IRS recently stated that the U.S. based holding companies claimed $18.3 billion in foreign tax credit in 2013 which is up from $8.17 billion in the previous year. The foreign tax credit was generally claimed for the tax paid in foreign countries on the dividend income repatriated to the U.S. by these holding companies. The data says that the holding companies reported $25.1 billion in such dividend income in 2013.
The data suggests that U.S. companies are bringing in more income from the foreign earnings to finance U.S. operations.
Since the tax incentives are not the motivation for repatriating the earnings, the economic factors seem to be the driving such a trend.
IRS has issued final regs clarifying eligibility for the foreign tax credit. Specifically, they provide additional guidance for determining who is considered to pay a foreign tax for purposes of the foreign tax credit. The regs affect taxpayers claiming direct and indirect foreign tax credits.
Code Sec. 901 permits taxpayers to claim a credit for income, war profits, and excess profits taxes paid or accrued during the tax year to any foreign country or to any U.S. possession. In 2006, IRS issued proposed regs that would retain the general principle that tax is considered paid by the person who has legal liability under foreign law for the tax. However, they would further clarify application of the legal liability rule in situations where foreign law imposes tax on the income of one person but requires another person to remit the tax. The regs also provide detailed guidance on how to treat taxes paid on the combined income of two or more persons.
Code Sec. 909, which addresses concerns about the inappropriate separation of foreign income taxes and related income, was added by the Education, Jobs and Medicaid Assistance Act, effective for foreign income taxes paid or accrued in tax years beginning on or before Dec. 31, 2010.
Under Code Sec. 909, there is a foreign tax credit splitting event if a foreign income tax is paid or accrued by a taxpayer and the related income is, or will be, taken into account by a covered person with respect to such taxpayer. In such a case, the tax is suspended until the tax year in which the related income is taken into account by the payor of the tax.