73 Pages Posted: 16 Aug 2015 Last revised: 4 Mar 2017
Date Written: August 14, 2015
The government has been involved in a sustained war against objectionable foreign tax credit transactions, and this war has caused the U.S. foreign tax credit regime to be riddled with complexity that spawns incoherent outcomes. The complexity contained in section 901 was created due to a legitimate concern. The threats posed by objectionable transactions that artificially generate excess foreign tax credits represent real policy problems. Since at least 1975, Congress and the Treasury Department have been convinced that the cross-crediting of excess foreign tax credits arising from “objectionable transactions” required a response in addition to simply relying on section 904. Thus, it is understandable that Congress and the Treasury Department would seek to redefine the foreign tax credit eligibility standards in response to transactions that generate foreign tax credits in objectionable ways. However, the historical record indicates that Congress and the Treasury Department ran roughshod over section 901 and used a scorched earth approach in their war against objectionable foreign tax credit transactions. The result is that the U.S. foreign tax credit regime is a “byzantine structure of staggering complexity.” In the rush to enact reforms, ill-conceived provisions were enacted that should not have been enacted.
Objectionable foreign tax credit transactions needed principled responses, and principled responses were enacted in the midst of a scattergun attack on these objectionable transactions. However, the United States must have a principled foreign tax credit regime that balances the need to prevent international double income taxation with the need to prevent abusive transactions. This Article addresses the disallowance provisions that have been added to section 901 as part of the government’s war against objectionable foreign tax credit transactions and assesses which of those provisions serve a continuing policy objective and which do not. The Article argues that U.S. tax law would be greatly improved if section 901 embodied a principled approach and if redundant provisions that create incoherent outcomes were removed.
Keywords: International Taxation, Base Erosion and Profit Shifting, Earning Stripping, Foreign Tax Credit, Section 901, Section 901(m), Section 904, Section 907, STARS, Section 7701(o), international double taxation
Suggested Citation: Suggested Citation
Wells, Bret, The Foreign Tax Credit War (August 14, 2015). Brigham Young University Law Review, 2016, Forthcoming; U of Houston Law Center No. 2015-A-15. Available at SSRN: https://ssrn.com/abstract=2644299