    LB&I Concept Unit    Unit NameForeign Tax Redeterminations    Primary UIL Code9432.02Calculation of Amount of Allowable FTC        Library LevelTitle      Knowledge BaseInternational     ShelfIndividual Outbound   BookForeign Tax Credits Individual   ChapterCalculation of Amount of Allowable FTC     Document Control Number (DCN)INT-C-224   Date of Last Update 06/03/21          Note: This document is not an official pronouncement of law, and cannot be used, cited or relied upon as such. Further, this document may not contain a comprehensive discussion of all pertinent issues or law or the IRS's interpretation of current law.  Table of Contents       (View this PowerPoint in “Presentation View” to click on the links below) General Overview Detailed Explanation of the Concept Index of Referenced Resources Training and Additional Resources Glossary of Terms and Acronyms Index of Related Practice Units                    2  General Overview          Foreign Tax Redeterminations The United States (U.S.) taxes U.S. taxpayers on their worldwide income. Thus, income earned outside of the U.S. (foreign source income) may be subject to tax in both the U.S. and in the source country, resulting in double taxation on the same income. The Foreign Tax Credit (FTC) attempts to mitigate double taxation by providing a credit against the U.S. tax on foreign source income. The FTC is generally limited to the lesser of 1) the foreign taxes paid or accrued for a tax year, or 2) pre-credit U.S. tax multiplied by a fraction, the numerator of which is the foreign source taxable income in a particular category of income, and the denominator is the taxpayer’s worldwide taxable income. IRC 904(a). A foreign tax redetermination occurs when there is a change in a taxpayer’s foreign tax liability that affects the taxpayer’s FTC previously claimed. For example, a taxpayer claims an FTC in year 1 based on foreign taxes paid or accrued in that year. Subsequently in year 3, the taxpayer is audited by the foreign country and the original tax liability for year 1 either increases or decreases. This redetermination impacts the FTC claimed in year 1. IRC 905(c)(1) specifies three main types of foreign tax changes that result in a foreign tax redetermination: 1. if taxes when paid or later adjusted differ from amounts accrued by the taxpayer and claimed as a credit; 2. accrued taxes that are not paid within 2 years after the close of the taxable year to which the taxes relate; or 3. refund of foreign taxes. This Practice Unit discusses the responsibility of the taxpayer to report a foreign tax redetermination and the time frame within which to report such an event.             Back to Table of Contents3  Detailed Explanation of the Concept          Foreign Tax Redeterminations Rules for foreign tax redeterminations and applicable statute of limitations.     AnalysisResources        Taxes Later Paid or Adjusted Differ From Taxes Claimed as Credit IRC 905(c)(1)(A)      IRC 905(c)(3)   An FTC is redetermined if a taxpayer takes credit for accrued taxes but later determines     Treas. Reg. 1.905-3  that the accrual was overstated and pays less than the amount accrued. The taxpayer, in   this case, must amend the tax return to reflect the corrected accrual and amount paid. If the Treas. Reg. 1.905-4(b)(1)(i)  taxpayer does not proactively notify the IRS and correct any overstated foreign taxes on the   original return, the statute of limitation remains open indefinitely for assessment. For   example, a taxpayer accrued $120 of foreign taxes when computing the FTC on their 2018   tax return, but determined on filing the 2018 foreign tax return in 2019 that the liability was   only $100. In this case, the taxpayer overstated the FTC and must amend the U.S. tax   return, in addition to other reporting requirements.    If the taxpayer uses the accrual method to claim the FTC and later paid more foreign taxes   than originally accrued (e.g., resulting from a foreign tax audit), the taxpayer can amend the   original year tax return to redetermine the FTC and claim a refund. In general, the taxpayer   has 10 years from the original filing due date (without regard to any extension(s)) to submit   a refund claim for the year in which the foreign taxes were accrued. However, if the   taxpayer uses the paid or cash method of claiming the FTC, the taxpayer can not relate the   additional foreign taxes back to the original credit year and claim a refund. The relation-back   doctrine only applies to a taxpayer using the accrual method to claim the FTC. In the case   in which the taxpayer uses the paid or cash method in the original tax year, any additional   foreign taxes paid in a subsequent year can only be claimed in the year paid. Note: A   change in election from the cash basis to the accrual basis cannot be made on an amended   return. 