * * * *
(5) Basis of foreign currency refunded--(i) In general. A recipient
of a refund of foreign tax shall determine its basis in the currency
refunded under the following rules.
(ii) United States dollar functional currency. If the functional
currency of the qualified business unit (QBU) (as defined in section
989 and the regulations under that section) that paid the tax and
received the refund is the United States dollar or the person receiving
the refund is not a QBU, then the recipient's basis in the foreign
currency refunded shall be the dollar value of the refund determined
under paragraph (b)(3) of this section by using, as appropriate, either
the average exchange rate for the taxable year to which such taxes
relate or the other exchange rate that was used to translate such
amount when originally claimed as a credit or added to post-1986
foreign income taxes.
(iii) Nondollar functional currency. If the functional currency of
the QBU receiving the refund is not the United States dollar and is
different from the currency in which the foreign tax was paid, then the
recipient's basis in the foreign currency refunded shall be equal to
the functional currency value of the non-functional currency refund
translated into functional currency at the exchange rate between the
functional currency and the non-functional currency. Such exchange rate
is determined under paragraph (b)(3) of this section by substituting
the words ``functional currency'' for the word ``dollar'' and by using,
as appropriate, either the average exchange rate for the taxable year
to which such taxes relate or the other exchange rate that was used to
translate such amount when originally claimed as a credit or added to
post-1986 foreign income taxes.
(iv) Functional currency tax liabilities. If the functional
currency of the QBU receiving the refund is the currency in which the
refund was made, then the recipient's basis in the currency received
shall be the amount of the functional currency received.
(v) Foreign currency gain or loss. For purposes of determining
foreign currency gain or loss on the initial payment of accrued foreign
tax in a non-functional currency, see section 988. For purposes of
determining subsequent foreign currency gain or loss on the disposition
of non-functional currency the basis of which is determined under this
paragraph (b)(5), see section 988(c)(1)(C).
(c) Foreign tax redetermination. For purposes of this section and
Sec. 1.905-4T, the term foreign tax redetermination means a change in
the foreign tax liability that may affect a taxpayer's foreign tax
credit. A foreign tax redetermination includes: accrued taxes that when
paid differ from the amounts added to post-1986 foreign income taxes or
claimed as credits by the taxpayer (such as corrections to overaccruals
and additional payments); accrued taxes that are not paid before the
date two years after the close of the taxable year to which such taxes
relate; any tax paid that is refunded in whole or in part; and, for
taxes taken into account when accrued but translated into dollars on
the date of payment, a difference between the dollar value of the
accrued tax and the dollar value of the tax paid attributable to
fluctuations in the value of the foreign currency relative to the
dollar between the date of accrual and the date of payment.
(d) * * * (1) * * * See Sec. 1.905-4T(b) which requires
notification to the IRS of a foreign tax redetermination with respect
to which a redetermination of United States liability is required, and
see section 905(b) and the regulations under that section which require
that a taxpayer substantiate that a foreign tax was paid and provide
all necessary
[[Page 62782]]
information establishing its entitlement to the foreign tax credit.
However, a redetermination of United States tax liability is not
required (and a taxpayer need not notify the IRS) if the foreign taxes
are taken into account when accrued but translated into dollars as of
the date of payment, the difference between the dollar value of the
accrued tax and the dollar value of the tax paid is attributable to
fluctuations in the value of the foreign currency relative to the
dollar between the date of accrual and the date of payment, and the
amount of the foreign tax redetermination with respect to each foreign
country is less than the lesser of ten thousand dollars or two percent
of the total dollar amount of the foreign tax initially accrued with
respect to that foreign country for the United States taxable year. * *
*
(2) Foreign taxes deemed paid under sections 902 or 960--(i)
Redetermination of United States tax liability not required. Subject to
the special rule of paragraph (d)(3) of this section, a redetermination
of United States tax liability is not required to account for the
effect of a redetermination of foreign tax paid or accrued by a foreign
corporation on the foreign taxes deemed paid by a United States
corporation under section 902 or 960. Instead, appropriate upward or
downward adjustments shall be made, in accordance with paragraph
(d)(2)(ii) of this section, at the time of the foreign tax
redetermination to the foreign corporation's pools of post-1986
undistributed earnings and post-1986 foreign income taxes to reflect
the effect of the foreign tax redetermination in calculating foreign
taxes deemed paid with respect to distributions and inclusions (and the
amount of such distributions and inclusions) that are includible in the
United States taxable year in which the foreign tax redetermination
occurred and subsequent taxable years. See Sec. 1.905-4T(b)(2) for
notification requirements where a redetermination of foreign tax paid
or accrued by a foreign corporation affects the computation of foreign
taxes deemed paid under section 902 or 960, and the taxpayer is
required to adjust the foreign corporation's pools of post-1986
undistributed earnings and post-1986 foreign income taxes under this
paragraph (d)(2).
(ii) Adjustments to the pools of post-1986 undistributed earnings
and post-1986 foreign income taxes--(A) Reduction in foreign tax paid
or accrued. A foreign corporation's pool of post-1986 foreign income
taxes in the appropriate separate category shall be reduced by the
United States dollar amount of a foreign tax refund or other reduction
in the amount of foreign tax paid or accrued, translated into United
States dollars as provided in paragraph (b)(3) of this section. A
foreign corporation's pool of post-1986 undistributed earnings in the
appropriate separate category shall be increased by the functional
currency amount of the foreign tax refund or other reduction in the
amount of foreign tax paid or accrued. The allocation of the refund or
other adjustment to the appropriate separate categories shall be made
in accordance with paragraph (b)(4) of this section and Sec. 1.904-6.
If a foreign corporation receives a refund of foreign tax in a currency
other than its functional currency, that refund shall be translated
into its functional currency, for purposes of computing the increase to
its pool of post-1986 undistributed earnings, at the exchange rate
between the functional currency and the non-functional currency, as
determined under paragraph (b)(3) of this section, by substituting the
words ``functional currency'' for the word ``dollar'' and by using the
same average or spot rate exchange rate convention that applies for
purposes of translating such foreign taxes into United States dollars.
