Foreign Flow-Through Election’s Effect on Noncompulsory Tax Treatment

The IRS has taken a step toward vigorous — aggressive even, some might say — enforcement of the compulsory payment rule for foreign tax credits. In CCA 200920051, the IRS suggests that an Italian election to treat two entities as transparent for Italian tax purposes resulted in a noncompulsory (therefore noncreditable in the United States) foreign tax payment.

The compulsory payment rule (also called the noncompulsory or voluntary payment rule) essentially provides that taxpayers must make all reasonable efforts to reduce their foreign taxes, over time, to the maximum extent possible.1 If an election or option under foreign law merely shifts a foreign tax liability to a different year or years, choosing or failing to choose it does not make a tax noncompulsory. (The IRS has distinguished situations in which an election instead changes the amount, rather than merely the year. See FSA 200049010.) Lastly, a taxpayer is not required to change ‘‘its form of doing business, its business conduct, or the form of any business transaction’’ in order to comply with the compulsory payment rule. [Treas. reg. section 1.904-2(e)(5).]. To read the full text of the article, please click on the pdf icon.