Foreign Tax Redeterminations — 1225 Inst 1118 (PDF)

The corporation’s foreign tax credit and U.S. tax liability must generally be redetermined if:

foreign tax redetermination, and, in the case of foreign income taxes deemed paid, the name and identifying number, if any, of the foreign corporation.

The date or dates the foreign income taxes were paid.
The amount of foreign income taxes paid or accrued on each date (in foreign currency) and the exchange rate used to translate each such amount.
The date or dates the foreign income taxes were accrued, if applicable.
Accrued foreign income taxes when paid or later adjusted differ from the amounts claimed as credits (including corrections to accrued amounts to reflect final foreign tax liability and additional payments of tax that accrue after the close of the tax year to which the tax relates);
Information sufficient to determine any change to the characterization of a distribution or the amount of any inclusion under section 951(a), 951A, 1291, or 1293.
Accrued foreign income taxes are not paid within 24 months after the close of the tax year to which they relate;
Any foreign income tax paid is fully or partially refunded;
A change in foreign tax liability that affects the amount of distributions or inclusions under sections 951, 951A, or 1293, or affects the application of the high-tax exception described in section 954(b)(4); or
A change to claim a foreign tax credit for foreign income taxes that were previously deducted or a change to claim a deduction for foreign income taxes that were previously credited.

See Regulations section 1.905-3(a) and (b).

See Regulations section 1.905-3(b)(1)(i) for a limited exception to a redetermination of a U.S. tax liability with respect to foreign income tax claimed as a credit under section 901 (other than a tax deemed paid under section 960).

A redetermination of U.S. tax liability is also generally required to account for the effect of a redetermination of foreign income tax paid or accrued by a foreign corporation on the amount of foreign income taxes deemed paid under section 960. See Regulations section 1.905-3(b)(2). For foreign tax redeterminations of a foreign corporation that relate to a tax year of the foreign corporation beginning before January 1, 2018, see Regulations section 1.905-5.

Reporting Requirements If, as a result of the foreign tax redetermination, the corporation’s U.S. tax liability for any tax year is changed, the corporation must file an amended return to report the foreign tax redetermination and, if applicable, pay additional U.S. tax.

Increase in U.S. tax liability as a result of foreign tax redeterminations is excepted from the general statute of limitations against assessment and collection. See sections 6501(c)(5) and 905(c). If you have a foreign tax redetermination that results in an increase in your U.S. tax liability for any year, please enter on page 2 of your Form 1120-X: “This amended return and Form 1118 is for a change in Foreign Tax Credit that increases U.S. tax liability.”

An amended Form 5471 when applicable.
Information sufficient to determine any interest due from or owing to the taxpayer, including the amount of any interest paid by the foreign government to the taxpayer, and the dates received.

Additional Information Required

If the redetermination was because of one of the following, the corporation must provide the additional information as indicated.

The closing balances of the pools of post-1986 undistributed earnings and post-1986 foreign income taxes for each affected year before and after adjusting the pools to account for the foreign tax redetermination.
The dates and amounts of any dividend distributions or other inclusions made out of post-1986 undistributed earnings for the affected year or years.

Refund of foreign income taxes paid.

The date of each such refund.
The amount of such refund (in foreign currency).
The exchange rate that was used to translate such amount when originally claimed as a credit.
The spot rate (as defined in Regulations section 1.988-1(d)) for the date the refund was received (for purposes of computing foreign currency gain or loss under section 988).

Accrued foreign income taxes that are not paid on or before the date that is 24 months after the close of the tax year to which such taxes relate.

The amount of such taxes in foreign currency.
The exchange rate that was used to translate such amount when originally claimed as a credit or added to post-1986 foreign income taxes or PTEP group taxes (as defined in Regulations section 1.960-3(d)(1)).

Accrued foreign income taxes that are not paid on or before the date that is 24 months after the close of the tax year to which such taxes relate.

Redetermination of U.S. tax liability results in an amount of additional tax due, and the carryback or carryover of an unused foreign income tax under section 904(c) only partially eliminates such amount. The information required in Regulations section 1.904-2(f).

Foreign tax redeterminations of foreign corporations that relate to tax years of the foreign corporation be- ginning before January 1, 2018. Provide the additional information listed under both categories below, as applicable.

Post-1986 pools of earnings and taxes of foreign corporations.

In addition, the amended return must have attached to it an amended Form 1118 and a statement that provides the following.

The taxpayer’s name, address, identifying number, the tax year or years of the taxpayer that are affected by the

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Pre-1987 accumulated profits of foreign corporations.

The dates and amounts of any dividend distributions or other inclusions made out of E&P for the affected year or years.
The rate of exchange on the date of any such distribution or inclusion.
The amount of E&P from which such dividends were paid or inclusions were made for the affected year or years.

See Regulations sections 1.986(a)-1 and 1.905-3 through 1.905-5 for further information regarding redeterminations and the required notification.

For special rules relating to corporations under the jurisdiction of the Large Business and International Division, see Regulations section 1.905-4(b)(4).

