Treasury And IRS Issue Guidance On Abusive Foreign Tax Credit Transactions

WASHINGTON PHOENIX LOS ANGELES LONDON BRUSSELS

Today, the Treasury Department and the IRS issued two notices concerning transactions intended to generate foreign tax credits for U.S. taxpayers.

• Notice 2004-19 describes the administrative and regulatory approaches the Treasury and IRS are using to address foreign tax credit transactions that create results inconsistent with the purpose of the foreign tax credit rules.

• According to today's press release, "Notice 2004-20 halts a specific transaction designed to generate credits for foreign taxes paid on gain that is not subject to tax in the United States. The claimed result of the transaction is a foreign tax credit but no corresponding income and U.S. tax for the U.S. taxpayer. The transaction involves a purported acquisition of stock of a foreign target corporation by a domestic corporation, an accompanying election under section 338, and a prearranged plan to sell the target corporation's assets in a transaction that gives rise to foreign tax without corresponding income for U.S. tax purposes. This transaction does not produce the foreign tax credit benefits claimed to be generated. Under Notice 2004-20, this transaction, and any transaction that is substantially similar, are identified as 'listed transactions' that are subject to disclosure, list-keeping, and registration requirements."

• Treasury Assistant Secretary for Tax Policy Pam Olson said, "The foreign tax credit serves the important purpose of eliminating potential double taxation. It was never intended to eliminate tax altogether. Transactions structured so the taxpayer incurs foreign taxes without any corresponding U.S. tax liability because the underlying income is not recognized for U.S. tax purposes do not give rise to the double taxation that is the economic basis for the foreign tax credit. These types of transactions should not generate foreign tax credits." Olson continued, "We are addressing abusive foreign tax credit transactions through proposed legislation and our ongoing administrative and regulatory actions. The guidance issued today reflects our determination to ensure that the foreign tax credit rules serve their intended purpose. These notices are an important part of our comprehensive efforts to address tax shelter transactions." Olson added, "The Treasury Department and the IRS will continue to use all of the tools available to stem abusive foreign tax credit transactions. In addition, we urge Congress to pass the legislation proposed in the President's Budget to ensure the government has additional tools to prevent abuse in this area."

• For additional information, please contact Phil West (pwest@steptoe.com).

• The notices can be accessed via: http://www.ustreas.gov/press/releases/js1177.htm

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