4    Back to Table of Contents    Detailed Explanation of the Concept (cont’d)          Foreign Tax Redeterminations    AnalysisResources        Taxes Later Paid or Adjusted Differ From Taxes Claimed as Credit (cont’d) IRC 6511(d)(3)(A)       Strong v. Willcuts - 17 AFTR 1027   Example 1: Taxpayer used the paid method to claim the FTC in year 1. In year 4, foreign    (D.C. mn. 1935)  country Z audited the taxpayer’s year 1 tax return and assessed $100 of additional taxes,       which the taxpayer duly paid in year 4. Because the taxpayer used the paid method in year   1, they can not go back to year 1 and claim the additional $100 of foreign taxes on an   amended return. The taxpayer, however, can claim the $100 for FTC purposes on the year   4 tax return. If, however, the taxpayer used the accrual method in year 1, they can amend   the year 1 tax return to claim the $100 additional foreign taxes. The taxpayer is not allowed   to change the method from paid to accrued on an amended return.   !CAUTION: Whether the taxpayer’s efforts to contest a foreign audit assessment were    adequate and comprehensive is a factual determination. See the Practice Unit titled    Exhaustion of Administrative Remedies.                           Back to Table of Contents5  Detailed Explanation of the Concept (cont’d)2     Foreign Tax Redeterminations   AnalysisResources       Accrued Taxes That Are Not Paid Within 24 Months After the Close of the Taxable Year To   Which the Taxes Relate    In general, when a taxpayer uses the accrual method to compute the FTC but has elected Treas. Reg. 1.905-3(a)-(b)(1)  or is otherwise required to translate the tax into dollars on the date paid rather than at the   average exchange rate for the year of accrual, any difference between the dollar value of Treas. Reg. 1.986(a)-1(a)(2)  the accrued foreign tax and the dollar value of the subsequent payment of the tax may be Treas. Reg. 1.988-1(a)(2)(ii)  taken into account by adjusting the U.S. tax liability in the year of the foreign tax   redetermination rather than by amending the return for the relation-back year, provided the   net dollar amount of the currency fluctuations attributable to the foreign tax redeterminations   is less than the lesser of $10,000 or two percent of the total dollar amount of the foreign   income tax initially accrued with respect to that foreign country for the taxable year. This   assumes the taxpayer paid the amount accrued within 24 months after the close of the tax   year.    However, if accrued foreign income taxes are not paid on or before the date that is 24 IRC 905(c)(1)(B)  months after the close of the taxable year to which they relate, the resulting foreign tax     IRC 905(c)(2)  redetermination is accounted for as if the unpaid portion of the foreign income taxes were     IRC 986(a)(2)(A)  refunded on such date. The credit is eliminated as of the end of the two-year period. The   taxpayer in this case must amend the tax return to eliminate the credit for the unpaid portion   of the tax. If the taxpayer does not proactively notify the IRS and correct any overstated   foreign taxes on the original return, the IRS has an unlimited statute of limitations to   redetermine the FTC and make any tax assessment. However, if the foreign taxes are   subsequently paid, credit is again allowed for the year of the original accrual. The caveat is   that the taxes subsequently paid shall be translated into dollars using the exchange rate as   of the time such taxes were paid to the foreign country or possession of the U.S., rather   than the average exchange rate of the year of the accrual. 6        Back to Table of Contents      Detailed Explanation of the Concept (cont’d)3          Foreign Tax Redeterminations  AnalysisResources      Accrued Taxes That Are Not Paid Within 24 Months After the Close of the Taxable Year To   Which the Taxes Relate (cont’d)    Example 2: Taxpayer D claims credit for year 1 for 1,000u (country Z currency) of tax that it Treas. Reg. 1.905-3(b)  accrues to country Z. The 1,000u is properly translated into dollars at the average exchange   rate for year 1. If D pays the tax in year 2 or 3 (within 24 months of the close of year 1), the IRC 905(c)(2)  credit for year 1 is not adjusted solely to reflect any difference between the amount claimed IRC 986(a)(2)(A)  as credit and the dollar value of the tax payment. On the other hand, if D pays the 1,000u Treas. Reg. 1.988-1(a)(2)(ii)  in, say, year 4 or later, credit for the accrued tax is denied as of the end of year 3, and D       has to notify the IRS by filing an amended return. If D pays the tax at a later date, D can   reclaim the year 1 credit, this time in a dollar amount determined by the exchange rate on   the date of payment.                          Back to Table of Contents7  Detailed Explanation of the Concept (cont’d)4           Foreign Tax Redeterminations     AnalysisResources     Refund of Credited Tax  IRC 905(c)(1)(C)When a credited foreign tax is refunded, a foreign tax redetermination results and a U.S. tax   Treas. Reg. 1.905-3 redetermination is required, regardless of the reason for the refund. Treas. Reg. 1.901-2(e)(5) Example 3: A taxpayer pays taxes to foreign country Y for year 1, but a loss sustained in Treas. Reg. 1.905-4    year 3 is carried back under country Y’s tax law to year 1 and causes the year 1 tax to be  refunded in whole or in part. FTC for year 1 must be recomputed by excluding the year 1  country Y tax that is refunded in year 3 on account of the loss carryback.   