New International Tax Provisions Take Aim at Foreign Tax Credit Planning But Also Provide Some Relief Under Section 6501(c)(8)

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On August 10, 2010, President Obama signed into law the Education Jobs and Medicaid Assistance Act, P.L. 111-226, which provides funds to the states for teachers’ salaries and Medicaid costs. To fund this bill, Congress enacted all but one of the international revenue offsets contained in the Extenders Bill, which of course raises questions about funding for the Extenders Bill. The sole international offset from the Extenders Bill not included in this legislation was the provision to source guarantee fees in the same manner as interest rather than as services compensation. It is important to note that the effective dates have been changed to be prospective, generally after December 31, 2010, rather than as of May 20, 2010, which was the effective date in the Extenders Bill.

The revenue provisions in this legislation primarily eliminate certain foreign tax credit planning strategies, but also curtail 80-20 companies with limited grandfather provisions. Also, foreign companies did not escape the reach of the legislation. Section 304 was amended to prevent foreign companies from using section 304 to remove earnings and profits from the United States, which previously could permit tax-free repatriation of U.S. profits. Finally, a taxpayer-friendly amendment to section 6501(c)(8) limits the extent to which a tax year will remain open when a taxpayer has reasonable cause for not filing a required information return.

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