The revenue provisions in this legislation were primarily international tax provisions, most of which were designed to curtail U.S. multinational foreign tax credit planning. However, one provision will directly affect foreign-owned U.S. companies that had engaged in certain transactions to repatriate their U.S. profits free of U.S. withholding tax.
Under the newly enacted legislation, the use of section 304 by foreign multinationals to repatriate earnings of their U.S. groups without U.S. taxation on that repatriation through a cross-group sale of a subsidiary will no longer be available. Similar to the section 956 “hop-scotch,” under current law, earnings bypassed any intermediary shareholders. The result was a foreign-to-foreign dividend that was not subject to U.S. withholding tax under section 1442. New section 304(b)(5)(B) prohibits earnings and profits from being taken into account under section 304 when the acquiror is foreign. This provision prevents the movement of earnings and profits from U.S. companies to foreign companies. Under the new provision, the earnings and profits are retained in the U.S. target company. Under prior law, the earnings and profits were treated as dividends distributed directly by a foreign company to a foreign company under section 304(a), which were not subject to U.S. withholding tax.
Also of interest was the technical correction to the proposed amendment to section 6501(c)(8) that provides a reasonable cause exception that limits the extension of the statute of limitations only to items related to the failure to provide information returns, including Form 5472. A prior amendment would have extended the statute of limitations for the entire return.
Not included in the August legislation was a provision to source guarantee payments similar to interest payments, i.e., residence of the obligor, and not as services compensation, the source of which is determined by where the services are performed. That provision had previously been proposed in the Extenders’ Bill to overrule the decision in Container Corporation v. Com’r, 134 T.C. No. 5 (Feb. 17, 2010). This provision would impact guarantees by foreign parent corporations and affiliates of U.S. companies. This provision is included in the Small Business Jobs Act of 2010, which is expected to be enacted by Congress in the near future.