(B) Additional foreign tax paid or accrued. A foreign corporation's
pool of post-1986 foreign income taxes in the appropriate separate
category shall be increased by the United States dollar amount of the
additional foreign tax paid or accrued, translated in accordance with
the rules of paragraphs (b)(1) and (b)(2) of this section. A foreign
corporation's pool of post-1986 undistributed earnings in the
appropriate separate category shall be decreased by the functional
currency amount of the additional foreign tax paid or accrued. The
allocation of the additional amount of foreign tax among the separate
categories shall be made in accordance with Sec. 1.904-6. If a foreign
corporation pays or accrues foreign tax in a currency other than its
functional currency, that tax shall be translated into its functional
currency, for purposes of computing the decrease to its pool of post-
1986 undistributed earnings, at the exchange rate between the
functional currency and the non-functional currency, as determined
under paragraph (b)(3) of this section, by substituting the words
``functional currency'' for the word ``dollar'' and by using the same
average or spot rate exchange rate convention that applies for purposes
of translating such foreign taxes into United States dollars.
* * * * *
(D) Examples. The following examples illustrate the application of
this paragraph (d)(2):
Example 1. Controlled foreign corporation (CFC) is a wholly-
owned subsidiary of its domestic parent, P. Both CFC and P are
calendar year taxpayers. CFC has a functional currency, the u, other
than the dollar and its pool of post-1986 undistributed earnings is
maintained in that currency. CFC and P use the average exchange rate
to translate foreign taxes. In 2008, CFC accrued and paid 100u of
foreign income taxes with respect to non-subpart F income. The
average exchange rate for 2008 was $1:1u. In 2009, CFC received a
refund of 50u of foreign taxes with respect to its non-subpart F
income in 2008. CFC made no distributions to P in 2008. In
accordance with paragraph (d)(2)(ii)(A) of this section and subject
to paragraph (d)(3) of this section, in 2009 CFC's pool of post-1986
foreign income taxes must be reduced by $50 (because the refund must
be translated into dollars using the exchange rate that was used to
translate such amount when added to CFC's post-1986 foreign income
taxes, that is, $1:1u, the average exchange rate for 2008) and the
CFC's pool of post-1986 undistributed earnings must be increased by
50u (because the post-1986 undistributed earnings must be increased
by the functional currency amount of the refund received). An income
adjustment reflecting foreign currency gain or loss under section
988 with respect to the refund of foreign taxes received by CFC is
not required because the foreign taxes are denominated and paid in
CFC's functional currency.
Example 2. The facts are the same as in Example 1, except that
in 2008, CFC had general category post-1986 undistributed earnings
attributable to non-subpart F income of 200u (net of foreign taxes),
and CFC accrued and paid 160u in foreign income taxes with respect
to those earnings. The average exchange rate for 2008 was $1:1u.
Also in 2008, CFC made a distribution to P of 50u, and P was deemed
to have paid $40 of foreign taxes with respect to that distribution
(50u/200u x $160). In 2009, CFC received a refund of foreign taxes
of 5u with respect to its nonsubpart F income in 2008. Also in 2009,
CFC made a distribution to P of 50u. CFC had no income and paid no
foreign taxes in 2009. In accordance with paragraph (d)(2)(ii) of
this section, CFC's pool of general category post-1986 foreign
income taxes is reduced in 2009 by $5 to $115 (because the refund
must be translated into dollars using the exchange rate that was
used to translate such amount when added to CFC's post-1986 foreign
income taxes, that is, $1:1u, the average exchange rate for 2008),
and CFC's pool of general category post-1986 undistributed earnings
must be increased in 2009 by 5u to 155u (because the post-1986
undistributed earnings must be increased by the functional currency
amount of the refund received). (An income adjustment reflecting
foreign currency gain or loss under section 988 with respect to the
refund of foreign taxes received by CFC is not required because the
foreign taxes are denominated and paid in CFC's functional
currency.) A redetermination of P's deemed paid credit
[[Page 62783]]
and U.S. tax for 2008 is not required, because the 5u refund, if
taken into account in 2008, would have reduced P's deemed paid taxes
by less than 10% (50u/205u x $155 = $37.80). See paragraph
(d)(3)(ii) of this section. P is deemed to pay $37.10 of foreign
taxes with respect to the distribution in 2009 of 50u (50u/155u x
$115).
Example 3. (i) CFC1 is a foreign corporation that is wholly-
owned by P, a domestic corporation. CFC2 is a foreign corporation
that is wholly-owned by CFC1. The functional currency of CFC1 and
CFC2 is the u, and the pools of post-1986 undistributed earnings of
CFC1 and CFC2 are maintained in that currency. CFC1, CFC2, and P use
the average exchange rate to translate foreign income taxes. In
2008, CFC2 had post-1986 undistributed earnings attributable to non-
subpart F income of 100u (net of foreign taxes) and paid 100u in
foreign income taxes with respect to those earnings. The average
exchange rate for 2008 was $1:1u. CFC1 had no income and no earnings
and profits other than those resulting from distributions from CFC2,
as provided in either Situation 1 or Situation 2. CFC1 paid no
foreign taxes.
(ii) Situation 1. In 2009, CFC2 received a refund of foreign
taxes of 25u with respect to its 2008 taxable year. As of the close
of 2009, CFC2 had 125u of post-1986 undistributed earnings (100u +
25u) and $75 of post-1986 foreign income taxes ($100-$25). In 2010,
CFC2 made a distribution to CFC1 of 50u. CFC1 was deemed to have
paid $30 of foreign taxes with respect to that distribution (50u/
125u x $75). (An income adjustment reflecting foreign currency gain
or loss under section 988 with respect to the refund of foreign
taxes received by CFC1 is not required because the foreign taxes are
denominated and paid in CFC1's functional currency.) At the end of
2010, CFC2 had 75u of post-1986 undistributed earnings (125u-50u)
and $45 of post-1986 foreign income taxes ($75-$30).
