On August 10, 2010, President Obama signed legislation providing funding for teachers, emergency responders and state health insurance. The House was asked to return from their summer recess to pass the Education Jobs and Medicaid Assistance Act (HR 1586) for the President’s signature. The $26.1-billion measure is partially paid for by $10 billion of international tax increases. House Ways and Means Committee Chairman Sander M. Levin, D-Mich. justified the changes to the international tax provisions that will affect many international businesses by saying, “In this bill, we close tax loopholes used by some companies to escape taxes and ship jobs overseas. Closing this loophole is fair taxation and is what the people of this country demand.”
HR 1586 contains the following international tax revenue raisers:
• Rules to prevent foreign tax credit splitting (generally effective for taxable years beginning after December 31, 2010).
• Denial of foreign tax credits with respect to certain covered asset acquisitions (generally effective for acquisitions after December 31, 2010).
• Separate application of foreign tax credit limitation to items re-sourced under tax treaties (effective for taxable years beginning after August 10, 2010).
• Limitation on foreign tax deemed paid with respect to Section 956 inclusions (effective for acquisitions of U.S. Property after December 31, 2010).
• Certain redemptions by foreign subsidiaries (effective for acquisitions after August 10, 2010)
• Modification of affiliation rules for interest expense allocation purposes (effective for taxable years beginning after August 10, 2010).
• Repeal of the “80/20” rules (effective for taxable years beginning after December 31, 2010).
As you might expect, each of the new international tax provisions noted above are very complex in nature and will have application only to those conducting international business operations. Accordingly, we have chosen not to include a detailed explanation of each of the provisions in this Insight. Suffice it to say, those conducting international business operations through offshore entities should consult with their tax advisors to determine the tax impact these new provisions will have on their operations.
Also, it should be noted that the new international tax revenue raisers were borrowed from the Tax Extenders bill, passage of which has been stalled in Congress. There is little disagreement in Congress that many of the popular temporary tax provisions, like the research credit, should be extended. However, Congress will now be forced to either come up with some new revenue raising measures or to scale back the extenders to pay for the expected legislation. We will see what effect the borrowing of the revenue raisers will have on the speed of passage of the Tax Extenders legislation when Congress returns from recess.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.