Foreign Income & Taxpayers

Prop. Regs. Reduce RIC Reporting Burden for Foreign-Source Income and Foreign Taxes Paid

The Service issued proposed regulations (REG-105248-04, 9/18/06) that would eliminate certain “country-by-country” reporting requirements for regulated investment companies (RICs) that elect under Sec. 853 to pass through to shareholders foreign taxes paid or incurred. RICs would no longer have to designate the amounts of foreign income and taxes paid or incurred on a country-by-country basis to shareholders. Similarly, they would no longer be required to report such information on Forms 1099. However, they would still be required to provide per-country information to the IRS on Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies.

Background

A RIC that makes a foreign tax passthrough election under Sec. 853 for a tax year must, within 60 days after the year’s close, mail a notice to shareholders designating each shareholder’s proportionate share of the (1) creditable foreign taxes it paid and (2) RIC’s gross income derived from non-U.S. sources. Regs. Sec. 1.853-3(a) requires the notice to designate the shareholder’s portion of foreign taxes paid to each foreign country or U.S. possession, and the portion of any dividend that represents income derived from sources within each foreign country or U.S. possession.

Under Regs. Sec. 1.853-4(a), the RIC must also file with Form 1099-DIV, Dividends and Distributions, and Form 1096, Annual Summary and Transmittal of U.S. Information Returns, a statement that sets forth the total income received from sources within foreign countries and U.S. possessions; the total amount of foreign taxes paid; the date, form and contents of the notice to shareholders; and the proportionate share of this income received and those taxes paid during the tax year attributable to one share of its stock. The RIC must also file, as part of its return for the tax year, Form 1118, Foreign Tax Credit—Corporations, modified to support the foreign tax passthrough election.

Prop. Regs.

The proposed regulations would revise Regs. Sec. 1.853-3 and -4 to require a RIC to provide aggregate per-country information on a statement filed with its return on Form 1120-RIC. This information remains relevant to the Service’s monitoring compliance with the Sec. 901 rules that disallow foreign tax credits for refundable and noncompulsory payments and for taxes paid to certain countries. However, the RIC would no longer need to furnish its shareholders with country-by-country information. Once the proposed rules become effective, the IRS will modify the instructions to Forms 1116, Foreign Tax Credit (Individual, Estate, or Trust), and 1118, to permit summary reporting at the shareholder level of RIC foreign-source income and foreign taxes passed through to shareholders under the Sec. 853 election.

The proposed regulations would also update Regs. Sec. 1.853-1 to reflect statutory amendments providing that the foreign tax passthrough election does not apply to taxes for which the RIC would not be allowed a credit by reason of Sec. 901(j), (k) and (l), or any similar provision. These amendments would also update the regulations to reflect more recent statutory compliance deadlines.

Implications

Due to the elimination of the “per-country limitation” under Sec. 904 in 1976, many RICs (even before the publication of the proposed regulations) had determined that furnishing country-by-country information to shareholders was eliminated by implication. The Service apparently continued to check such information to ensure that no more than the correct amount of foreign tax had been paid, particularly for withholding rates reduced by treaty. Several commentators suggested that the IRS relieve this shareholder-reporting burden, given that the information was provided to the Service by the RICs. The proposed regulations follow those suggestions and, once effective, will provide welcome simplification.

From Marc Levy, CPA, Washington, DC