(iii) Situation 2. The facts are the same as in Example 3(ii),
Situation 1, except that CFC2 made a distribution of 50u in 2009 and
received a refund of 75u of foreign tax in 2010. In 2009, the amount
of foreign taxes deemed paid by CFC1 is $50 (50u/100u x $100). In
accordance with paragraph (d)(2)(ii)(C) of this section, the pools
of post-1986 foreign income taxes of CFC1, as well as CFC2, must be
adjusted in 2010, because the 2010 refund would otherwise have the
effect of reducing below zero CFC2's pool of post-1986 foreign
income taxes. Under paragraph (d)(3)(iv) of this section, the pools
would have to be adjusted in 2009, and a redetermination of P's
United States tax liability would be required, if P had received or
accrued a distribution or inclusion from CFC1 or CFC2 in 2009 and
computed an amount of foreign taxes deemed paid. CFC1's pool of
post-1986 foreign income taxes must be reduced in 2010 by $42.86,
determined as follows: $50 (foreign taxes deemed paid on the
distribution from CFC2) minus $7.14 (the foreign taxes that would
have been deemed paid had the refund occurred prior to the
distribution (50u/175u x $25)). CFC2's pool of foreign taxes must be
reduced in 2010 by $32.14, determined as follows: $75 (75u refund
translated into dollars using the exchange rate that was used to
translate such amount when originally added to post-1986 foreign
income taxes, that is, $1:1u, the average exchange rate for 2008)
minus $42.86 (the adjustment to CFC1's pool of post-1986 foreign
income taxes). (An income adjustment reflecting foreign currency
gain or loss under section 988 with respect to the refund of foreign
taxes received by CFC1 is not required because the foreign taxes are
denominated and paid in CFC1's functional currency.) The following
reflects the pools of post-1986 undistributed earnings and post-1986
foreign income taxes of CFC1 and CFC2.
----------------------------------------------------------------------------------------------------------------
Post-1986 earnings (u) Foreign taxes ($)
----------------------------------------------------------------------------------------------------------------
CFC2:
2008.......................................................... 100 100
2009.......................................................... 100-50 = 50 100-50 = 50
2010.......................................................... 50 + 75 = 125 50-32.14 = 17.86
CFC1:
2009.......................................................... 50 50
2010.......................................................... 50 50-42.86 = 7.14
----------------------------------------------------------------------------------------------------------------
* * * * *
(d)(3) * * *
(ii) Deemed paid foreign tax adjustment of ten percent or more. A
redetermination of United States tax liability is required if a foreign
tax redetermination occurs with respect to foreign taxes paid by a
foreign corporation and such foreign tax redetermination, if taken into
account in the taxable year of the foreign corporation to which the
foreign tax redetermination relates, has the effect of reducing by ten
percent or more the domestic corporate shareholder's foreign taxes
deemed paid under section 902 or 960 with respect to a distribution or
inclusion from the foreign corporation in any taxable year of the
domestic corporate shareholder. If a redetermination of United States
tax is required under the preceding sentence for any taxable year, a
redetermination of United States tax is also required for all
subsequent taxable years in which the domestic corporate shareholder
received or accrued a distribution or inclusion from the foreign
corporation.
(iii) Example. The following example illustrates the application of
paragraph (d)(3)(ii) of this section:
Example. (i) Facts. Controlled foreign corporation (CFC) is a
wholly-owned subsidiary of its domestic parent, P. Both CFC and P
use the calendar year as their taxable year. CFC has a functional
currency, the u, other than the dollar, and its pool of post-1986
undistributed earnings is maintained in that currency. CFC and P use
the average exchange rate to translate foreign income taxes. As of
January 1, 2008, CFC had 500u of general category post-1986
undistributed earnings and $200 of general category post-1986
foreign income taxes. In 2008, when the average exchange rate for
the year was $1:1u, CFC earned general category income of 600u,
accrued 100u of foreign income tax with respect to that income, and
made a distribution to P of 100u, 10% of CFC's post-1986
undistributed earnings of 1,000u. P was deemed to have paid $30 of
foreign income taxes in 2008 with respect to that distribution
(100u/1,000u x $300). In 2009, CFC paid its actual foreign tax
liability for 2007 of 80u. Also in 2009, for which the average
exchange rate was $1:1.5u, CFC earned 500u of general category
income, accrued 150u of tax with respect to that income, and
distributed 100u to P. In 2010, CFC incurred a general category loss
of (500u) and accrued no foreign tax. The loss was carried back to
2008 for foreign tax purposes, and CFC received a refund in 2011 of
all 80u of foreign taxes paid for its 2008 taxable year.
(ii) Result in 2009. If the 20u overaccrual of tax for 2007 were
taken into account in 2008, CFC's general category post-1986
undistributed earnings would be 1,020u, CFC's general category post-
1986 foreign income taxes would be $280, and P would be deemed to
pay $27.45 of tax with respect to the 2008 distribution of 100u
(100u/1020u x $280 = $27.45). Because $2.55 is less than 10% of the
$30 of foreign taxes deemed paid as originally calculated in 2008, P
is not required to redetermine its deemed paid credit and U.S. tax
liability for 2008 in 2009. Instead, CFC's general category post-
1986 foreign income taxes are reduced by $20 in 2009 (because the
overaccrual for 2008 is translated into dollars using the exchange
rate that was used to translate such amount when originally added to
post-1986 foreign income taxes, that is, $1:1u, the average exchange
rate for 2008), and the corresponding pool of general category post-
1986 undistributed earnings is increased by 20u in 2009 (because the
post-1986 undistributed earnings pool is increased by the functional
currency amount of the overaccrual). CFC's general category post-
1986 undistributed earnings are also
[[Page 62784]]
increased in 2009 to 1270u by the 350u earned in 2009 (900u + 20u +
350u = 1270u), and CFC's general category post-1986 foreign income
taxes are increased by $100 to $350 ($270 - $20 + $100). P is deemed
to pay $27.56 of foreign income taxes in 2009 with respect to the
100u distribution from CFC in that year (100u/1270u x $350).
