Tax Update

Congress Tightens Foreign Tax Credit and Other International Tax Rules

On August 10, 2010, President Obama signed into law the Education Jobs and Medicaid Assistance Act (the “Act”). The Act includes as revenue raisers a number of proposed amendments to the foreign tax credit and other international provisions of the Internal Revenue Code (the “Code”) that may be applicable to your business.

1. Prevent Splitting of Foreign Income and Foreign Taxes for Foreign Tax Credit Purposes

The Act adds new Section 909 of the Code, which provides that, in the case of a “foreign tax credit splitting event” with respect to a foreign income tax paid or accrued by a U.S. taxpayer, the taxpayer’s ability to take a credit for the foreign income tax will be suspended until the taxable year in which the income to which the foreign tax relates is taken into account by the taxpayer under the Code.

There is a “foreign tax credit splitting event” with respect to a foreign income tax if the income to which the foreign tax relates is (or will be) taken into account under the Code by a “covered person.” With respect to any person who pays or accrues a foreign income tax (a “payor”), a covered person means (i) any entity in which the payor holds, directly or indirectly, at least a 10% ownership interest (by vote or value), (ii) any person that holds, directly or indirectly, at least a 10% ownership interest (by vote or value) in the payor, (iii) any person that bears a relationship to the payor described in Section 267(b) or 707(b) of the Code and (iv) any other person specified by the IRS for purposes of this rule.

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