Schedule L (Form 1118). In addition to filing an amended return with Form 1118 and attached statement for the tax year(s) of the taxpayer for which the U.S. tax liability is changed as a result of the foreign tax redetermination, the taxpayer must include with its current-year return a Schedule L (Form 1118) summarizing the foreign tax redeterminations that occurred that year.

If a foreign tax redetermination does not change the amount of U.S. tax due for any tax year, the taxpayer does not need to file an amended return and may instead notify the IRS of the redetermination by attaching a completed Schedule L (Form 1118) to the original return for the taxpayer’s tax year in which the foreign tax redetermination occurs. See Instructions for Schedule L (Form 1118) for additional information.

Contested foreign income tax liability. In general, a taxpayer cannot claim a credit for a contested foreign income tax liability until the contest is resolved and the amount of the liability is finally determined.

Cash method taxpayers. Unless an election to claim a provisional credit for contested foreign income taxes (described below) is made, a taxpayer that claims the foreign tax credit on a cash basis cannot claim a credit for a contested foreign income tax liability (or portion thereof) that has been remitted to the foreign country until such time as the contest is resolved and the tax is considered paid for purposes of section 901. Once the contest is resolved and the foreign income tax liability is finally determined, the tax liability is treated as paid in the tax year in which the foreign tax was remitted. See Regulations section 1.905-1(c)(2).

Accrual method taxpayers. Unless an election to claim a provisional credit for contested foreign income taxes is made, a taxpayer that claims the foreign tax credit on the accrual basis cannot claim a credit for a contested foreign income tax liability until such time as both the contest is resolved and the tax is considered paid, even if the contested liability (or portion thereof) has previously been remitted to the foreign country. Once the contest is resolved and the foreign income tax liability is finally determined and paid, the tax liability accrues, and is considered to accrue in the relation-back year for purposes of the foreign tax credit. See Regulations section 1.905-1(d)(3).

Election To Claim a Provisional Credit for Contested Foreign Income Taxes

Election to account for foreign tax redeterminations with respect to pre-2018 tax years in the foreign cor- poration’s last pooling year. An irrevocable election may be made by a foreign corporation’s controlling domestic shareholders to account for all foreign tax redeterminations that occur in tax years ending on or after November 2, 2020, with respect to pre-2018 tax years of foreign corporations as if they occurred in the foreign corporation’s last tax year beginning before January 1, 2018 (last pooling year). Such election is binding on all persons who are, or were in a prior year to which the election applies, U.S. shareholders of the foreign corporation with respect to which the election is made for all of its subsequent foreign tax redeterminations, as well as foreign tax redeterminations of other members of the same CFC group as the foreign corporation for which the election is made. The election is made by filing:

The statement required under Regulations section 1.964-1(c)(3)(ii) with a timely filed original income tax return for the tax year of each controlling domestic shareholder of the foreign corporation in which or with which the foreign corporation’s first redetermination year ends;
Any notices required under Regulations section 1.964-1(c)(3)(iii);
Amended returns as required under Regulations sections 1.905-4, 1.905-5(e), 1.905-3T(d), and 1.905-5T. See Regulations section 1.905-5(e) for additional information.

Cash method taxpayers. A taxpayer claiming foreign tax credits on the cash basis may elect to claim a foreign tax credit for a contested foreign income tax liability (or a portion thereof) in the year the contested amount (or a portion thereof) is remitted to the foreign country, notwithstanding that the liability is not finally determined and so is not considered an amount of tax paid.

This election is available only for contested foreign income taxes that are remitted in a tax year in which the taxpayer has elected under section 901(a) to claim a credit, instead of a deduction under section 164(a)(3), for foreign income taxes that are paid in such year.

To make the election, a taxpayer claiming credits on the cash basis must file a Form 1118 for the tax year in which the contested liability is remitted and a Form 7204, Consent To Extend the Time To Assess Tax Related to Contested Foreign Income Taxes—Provisional Foreign Tax Credit Agreement.

In addition, the taxpayer must, for each subsequent tax year up to and including the tax year in which the contest is resolved, file annually Schedule L (Form 1118). Any portion of a contested foreign income tax liability for which a provisional credit is claimed that is subsequently refunded by the foreign country results in a foreign tax redetermination under Regulations section 1.905-3(a).

Accrual method taxpayers. A taxpayer may elect to claim a foreign tax credit for a contested foreign income tax liability (or a portion thereof) in the relation-back year when the contested amount (or a portion thereof) is

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remitted to the foreign country, notwithstanding that the liability is not finally determined and so has not accrued.

This election is available only for contested foreign income taxes that relate to a tax year in which the taxpayer has elected under section 901(a) to claim a credit, instead of a deduction under section 164(a)(3), for foreign income taxes that accrued in such year.

A taxpayer claiming credits on the accrual basis must file an original or amended return for the tax year to which the contested tax relates, together with a Form 1118, and a Form 7204.

Interest and Penalties In most cases, interest is computed on the deficiency or overpayment that resulted from the foreign tax adjustment (sections 6601 and 6611 and the related regulations). See Regulations section 1.905-4(e) for additional information.

If the corporation does not comply with the requirements discussed above within the time for filing specified, the penalty provisions of section 6689 (and the related regulations) will apply.