(iii) Result in 2011. If the 80u refund of tax for 2008 were
taken into account in 2008, CFC's general category post-1986
undistributed earnings would be 1,100u, CFC's general category post-
1986 foreign income taxes would be $200, and P would be deemed to
pay $18.18 of tax with respect to the 2008 distribution of 100u
(100u/1,100u x $200 = $18.18). Because $11.82 is more than 10% of
the $30 of foreign taxes deemed paid as originally calculated in
2008, under paragraph (d)(3)(ii) of this section, P is required to
redetermine its deemed paid credit and U.S. tax liability for 2008
and 2009 in 2011. As redetermined in 2011, CFC's post-1986
undistributed earnings for 2009 are 1350u (1,100u as revised for
2008, less 100u distributed in 2008, plus 350u earned in 2009), and
its post-1986 foreign income taxes for 2009 are $381.82 ($200 as
revised for 2008, less $18.18 deemed paid in 2008, plus $100 accrued
for 2009). As redetermined in 2011, P's deemed paid credit with
respect to the 100u distribution from CFC in 2009 is $24.28 (100u/
1350u x $381.82).
* * * * *
(v) Example. The following example illustrates the application of
paragraph (d)(3)(iv) of this section:
Example. Controlled foreign corporation (CFC) is a wholly-owned
subsidiary of its domestic parent, P. Both CFC and P are calendar
year taxpayers. CFC has a functional currency, the u, other than the
dollar, and its pool of post-1986 undistributed earnings is
maintained in that currency. CFC and P use the average exchange rate
to translate foreign taxes. The average exchange rate for both 2008
and 2009 was $1:1u. In 2008, CFC earned 200u of general category
income, accrued and paid 100u of foreign taxes with respect to that
income, and made a distribution to P of 50u, half of CFC's post-1986
undistributed earnings of 100u. P is deemed to have paid $50 of
foreign taxes with respect to that distribution (50u/100u x $100).
In 2009, CFC received a refund of all 100u of foreign taxes related
to the general category income for 2008. In 2009, CFC earned an
additional 290u of income, 200u of which was passive category income
and 90u of which was general category income, and accrued and paid
95u of foreign tax, 40u of which was with respect to the passive
category income and 45u of which was with respect to the general
category income. In accordance with paragraph (d)(3)(iv) of this
section, P is required to redetermine its United States tax
liability for 2008 to account for the foreign tax redetermination
occurring in 2009 because, if an adjustment to CFC's pool of post-
1986 foreign income taxes in the general category were made, the
pool would be ($5). A deficit is not permitted to be carried in
CFC's pool of post-1986 foreign income taxes in any separate
category.
* * * * *
(f) Expiration date. The applicability of this section expires on
or before November 5, 2010.
0
Par. 3. Section 1.905-4T is revised to read as follows:
Sec. 1.905-4T Notification of foreign tax redetermination
(temporary).
(a) Application of this section. The rules of this section apply
if, as a result of a foreign tax redetermination (as defined in Sec.
1.905-3T(c)), a redetermination of United States tax liability is
required under section 905(c) and Sec. 1.905-3T(d).
(b) Time and manner of notification--(1) Redetermination of United
States tax liability--(i) In general. Except as provided in paragraphs
(b)(1)(iv), (v), and (b)(3) of this section, any taxpayer for which a
redetermination of United States tax liability is required must notify
the Internal Revenue Service (IRS) of the foreign tax redetermination
by filing an amended return, Form 1118 (Foreign Tax Credit--
Corporations) or Form 1116 (Foreign Tax Credit), and the statement
required under paragraph (c) of this section for the taxable year with
respect to which a redetermination of United States tax liability is
required. Such notification must be filed within the time prescribed by
this paragraph (b) and contain the information described in paragraph
(c) of this section. Where a foreign tax redetermination requires an
individual to redetermine the individual's United States tax liability,
and as a result of such foreign tax redetermination the amount of
creditable taxes paid or accrued by such individual during the taxable
year does not exceed the applicable dollar limitation in section
904(k), the individual shall not be required to file Form 1116 with the
amended return for such taxable year if the individual satisfies the
requirements of section 904(k).
(ii) Reduction in amount of foreign tax liability. Except as
provided in paragraphs (b)(1)(iv), (v), and (b)(3) of this section, for
each taxable year of the taxpayer with respect to which a
redetermination of United States tax liability is required by reason of
a foreign tax redetermination that reduces the amount of foreign taxes
paid or accrued, or included in the computation of foreign taxes deemed
paid, the taxpayer must file a separate notification for each such
taxable year by the due date (with extensions) of the original return
for the taxpayer's taxable year in which the foreign tax
redetermination occurred.
(iii) Increase in amount of foreign tax liability. Except as
provided in paragraphs (b)(1)(iv), (v), and (b)(3) of this section, for
each taxable year of the taxpayer with respect to which a
redetermination of United States tax liability is required by reason of
a foreign tax redetermination that increases the amount of foreign
taxes paid or accrued, or included in the computation of foreign taxes
deemed paid, the taxpayer must notify the Internal Revenue Service
within the period provided by section 6511(d)(3)(A). Filing of such
notification within the prescribed period shall constitute a claim for
refund of United States tax.
(iv) Multiple redeterminations of United States tax liability for
same taxable year. Where more than one foreign tax redetermination
requires a redetermination of United States tax liability for the same
taxable year of the taxpayer and those redeterminations occur within
two consecutive taxable years of the taxpayer, the taxpayer may file
for such taxable year one amended return, Form 1118 or 1116, and the
statement required under paragraph (c) of this section that reflect all
such foreign tax redeterminations. If the taxpayer chooses to file one
notification for such redeterminations, the taxpayer must file such
notification by the due date (with extensions) of the original return
for the taxpayer's taxable year in which the first foreign tax
redetermination that reduces foreign tax liability occurred. Where a
foreign tax redetermination with respect to the taxable year for which
a redetermination of United States tax liability is required occurs
after the date for providing such notification, more than one amended
return may be required with respect to that taxable year.
