On September 2, 2011, the IRS and the Department of Treasury released the 2011–2012 Priority Guidance Plan (“Plan”) listing the topics on which they intend to publish formal administrative guidance between July 2011 and June 2012. Of the 317 projects listed, there are 49 international tax projects.
The Plan is developed annually based on suggestions from taxpayers, tax practitioners and industry groups. As they have done previously, the IRS and Treasury intend to update and republish the Plan to reflect additional guidance to be published during the year.
The international tax items included address the significant legislation enacted over the past several years, including the FATCA provisions in the Hiring Incentives to Restore Employment Act (the “HIRE Act”) of 2010 and other international tax provisions that were added by the Education Jobs and Medicaid Assistance Act (the “Education Jobs Act”) of 2010.
The Plan includes regulations under Section 954 relating to contract manufacturing for purposes of determining foreign base company sales income, as well as guidance on passive foreign investment companies (PFICs). With respect to PFICs, guidance will focus on regulations under Sections 1297 and 1298 in what has become a gradual approach to PFIC guidance. Other issues to be addressed include guidance under Section 956 on the treatment of loans to related foreign partnerships and, under Section 959, final regulations on previously taxed earnings and profits that will finalize proposed regulations that were published in 2006.
There are eight items under the category of inbound transactions, several of which are carryover projects involving guidance under Section 871(m), which was added by the HIRE Act and treats “dividend equivalent payments” paid to a non-U.S. person as actual dividend payments for withholding tax purposes.
Despite the IRS’s release of two notices this year alone, tax practitioners are possibly most eager for more guidance on the FATCA legislation, another provision introduced by the HIRE Act that is essentially an anti-tax avoidance provision requiring “foreign financial institutions” such as non- U.S. banks and offshore investment funds, as well as certain other non-U.S. entities, to provide information to the IRS with respect to their account holders and investors who are U.S. persons or suffer a 30 percent withholding tax.
New to this year’s Plan are controversial regulations under Section 6049 that would extend information reporting requirements to include bank deposit interest paid to nonresident aliens who are residents of any foreign country as opposed to solely targeting Canadian residents. Other projects for which guidance will be published include items related to Section 1441 withholding, as well as conduit financing arrangements.
There are three items in this category under Section 367 that are carried over from prior year Priority Guidance (i.e., guidance related to Sections 367 and 1248, final regulations regarding outbound asset reorganizations and regulations regarding transfers of intangible property to foreign corporations). Further guidance is intended under Section 7874 (corporate inversions) regarding the definition of “surrogate foreign corporation,” as the IRS intends to finalize proposed and temporary regulations that were published in 2009.
Foreign Tax Credits
This category provides the largest number of priority issues to be addressed this year, including several items from last year; most notably, guidance on newly enacted Section 901(m) which generally disallows foreign tax credits in cases in which a “covered asset acquisition” results in the creation of additional asset basis for U.S. tax purposes, without a corresponding increase in the basis of such assets for foreign tax purposes. This item is of particular interest given the minimal legislative history for the statute.
The Plan also lists three new sections added recently by the Education Jobs Act, including 1) Section 904(d)(6), which addresses the separate application of the foreign tax credit limitation to items resourced under treaties; 2) Section 909, which provides that a foreign tax credit splitting event cannot be taken into account for federal income tax purposes before the taxable year in which the taxpayer takes the related income into account; and 3) Section 960(c) regarding the amount of foreign taxes deemed paid with respect to Section 956 inclusions.
Finalization projects are also included for items that were part of last year’s Priority Guidance. Those include final regulations under Section 904(f) concerning rules relating to domestic and foreign overall losses, and the consequences of such losses and final regulations under Section 905(c) regarding foreign tax redeterminations. A new foreign tax credit project on the list includes defining the term “taxpayer” under Section 901.
The list for transfer pricing items includes carry-overs from last year’s priority list, including final regulations relating to cost sharing arrangements. The Plan contains eight projects relating to treaties and sourcing issues; most notably, guidance under Section 894 on issues affecting tax treaties including the definition of beneficial ownership.
To be sure, there is a significant emphasis being placed on international tax issues by the IRS and Treasury, which can only be a good sign for taxpayers in their continuing quest for guidance.