The U.S. Treasury Department released its General Explanations of the Obama Administration’s Fiscal Year 2014 Revenue Proposals on April 10, 2013. The publication, known as the Greenbook, includes the following international tax proposals that would effectuate reform of the U.S. international tax system. (See General Explanations.)
1. Defer Interest Expense Deduction Related to Deferred Income of Foreign Subsidiaries
The proposal would defer the deduction of interest expense. The deferral rule would apply to the extent that interest expense is properly allocated and apportioned to stock of a foreign corporation that exceeds an amount proportionate to the U.S. taxpayer’s pro rata share of income from such subsidiaries that is currently subject to U.S. tax.
2. Determine the Foreign Tax Credit on a Pooling Basis
A U.S. corporation which owns a foreign subsidiary and receives a dividend would be required to determine its deemed paid foreign tax credit on a consolidated basis. The U.S. taxpayer would be required to take into account aggregate foreign taxes and earnings and profits of all of the foreign subsidiaries with respect to which the U.S. taxpayer can claim a deemed paid foreign tax credit.
3. Impose Current Taxation of Excess Returns Associated with Transfers of Intangibles Offshore
A U.S. person that transfers directly or indirectly an intangible asset from the United States to a related controlled foreign corporation (CFC) would be required to treat excess income from transactions related to the intangible as Subpart F income. The requirement would apply if the income attributable to the intangible is subject to a low foreign effective tax rate.
4. Limit Shifting of Income through Intangible Property Transfers
The definition of intangible would include workforce in place, goodwill and going concern value for purposes of I.R.C. Sections 482 and 367(d). Section 482 provides that, in the case of transfers of intangible assets between related companies, the income with respect to the transaction must be commensurate with the income attributable to transferred intangible assets. Section 367(d) imposes taxation on outbound transfers of intangible assets to foreign corporations in nonrecognition transactions.
5. Disallow the Deduction for Non-Taxed Reinsurance Premiums Paid to Affiliates
An insurance company’s deductions would be disallowed for premiums and other amounts paid to affiliated foreign companies with respect to reinsurance of property and casualty risks. The requirement would apply if the foreign re-insurer or its parent company is not subject to U.S. income tax with respect to the premiums received. The proposal would exclude from the insurance company’s income any return premiums, ceding commissions, reinsurance covered or other amounts received with respect to reinsurance policies for which a premium deduction was denied.
6. Limit Earnings Stripping by Expatriated Entities
The proposal would revise I.R.C. Section 163(j) to tighten the limitation on the deductibility of interest paid by an expatriated entity to related persons. The debt-to-equity safe harbor would be eliminated. The 50% adjusted taxable income threshold for the limitation would be reduced to 25%. The carryforward for disallowed interest would be limited to ten years and the carryforward of excess limitation would be eliminated.
7. Modify Tax Rules for Dual Capacity Taxpayers
A dual capacity taxpayer would be allowed to claim the foreign tax credit on the U.S. tax return for the portion of a foreign tax that does not exceed the foreign tax that the taxpayer would pay if the taxpayer were not a dual-capacity taxpayer.
8. Tax Gain from the Sale of a Partnership Interest on Look-through Basis
Gain or loss from the sale or exchange of a partnership interest by a nonresident foreign individual or company generally would be treated as effectively connected with the conduct of a U.S. trade or business.
9. Prevent Use of Leveraged Distributions from Related Foreign Corporations to Avoid Dividend Treatment
The proposal would prevent a U.S. shareholder from treating certain distributions from a foreign corporation as a return of capital instead of an ordinary income dividend under the I.R.C. Section 301 ordering rule. The requirement would apply where a foreign corporation funds a second related foreign corporation with the principal purpose of avoiding dividend treatment on distributions to U.S. shareholders. The U.S. shareholder’s basis in the stock of the distributing corporation would not be taken into account for the purpose of determining the treatment of the distribution under the ordering rule.
10. Extend I.R.C. Section 338(h)(16) to Certain Asset Acquisitions
I.R.C. Section 338(h)(16) generally provides that the deemed asset sale resulting from a Section 338 election is not treated as occurring for purposes of determining the source or character of any item when the foreign tax credit rules are applied to the seller. Section 338(h)(16) prevents a seller from increasing allowable foreign tax credits as a result of a Section 338 election. I.R.C. Section 901(m) disallows a foreign tax credit for foreign taxes paid or accrued after a covered asset acquisition. The proposal would extend the application of I.R.C. Section 338(h)(16) to any covered asset acquisition within the meaning of I.R.C. Section 901(m).
11. Remove Foreign Taxes from an I.R.C. Section 902 Corporation’s Foreign Tax Pool when Earnings Are Eliminated
For purposes of the deemed paid foreign tax credit, foreign taxes paid by a foreign corporation would be reduced when a transaction results in the elimination of a foreign corporation’s earnings and profits other than by a dividend distribution. An example of such transaction is a corporate stock redemption that is treated as a sale or exchange which results in the reduction of the earnings and profits of the redeeming corporation.
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