(v) Carryback and carryover of unused foreign tax. Where a foreign
tax redetermination requires a redetermination of United States tax
liability that would otherwise result in an additional amount of United
States tax due, but such amount is eliminated as a result of a
carryback or carryover of an unused foreign tax under section 904(c),
the taxpayer may, in lieu of applying the rules of paragraphs (b)(1)(i)
and (ii) of this section, notify the IRS of such redetermination by
attaching a statement to the original return for the taxpayer's taxable
year in which the foreign tax redetermination occurs. Such statement
must be filed by the due date (with extensions) of the original return
for the taxpayer's taxable year in which the foreign tax
redetermination occurred and contain the information described in Sec.
1.904-2(f).
[[Page 62785]]
(vi) Example. The following example illustrates the application of
this paragraph (b)(1):
Example. (i) X, a domestic corporation, is an accrual basis
taxpayer and uses the calendar year as its United States taxable
year. X conducts business through a branch in Country M, the
currency of which is the m, and also conducts business through a
branch in Country N, the currency of which is the n. X uses the
average exchange rate to translate foreign income taxes. Assume that
X is able to claim a credit under section 901 for all foreign taxes
paid or accrued.
(ii) In 2008, X accrued and paid 100m of Country M taxes with
respect to 400m of foreign source general category income. The
average exchange rate for 2008 was $1:1m. Also in 2008, X accrued
and paid 50n of Country N taxes with respect to 150n of foreign
source general category income. The average exchange rate for 2008
was $1:1n. X claimed a foreign tax credit of $150 ($100 (100m at
$1:1m) + $50 (50n at $1:1n)) with respect to its foreign source
general category income on its United States tax return for 2008.
(iii) In 2009, X accrued and paid 100n of Country N taxes with
respect to 300n of foreign source general category income. The
average exchange rate for 2009 was $1.50:1n. X claimed a foreign tax
credit of $150 (100n at $1.5:1n) with respect to its foreign source
general category income on its United States tax return for 2009.
(iv) On June 15, 2012, when the spot exchange rate was $1.40:1n,
X received a refund of 10n from Country N, and, on March 15, 2013,
when the spot exchange rate was $1.20:1m, X was assessed by and paid
Country M an additional 20m of tax. Both payments were with respect
to X's foreign source general category income in 2008. On May 15,
2013, when the spot exchange rate was $1.45:1n, X received a refund
of 5n from Country N with respect to its foreign source general
category income in 2009.
(v) X must redetermine its United States tax liability for both
2008 and 2009. With respect to 2008, X must notify the IRS of the
June 15, 2012, refund of 10n from Country N that reduced X's foreign
tax liability by filing an amended return, Form 1118, and the
statement required in paragraph (c) of this section for 2008 by the
due date of the original return (with extensions) for 2012. The
amended return and Form 1118 must reduce the amount of foreign taxes
claimed as a credit under section 901 by $10 (10n refund translated
at the average exchange rate for 2008, or $1:1n (see Sec. 1.905-
3T(b)(3)). X will recognize foreign currency gain or loss under
section 988 in or after 2012 on the conversion of the 10n refund
into dollars. With respect to the March 15, 2013, additional
assessment of 20m by Country M, X must notify the IRS within the
time period provided by section 6511(d)(3)(A), increasing the
foreign taxes available as a credit by $24 (20m translated at the
exchange rate on the date of payment, or $1.20:1m ). See sections
986(a)(1)(B)(i) and 986(a)(2)(A) and Sec. 1.905-3T(b)(1)(ii)(A). X
may so notify the IRS by filing a second amended return, Form 1118,
and the statement required in paragraph (c) of this section for
2008, within the time period provided by section 6511(d)(3)(A).
Alternatively, when X redetermines its United States tax liability
for 2008 to take into account the 10n refund from Country N which
occurred in 2012, X may also take into account the 20m additional
assessment by Country M which occurred on March 15, 2013. See Sec.
1.905-4T(b)(1)(iv). Where X reflects both foreign tax
redeterminations on the same amended return, Form 1118, and in the
statement required in paragraph (c) of this section for 2008, the
amount of X's foreign taxes available as a credit would be:
(A) Reduced by $10 (10n refund translated at $1:1n) and
(B) Increased by $24 (20m additional assessment translated at
the exchange rate on the date of payment, March 15, 2013, or
$1.20:1m). The foreign taxes available as a credit therefore would
be increased by $14 ($24 (additional assessment) - $10 (refund)).
The due date of the 2008 amended return, Form 1118, and the
statement required in paragraph (c) of this section reflecting
foreign tax redeterminations in both years would be the due date
(with extensions) of X's original return for 2012.
(vi) With respect to 2009, X must notify the IRS by filing an
amended return, Form 1118, and the statement required in paragraph
(c) of this section for 2009 that is separate from that filed for
2008. The amended return, Form 1118, and the statement required in
paragraph (c) of this section for 2009 must be filed by the due date
(with extensions) of X's original return for 2013. The amended
return and Form 1118 must reduce the amount of foreign taxes claimed
as a credit under section 901 by $7.50 (5n refund translated at the
average exchange rate for 2009, or $1.50:1n). X will recognize
foreign currency gain or loss under section 988 in or after 2013 on
the conversion of the 5n refund into dollars.
(2) Pooling adjustment in lieu of redetermination of United States
tax liability. Where a redetermination of foreign tax paid or accrued
by a foreign corporation affects the computation of foreign taxes
deemed paid under section 902 or 960, and the taxpayer is required to
adjust the foreign corporation's pools of post-1986 undistributed
earnings and post-1986 foreign income taxes under Sec. 1.905-3T(d)(2),
the taxpayer is required to notify the IRS of such redetermination by
reflecting the adjustments to the foreign corporation's pools of post-
1986 undistributed earnings and post-1986 foreign income taxes on a
Form 1118 for the taxpayer's first taxable year with respect to which
the redetermination affects the computation of foreign taxes deemed
paid. Such Form 1118 must be filed by the due date (with extensions) of
the original return for such taxable year. In the case of multiple
redeterminations that affect the computation of foreign taxes deemed
paid for the same taxable year and that are required to be reported
under this paragraph (b)(2), a taxpayer may file one notification for
all such redeterminations in lieu of filing a separate notification for
each such redetermination. See section 905(b) and the regulations under
that section which require that a taxpayer substantiate that a foreign
tax was paid and provide all necessary information establishing its
entitlement to the foreign tax credit.
