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Mar 2016, Issue 6

US IRS provides guidance for examining 'voluntary tax' issues - impact on MNCs with cross-border operations in China


The Large Business and International Division of the United States (US) Internal Revenue Service (IRS) issued three International Practice Units (IPUs) several months ago, titled (i) 'Exhaustion of Remedies', (ii) 'Exhaustion of Remedies and Transfer Pricing (TP)' and (iii) 'Exhaustion of Remedies in Non-TP Situations', to intensify the scrutiny on 'voluntary tax' in claiming foreign tax credit (FTC) for US federal income tax purposes by providing IRS tax officials with the general guidelines in auditing 'exhaustion of remedies' in possible 'voluntary tax' situations.

The three IPUs address the requirement in the US tax legislation that foreign income tax payments must be 'compulsory' in order to be creditable. Specifically, they deal with the FTC creditability rule urging a US taxpayer to exhaust all remedies before making a foreign income tax payment. In view of the evolving tax climate in China and the increasing number of tax controversies on complicated transactions around the globe, US-controlled multinational companies (MNCs) operating in China should be aware of the approaches laid out in the IPUs and take prudent actions in handling China tax matters so as to secure their FTC claims. Given the international norm to deny voluntary tax for FTC purpose, the IPUs also provide a good reference for other non-US-controlled MNCs to handle the voluntary tax issue in their home jurisdiction.

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