Foreign Tax Reform is Law – What Does It Mean for You?

On August 10, 2010 President Obama signed into law H.R. 1586, the Education Jobs and Medicaid Assistance Act, which includes a $9 billion package of international tax reform. These international tax provisions will fund most of the bill’s revenue offsets in effort to save thousands of teaching jobs and help states fund Medicaid shortfalls.

The legislation is designed to reduce the opportunities for U.S. corporations to optimize the use of the foreign tax credit by incorporating a host of international tax reform measures and closing a number of foreign tax credit loopholes.

For example, the provisions will:

• Eliminate the ability to split foreign taxes from the associated foreign income in order to prevent inappropriate separation of creditable foreign taxes.
• Reduce foreign tax credits on stepped-up assets in order to prevent taxpayers from claiming the foreign tax credit on foreign income that is never taxed in the U.S.
• Restrict tax treaty use to resource U.S. income in order to segregate the income so that it is not used for claiming foreign tax credits.
• Limit the amount of foreign taxes deemed paid with respect to Sec. 956 inclusions (relating to investments in U.S. property) in order to limit the foreign tax credits claimed on a deemed dividend.

Other provisions of the legislation include the repeal of the 80/20 rules under which interest and dividends received from a domestic corporation or a resident alien were treated as foreign source when for a 3 year period and at least 80% of the gross income was active foreign business income.

In addition, the new law eliminates the advance payment option for the earned income credit. However, the elimination is projected to impact a relatively small number of taxpayers.

Most of these provisions are effective for taxable years beginning January 1, 2011, yet some may be retroactive.

Keep in mind this is a summary of some of the provisions of the legislation. If you’d like further information on how these provisions may affect you and/or your business, please contact Yadira Hiraldo at 305.646.6031 or yhiraldo@kaufmanrossin.com.