(3) Taxpayers under the jurisdiction of the Large and Mid-Size
Business Division. The rules of this paragraph (b)(3) apply where a
redetermination of United States tax liability is required by reason of
a foreign tax redetermination that results in a reduction in the amount
of foreign taxes paid or accrued, or included in the computation of
foreign taxes deemed paid, and such foreign tax redetermination occurs
while a taxpayer is under the jurisdiction of the Large and Mid-Size
Business Division (or similar program). The taxpayer must, in lieu of
applying the rules of paragraphs (b)(1)(i) and (ii) of this section
(requiring the filing of an amended return, Form 1118, and a statement
described in paragraph (c) of this section by the due date (with
extensions) of the original return for the taxpayer's taxable year in
which the foreign tax redetermination occurred), notify the IRS of such
redetermination by providing to the examiner the statement described in
paragraph (c) of this section during an examination of the return for
the taxable year for which a redetermination of United States tax
liability is required by reason of such foreign tax redetermination.
The taxpayer must provide the statement to the examiner no later than
120 days after the latest of the date the foreign tax redetermination
occurs, the opening conference of the examination, or the hand-delivery
or postmark date of the opening letter concerning the examination. If,
however, the foreign tax redetermination occurs more than 180 days
after the latest of the opening conference or the hand-delivery or
postmark date of the opening letter, the taxpayer may, in lieu of
applying the rules of paragraphs (b)(1)(i) and (ii) of this section,
provide the statement to the examiner within 120 days after the date
the foreign tax redetermination occurs, and the IRS, in its discretion,
may accept such statement or require the taxpayer to comply with the
rules of paragraphs (b)(1)(i) and (ii) of this section. A taxpayer
subject to the rules of this paragraph (b)(3) must satisfy the rules of
this paragraph (b)(3) (in lieu of the rules of paragraphs (b)(1)(i) and
(ii) of this section) in order not to be subject to the penalty
relating to the failure to file notice of a foreign tax
[[Page 62786]]
redetermination under section 6689 and the regulations under that
section. This paragraph (b)(3) shall not apply where the due date
specified in paragraph (b)(1)(ii) of this section for providing notice
of the foreign tax redetermination precedes the latest of the opening
conference or the hand-delivery or postmark date of the opening letter
concerning an examination of the return for the taxable year for which
a redetermination of United States tax liability is required by reason
of such foreign tax redetermination. In addition, any statement that
would otherwise be required to be provided under this paragraph (b)(3)
on or before May 5, 2008 will be considered timely if provided on or
before May 5, 2008.
(4) Example. The following example illustrates the application of
paragraph (b)(3) of this section:
Example. X, a taxpayer under the jurisdiction of the Large and
Mid-Size Business Division, uses the calendar year as its United
States taxable year. On October 15, 2009, X receives a refund of
foreign tax that constitutes a foreign tax redetermination that
necessitates a redetermination of United States tax liability for
X's 2008 taxable year. Under paragraph (b)(1)(ii) of this section, X
is required to notify the IRS of the foreign tax redetermination by
filing an amended return, Form 1118, and the statement required in
paragraph (c) of this section for its 2008 taxable year by September
15, 2010 (the due date (with extensions) of the original return for
X's 2009 taxable year). On December 15, 2010, the IRS hand delivers
an opening letter concerning the examination of the return for X's
2008 taxable year, and the opening conference for such examination
is scheduled for January 15, 2011. Because the date for notifying
the IRS of the foreign tax redetermination under paragraph
(b)(1)(ii) of this section precedes the date of the opening
conference concerning the examination of the return for X's 2008
taxable year, paragraph (b)(3) of this section does not apply, and X
must notify the IRS of the foreign tax redetermination by filing an
amended return, Form 1118, and the statement required in paragraph
(c) of this section for the 2007 taxable year by September 15, 2010.
(c) Notification contents--(1) In general. In addition to
satisfying the requirements of paragraph (b) of this section, the
taxpayer must furnish a statement that contains information sufficient
for the IRS to redetermine the taxpayer's United States tax liability
where such a redetermination is required under section 905(c), and to
verify adjustments to the pools of post-1986 undistributed earnings and
post-1986 foreign income taxes where such adjustments are required
under Sec. 1.905-3T(d)(2). The information must be in a form that
enables the IRS to verify and compare the original computations with
respect to a claimed foreign tax credit, the revised computations
resulting from the foreign tax redetermination, and the net changes
resulting therefrom. The statement must include the taxpayer's name,
address, identifying number, and the taxable year or years of the
taxpayer that are affected by the foreign tax redetermination. In
addition, the taxpayer must provide the information described in
paragraph (c)(2) or (c)(3) of this section, as appropriate. If the
statement is submitted to the IRS under paragraph (b)(3) of this
section, which provides requirements with respect to reporting by
taxpayers under the jurisdiction of the Large and Mid-Size Business
Division, the statement must also include the following declaration
signed by a person authorized to sign the return of the taxpayer:
``Under penalties of perjury, I declare that I have examined this
written statement, and to the best of my knowledge and belief, this
written statement is true, correct, and complete.''
(2) Foreign taxes paid or accrued. Where a redetermination of
United States tax liability is required by reason of a foreign tax
redetermination as defined in Sec. 1.905-3T(c), in addition to the
information described in paragraph (c)(1) of this section, the taxpayer
must provide the following: the date or dates the foreign taxes were
accrued, if applicable; the date or dates the foreign taxes were paid;
the amount of foreign taxes paid or accrued on each date (in foreign
currency) and the exchange rate used to translate each such amount, as
provided in Sec. 1.905-3T(b)(1) or (b)(2); and information sufficient
to determine any interest due from or owing to the taxpayer, including
the amount of any interest paid by the foreign government to the
taxpayer and the dates received. In addition, in the case of any
foreign tax that is refunded in whole or in part, the taxpayer must
provide the date of each such refund; the amount of such refund (in
foreign currency); and the exchange rate that was used to translate
such amount when originally claimed as a credit (as provided in Sec.
