The U.S. Supreme Court heard oral arguments yesterday in a key case involving the rules for the taxation of foreign income. In recent years, there has been considerable controversy about the IRS's efforts to collect taxes on offshore accounts. This case, however, concerns the question of U.S. tax credits based on the payment of foreign taxes.
The case is called PPL Corp. and Subsidiaries v. Commissioner. The commissioner is of course the commissioner of the Internal Revenue Service. PPL Corp. is an American company that was subject to a windfall profits tax in the United Kingdom.
The tax in question was a complicated "clawback" tax based on an algebraic formula involving several complex components. These included various imputed estimates of a company's value. It applied in particular to certain industries: namely, companies that bought previously nationalized utilities firms when Margaret Thatcher's government privatized those industries in 1979.
The U.S. Tax Court found that the company was entitled to take a U.S. tax credit for tax payments made in Britain under this tax. The U.S. circuit courts of appeal, however, have come to different conclusions on when the payment of a foreign tax should give rise to a U.S. tax credit.
Beyond the particular tax law issue at stake, the case shows the difficulties that can occur when more than one country tries to tax the same income. If an American taxpayer makes money operating a business in a foreign country, it is natural for that country to seek to the income. But if the U.S. seeks to do the same, there is obviously the possibility of double taxation
In order to prevent double taxation, the U.S. Internal Revenue Code contains section 901. This section provides for a credit, under specified circumstances, for income taxes that Americans pay to other countries.
Source: "Argument preview: Giving credit where credit is due," scotusblog, Allison Christians, 2-19-13
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