December 18, 2007

Ms. Linda Stiff

Acting Commissioner

Internal Revenue Service

1111 Constitution Avenue, N.W.

Washington, D.C. 20224

Mr. Donald Korb

Chief Counsel

Internal Revenue Service

1111 Constitution Avenue, N.W.

Washington, D.C. 20224

Mr. Steven Musher

Associate Chief Counsel (International)

Internal Revenue Service

1111 Constitution Avenue, N.W.

Washington, D.C. 20224

Mr. Eric Solomon

Assistant Secretary (Tax Policy)

Department of the Treasury

1500 Pennsylvania Avenue, NW, Room 3104 MT

Washington, DC 20220

RE:   Proposed Regulations (REG-156779-06) Regarding Guidance Relating to the Determination of the Amount of Taxes Paid

Dear Ms. Stiff and Mssrs. Korb, Musher and Solomon:

On March 29, 2007, the IRS and the Treasury Department issued proposed regulations which among other things provide guidance on whether a payment is compulsory for an increase in a foreign subsidiary’s foreign tax liability due to the sharing of losses or because of a combined settlement with a foreign taxing authority.[1] AICPA is responding to these section 901 proposed regulations’ request for public comments.

The American Institute of Certified Public Accountants (AICPA) respectfully requests that the IRS and Treasury reconsider the following approach to prop. reg. section 1.901-2(e)(5)(iii):^[2]

·         First, the definition of “compulsory” under the current regulations (unchanged by the proposed regulations) requires foreign taxpayers to interpret and apply foreign law reasonably to reduce the taxpayer’s reasonably expected tax liability over time. We do not believe that group relief or similar loss sharing regimes are inconsistent with that general rule. Further, to the extent there is an issue in how to interpret this rule, we do not believe the mechanism of defining a U.S.-owned group is an appropriate approach.

·         Second, given the lack of clarity about how the proposed regulations will apply in several situations, the proposed regulations may be applied in a manner inconsistent with current U.S. tax policy. For example, the proposed regulations do not address situations in which foreign income taxes are paid or accrued by a member of a U.S.-owned group following its surrender of its losses to a foreign group member. Also, the proposed regulations do not address when an entity that is not a member of the U.S.-owned group surrenders a loss to a U.S.-owned group member. The proposed regulations do not include guidance about the consequences when a member of the U.S.-owned group carries forward its current year loss rather than surrendering such loss to another group member with income.

·         Third, foreign consolidation regimes and group relief regimes appear to receive inconsistent treatment.

·         Finally, the proposed regulations appear to unintentionally write a new requirement into the criteria for making a domestic use election under the dual consolidated loss regulations – i.e., the requirement of foregoing foreign tax credits – at least in group relief regimes.

For all of the reasons listed above, the AICPA recommends that the IRS draft new language with respect to whether a payment is compulsory for an increase in a foreign subsidiary’s foreign tax liability due to the sharing of losses or because of a combined settlement with a foreign taxing authority. Specifically, we suggest that the IRS add language to the current sentence in reg. section 1.901-2(e)(5)(i) to provide:

Where (i) foreign tax law includes options or elections whereby a taxpayer’s tax liability may be shifted, in whole or part, to a different year or years, or (ii) in accordance with foreign tax law, group relief, consolidation, or similar regimes, a taxpayer may elect to share or surrender losses with another person, the taxpayer’s use or failure to use such options or elections does not result in a payment in excess of the taxpayer’s liability for foreign tax.

The rationale for this recommendation is set forth in the enclosed comments.

The attached comments were developed by the International Taxation Technical Resource Panel’s Proposed Foreign Tax Credit Regulations Comment Letter Committee and approved by the International Taxation Technical Resource Panel and Tax Executive Committee.

The AICPA is the national professional organization of certified public accountants comprised of approximately 330,000 members. Our members advise clients on federal, state and international tax matters, and prepare income and other tax returns for millions of Americans. Our members provide services to individuals, not-for-profit organizations, small and medium-sized business, as well as America’s largest businesses.