1.905-3T(b)(3)) and the exchange rate for the date the refund was
received (for purposes of computing foreign currency gain or loss under
section 988). In addition, in the case of any foreign taxes that were
not paid before the date two years after the close of the taxable year
to which such taxes relate, the taxpayer must provide the amount of
such taxes in foreign currency, and the exchange rate that was used to
translate such amount when originally added to post-1986 foreign income
taxes or claimed as a credit. Where a redetermination of United States
tax liability results in an amount of additional tax due, but the
carryback or carryover of an unused foreign tax under section 904(c)
only partially eliminates such amount, the taxpayer must also provide
the information required in Sec. 1.904-2(f).
(3) Foreign taxes deemed paid. Where a redetermination of United
States tax liability is required under Sec. 1.905-3T(d)(3) to account
for the effect of a redetermination of foreign tax paid or accrued by a
foreign corporation on foreign taxes deemed paid under section 902 or
960, in addition to the information described in paragraphs (c)(1) and
(c)(2) of this section, the taxpayer must provide the balances of the
pools of post-1986 undistributed earnings and post-1986 foreign income
taxes before and after adjusting the pools in accordance with the rules
of Sec. 1.905-3T(d)(2), the dates and amounts of any dividend
distributions or other inclusions made out of earnings and profits for
the affected year or years, and the amount of earnings and profits from
which such dividends were paid for the affected year or years.
(d) Payment or refund of United States tax. The amount of tax, if
any, due upon a redetermination of United States tax liability shall be
paid by the taxpayer after notice and demand has been made by the IRS.
Subchapter B of chapter 63 of the Internal Revenue Code (relating to
deficiency procedures) shall not apply with respect to the assessment
of the amount due upon such redetermination. In accordance with
sections 905(c) and 6501(c)(5), the amount of additional tax due shall
be assessed and collected without regard to the provisions of section
6501(a) (relating to limitations on assessment and collection). The
amount of tax, if any, shown by a redetermination of United States tax
liability to have been overpaid shall be credited or refunded to the
taxpayer in accordance with the provisions of section 6511(d)(3)(A) and
Sec. 301.6511(d)-3 of this chapter.
(e) Interest and penalties--(1) In general. If a redetermination of
United States tax liability is required by reason of a foreign tax
redetermination, interest shall be computed on the underpayment or
overpayment in accordance with sections 6601 and 6611 and the
regulations under these sections. No interest shall be assessed or
collected on any underpayment resulting from a refund of foreign tax
for any period before the receipt of the refund, except to the extent
interest was paid by the foreign country or possession of the United
States on the refund for the period. In no case, however, shall
interest assessed and collected pursuant to the preceding sentence for
any period
[[Page 62787]]
before receipt of the foreign tax refund exceed the amount that
otherwise would have been assessed and collected under section 6601 and
the regulations under this section for that period. Interest shall be
assessed from the time the taxpayer (or the foreign corporation of
which the taxpayer is a shareholder) receives a refund until the
taxpayer pays the additional tax due the United States.
(2) Adjustments to pools of foreign taxes. No underpayment or
overpayment of United States tax liability results from a
redetermination of foreign tax unless a redetermination of United
States tax liability is required. Consequently, no interest shall be
paid by or to a taxpayer as a result of adjustments to a foreign
corporation's pools of post-1986 undistributed earnings and post-1986
foreign income taxes made in accordance with Sec. 1.905-3T(d)(2).
(3) Imposition of penalty. Failure to comply with the provisions of
this section shall subject the taxpayer to the penalty provisions of
section 6689 and the regulations under that section.
(f) Effective/applicability date--(1) In general. This section
applies to foreign tax redeterminations (defined in Sec. 1.905-3T(c))
occurring in taxable years of United States taxpayers beginning on or
after November 7, 2007, where the foreign tax redetermination affects
the amount of foreign taxes paid or accrued by a United States
taxpayer. Where the redetermination of foreign tax paid or accrued by a
foreign corporation affects the computation of foreign taxes deemed
paid under section 902 or 960 with respect to pre-1987 accumulated
profits or post-1986 undistributed earnings of the foreign corporation,
this section applies to foreign tax redeterminations occurring in a
taxable year of the foreign corporation which ends with or within a
taxable year of its domestic corporate shareholder beginning on or
after November 7, 2007. In no case, however, shall this paragraph
(f)(1) operate to extend the statute of limitations provided by section
6511(d)(3)(A).
(2) Foreign tax redeterminations occurring in taxable years
beginning before November 7, 2007--(i) Scope. This paragraph (f)(2)
applies to any foreign tax redetermination (as defined in Sec. 1.905-
3T(c)) which occurred in any of the three taxable years of a United
States taxpayer immediately preceding the taxpayer's first taxable year
beginning on or after November 7, 2007; reduced the amount of foreign
taxes paid or accrued by the taxpayer; and requires a redetermination
of United States tax liability for any taxable year. This paragraph
(f)(2) also applies to any redetermination of foreign tax paid or
accrued by a foreign corporation which occurred in a taxable year of
the foreign corporation which ends with or within any of the three
taxable years of a domestic corporate shareholder immediately preceding
such shareholder's first taxable year beginning on or after November 7,
2007; reduced foreign taxes included in the computation of foreign
taxes deemed paid by such shareholder under section 902 or 960; and
requires a redetermination of United States tax liability under Sec.
1.905-3T(d)(3) for any taxable year. For corresponding rules applicable
to foreign tax redeterminations occurring in taxable years beginning
before the third taxable year immediately preceding the taxable year
beginning on or after November 7, 2007, see 26 CFR 1.905-4T and 1.905-
5T (as contained in 26 CFR part 1, revised as of April 1, 2007).
(ii) Notification required. If, as of November 7, 2007, the
taxpayer has not satisfied the notification requirements described in
Sec. 1.905-3T and this section (as contained in 26 CFR part 1, revised
as of April 1, 2007, as modified by Notice 90-26, 1990-1 CB 336, see
Sec. 601.601(d)(2)(ii)(b) of this chapter), with respect to a foreign
tax redetermination described in paragraph (f)(2)(i) of this section,
the taxpayer must notify the IRS of the foreign tax redetermination by
filing an amended return, Form 1118 or 1116, and the statement required
in paragraph (c) of this section for the taxable year with respect to
which a redetermination of United States tax liability is required.
