Proposed Guidance Under Internal Revenue Code Sections 901(a), 275(a)(4), and 905(c)¹

By Jenna (Shih) Anderson and Po Han Chen²

EXECUTIVE SUMMARY

Pursuant to sections 901(a) and 275(a)(4) of the Internal Revenue Code of 1986, as amended (the "Code"), a U.S. corporation may elect to deduct or credit foreign taxes paid or accrued on an annual basis. Each year, a taxpayer must elect either to deduct or credit all creditable foreign income taxes.

Code section 905(c) and related regulations generally address foreign tax credit adjustments when the amount of a foreign tax liability changes between when it was accrued and when it was paid, when accrued taxes are not paid within two years after the tax year close, or when foreign taxes paid are refunded. Changes to deemed paid tax amounts³ generally are adjusted via modification of foreign income tax and undistributed earnings pools, although in limited cases a foreign tax redetermination is required. Changes to direct taxes⁴ generally require a foreign tax redetermination.