Example 4: A U.S. taxpayer earns interest income in a bank located in country X. In  accordance with country X tax law, the bank withholds 35% in taxes on the interest income.  The taxpayer then claims an FTC with the U.S. based on the 35% withholding tax. Country  X has a tax treaty with the U.S., which stipulates a 0% withholding tax on interest income  earned by U.S. taxpayers in country X. Therefore, the taxpayer improperly claimed the  credit. In addition, if taxpayer files for a refund with country X and receives a refund from  country X, the taxpayer must notify the IRS of such refund and recompute the FTC.     required. However, it is not suggesting that the U.S. taxpayer is allowed to claim the FTC in the first place when a tax treaty is in place to either mitigate or eliminate the tax withholding. Tax in excess of the treaty rate is not considered paid and may not be claimed as a credit. In addition, the unlimited statute of section 905(c) applies if the taxpayer later actually receives a foreign tax refund.CAUTION:Thisexampleisillustratingacasewhere a U.S. tax redetermination is     Back to Table of Contents8  Detailed Explanation of the Concept (cont’d)5           Foreign Tax Redeterminations  AnalysisResources      Refund of Credited Tax (cont’d)    Notification: In general, the taxpayer must file an amended return with an accompanying Treas. Reg. 1.905-4(b)  amended Form 1116 or 1118 with additional information required to support the U.S. tax       redetermination for each affected taxable year with respect to which a foreign tax   redetermination results in additional U.S. tax liability. The taxpayer must file an amended   return for each affected taxable year by the due date (with extensions) of the original return   for the taxpayer’s taxable year for which the foreign tax redetermination is required. If the   foreign tax redetermination does not increase U.S. tax (e.g., because the U.S. tax   deficiency is offset with available FTC carryovers), the required statement is made with IRC 6501(c)(5)  Form 1116 or 1118 filed for the taxable year in which the foreign tax redetermination   occurred. IRC 905(c)  This is a required notification. IRC 6501(c)(5) in conjunction with IRC 905(c) provides an IRM 4.61.10.8 - Changes in the   Amount of Foreign Taxes Claimed  exception to the normal assessment statute and allows the IRS to assess additional tax if       the redetermination results in additional tax due. If the taxpayer fails to notify the IRS, and   the IRS makes the discovery during an examination, it would have unlimited statute of   limitations to make an adjustment related to the foreign tax redetermination. Even if the   taxpayer informs the IRS (or the IRS discovers the foreign tax redetermination) after the   normal statute has expired, the IRS is still allowed to make any tax assessment.              Back to Table of Contents9  Index of Referenced Resources                  Foreign Tax Redeterminations IRC 904(a) IRC 905(c) IRC 986(a)(2)(A) IRC 6501(c)(5) IRC 6511(d)(3)(A) IRM 4.61.10.8 - Changes in the Amount of Foreign Taxes Claimed Treas. Reg. 1.905-3 Treas. Reg. 1.905-4 CCA 201534013 - IRC 905(c) Strong v. Willcuts - 17 AFTR 1027 (D.C. mn. 1935)                   Back to Table of Contents10  Training and Additional Resources         Foreign Tax Redeterminations  Type of ResourceDescription(s) Databases / Research Tools Bittker & Lokken Fed. Tax’n Inc, Est and Gift Para 72.14   Mertens Law of Fed. Income Tax’n Section 45D:29   BNA Tax Management Portfolio Foreign Income Series 6020-1st VI                                 Back to Table of Contents11  Glossary of Terms and Acronyms    Term/AcronymDefinitionCCAChief Counsel Advice  FTCForeign Tax Credit  IRCInternal Revenue Code  Treas. Reg.Treasury Regulation                                  Back to Table of Contents12  Index of Related Practice Units    Associated UIL(s)Related Practice Unit9432.01Creditable Foreign Taxes  9432.01-02Exhaustion of Administrative Remedies  9432.02-06Foreign Currency Translation                                    Back to Table of Contents13

<p>Practice Unit Discusses Foreign Tax Redeterminations</p>

Practice Unit Discusses Foreign Tax Redeterminations

Internal Revenue Service

The IRS has released a practice unit on foreign tax redeterminations, focusing on the three main types of changes in a taxpayer’s foreign tax liability that affect the taxpayer’s previously claimed foreign tax credits and discussing reporting responsibilities and applicable statutes of limitations.

<p>The IRS has released a practice unit on foreign tax redeterminations, focusing on the three main types of changes in a taxpayer’s foreign tax liability that affect the taxpayer’s previously claimed foreign tax credits and discussing reporting responsibilities and applicable statutes of limitations.</p>