U.S. Tax Consequences of EU State Aid Recoupment: IRS Issues Notice Treating Certain Payments of Prior-Year Foreign Taxes as “Splitter Arrangements”

Sullivan & Cromwell LLP - September 22, 2016

On September 15, the IRS and Treasury Department proposed, in Notice 2016-52 (the “Notice”), new rules that limit the ability of U.S. multinational groups to claim credits against U.S. taxes for significant foreign tax adjustments (i.e., adjustments of more than $10 million).  Foreign assessments within the scope of the Notice include (but are not limited to) those that may arise in connection with the state aid investigations that have been initiated by the European Commission over the last several years.
The Notice describes two categories of transactions that might otherwise allow a U.S. multinational to expedite its ability to claim foreign tax credits in respect of amounts paid to resolve a significant foreign assessment, and treats such structures as “splitter arrangements”.  Accordingly, the creditability of foreign taxes paid in connection with such transactions will generally be suspended until the “related income” is taken into account for U.S. tax purposes.  Because a U.S. multinational might consider paying a foreign assessment to be less burdensome if the additional foreign tax can be credited in the United States on an efficient basis, the new rules are intended to encourage U.S. multinationals to contest major foreign tax adjustments.