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Maximizing/Substantiating Foreign Tax Credits
Caplin & Drysdale
Maximizing/Substantiating Foreign Tax Credits

U.S. taxpayers concerned about avoiding double taxation and seeking to minimize their worldwide tax liability must be able to navigate the labyrinthian foreign tax credit rules of the Internal Revenue Code. The old challenges remain: determining which foreign levies qualify for the U.S. tax credit, which person is entitled to the credit, and the mechanics of calculating and applying the credit. Nowadays, however, taxpayers must also contend with IRS demands for substantiation and payment above and beyond what has been required historically. This makes it even more important to have tax counsel who knows both the written rules and IRS enforcement practice.

At Caplin & Drysdale, our attorneys have a wealth of experience dealing with foreign tax credit qualification and substantiation issues. We have helped many taxpayers, and can help you, to structure operations to make the most of the foreign tax credit rules on a prospective basis, or to defend your entitlement to foreign tax credits previously claimed.

Representative Engagements

  1. A large U.S. manufacturing company finds itself in a position where it has not claimed foreign tax credits for more than $20 million in foreign taxes paid years earlier, which may now be difficult to access for various legal and factual reasons.

    Result: Caplin & Drysdale devises an inventive strategy for accessing the credits and drafts an IRS ruling request to confirm that the strategy will work.

  2. The IRS ruled publicly that a foreign tax imposed on a segment of the natural resources industry was not eligible for credit under section 901.

    Result: Caplin & Drysdale, in association with foreign economists hired and supervised by us, performed an empirical study and prepared a report demonstrating convincingly that the foreign tax was creditable under section 903, an approach that neither the IRS nor taxpayers seemingly had taken before.

  3. The IRS sought to deny tens of millions of dollars of foreign tax credits on substantiation grounds, arguing that the taxpayer's proof of withholding was insufficient to prove payment.

    Result: Caplin & Drysdale enlisted the help of the U.S. Competent Authority and foreign tax officials and assembled appropriate documentation to persuade the IRS to allow the credits.

Our Services

To make sure you get the most out of the foreign tax credit rules, Caplin & Drysdale can:

  • Evaluate which taxpayer, and which foreign levies, will qualify for the U.S. tax credit;
  • Guide you through the "basket" characterization and calculation rules;
  • Devise appropriate strategies to maximize your credits and to access excess credits;
  • Advise you of the type of substantiation issues likely to arise;
  • Defend your entitlement to claimed foreign tax credits at all stages of proceedings; and
  • Invoke Competent Authority assistance to support the creditability of a foreign tax and your entitlement to the credit.
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