Such notification must be filed no later than the due date (with
extensions) of the original return for the taxpayer's first taxable
year following the taxable year in which these regulations are first
effective. Where the foreign tax redetermination requires an individual
to redetermine the individual's United States tax liability, and as a
result of such foreign tax redetermination the amount of creditable
taxes paid or accrued by such individual during the taxable year does
not exceed the applicable dollar limitation in section 904(k), the
individual shall not be required to file Form 1116 with the amended
return for such taxable year if the individual satisfies the
requirements of section 904(k). The rules of paragraphs (b)(1)(iv) and
(v) of this section (concerning multiple redeterminations of United
States tax liability for the same taxable year, and the carryback and
carryover of unused foreign tax) shall apply.
(iii) Taxpayers under the jurisdiction of the Large and Mid-Size
Business Division. If a taxpayer under the jurisdiction of the Large
and Mid-Size Business Division is otherwise required under paragraph
(f)(2)(ii) of this section to notify the IRS of a foreign tax
redetermination described in paragraph (f)(2)(ii) of this section by
filing an amended return, Form 1118, and the statement required in
paragraph (c) of this section, such taxpayer may, in lieu of applying
the rules of paragraph (f)(2)(ii) of this section, provide to the
examiner the information described in paragraph (c) of this section
during an examination of the return for the taxable year for which a
redetermination of United States tax liability is required by reason of
such foreign tax redetermination. The taxpayer must provide the
information to the examiner on or before the date that is the later of
May 5, 2008 or 120 days after the latest of the opening conference or
the hand-delivery or postmark date of the opening letter concerning an
examination of the return for the taxable year for which a
redetermination of United States tax liability is required. However, if
November 7, 2007 is more than 180 days after the latest of the opening
conference or the hand-delivery or postmark date of the opening letter,
the IRS, in its discretion, may accept such statement or require the
taxpayer to comply with the rules of paragraph (f)(2)(ii) of this
section. This paragraph (f)(2)(iii) shall not apply where the due date
specified in paragraph (f)(2)(ii) of this section for providing notice
of the foreign tax redetermination precedes the latest of the opening
conference or the hand-delivery or postmark date of the opening letter
concerning an examination of the return for the taxable year for which
a redetermination of United States tax liability is required.
(iv) Interest and penalties. Interest shall be computed in
accordance with paragraph (e) of this section. Failure to comply with
the provisions of this paragraph (f)(2) shall subject the taxpayer to
the penalty provisions of section 6689 and the regulations under that
section.
(3) Expiration date. The applicability of this section expires on
or before November 5, 2010.
0
Par. 4. Section 1.905-5T is amended as follows:
0
1. Remove the language ``earnings and profits accumulated in taxable
years of a foreign corporation beginning prior to January 1, 1987''
from the second sentence of paragraph (a) and add the language ``pre-
1987 accumulated profits (as defined in Sec. 1.902-1(a)(10)(i)'' in
its place.
0
2. Remove the language ``Sec. 1.905-4(b)(3)'' from the second sentence
of
[[Page 62788]]
paragraph (d)(1) and add the language ``Sec. 1.905-4T(c)'' in its
place.
0
3. Remove the language ``Sec. 1.905-4T(b)(3)(ii)(A)'' from paragraph
(d)(2) and add the language ``Sec. 1.905-4T(c)(2)'' in its place.
0
4. Remove the language ``paragraph (b)(3)(iii)'' from paragraph (d)(3)
and add the language ``Sec. 1.905-4T(c)(3)'' in its place.
0
5. Remove the language ``Sec. 1.905-4T(b)(3)(iii) in lieu of the
exchange rate for the date of the accrual'' from paragraph (d)(4) and
add the language ``Sec. 1.905-4T(c)(3)'' in its place.
0
6. Revise the heading and first sentence of paragraph (f).
0
7. Add a new paragraph (g).
The revision and addition read as follows:
Sec. 1.905-5T Foreign tax redeterminations and currency translation
rules for foreign tax redeterminations occurring in taxable years
beginning prior to January 1, 1987 (temporary).
* * * * *
(f) Special effective/applicability date. See Sec. 1.905-4T(f) for
the applicability date of notification requirements relating to foreign
tax redeterminations that affect foreign taxes deemed paid under
section 902 or section 960 with respect to pre-1987 accumulated profits
accumulated in taxable years of a foreign corporation beginning on or
after January 1, 1987. * * *
(g) Expiration date. The applicability of this section expires on
or before November 5, 2010.
PART 301--PROCEDURE AND ADMINISTRATION
0
Par. 5. The authority citation for part 301 continues to read as
follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 6. Section 301.6689-1T is amended as follows:
0
1. Add a new sentence at the end of paragraph (a).
0
2. Revise paragraph (e).
The addition and revision read as follows:
Sec. 301.6689-1T Failure to file notice of redetermination of foreign
tax (temporary).
(a) * * * Subchapter B of chapter 63 of the Internal Revenue Code
(relating to deficiency proceedings) shall not apply with respect to
the assessment of the amount of the penalty.
* * * * *
(e) Effective/applicability date--(1) In general. This section
applies to foreign tax redeterminations (as defined in Sec. 1.905-
3T(c) of this chapter) occurring in taxable years of United States
taxpayers beginning on or after November 7, 2007, and in the three
immediately preceding taxable years. For corresponding rules applicable
to foreign tax redeterminations occurring in earlier taxable years of
United States taxpayers, see 26 CFR 301.6689-1T (as contained in 26 CFR
part 301, revised as of April 1, 2007).
(2) Expiration date. The applicability of this section expires on
or before November 5, 2010.
Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
Approved: August 9, 2007.
Karen A. Sowell,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E7-21766 Filed 11-6-07; 8:45 am]
BILLING CODE 4830-01-P