FROM THE OFFICE OF PUBLIC AFFAIRS

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Today, the Treasury Department and the IRS issued Notice 2003-5 to provide guidance to taxpayers regarding the application of statutory changes to the foreign tax credit rules that were enacted as part of the Taxpayer Relief Act of 1997 but that apply only as of January 2003. 

"This timely and much needed guidance gives taxpayers the rules for the foreign tax credit reforms now taking effect,” stated Assistant Secretary for Tax Policy Pam Olson.  “While the transition into the new look-through rules for dividends from 10/50 corporations is complicated, our aim is to provide clear rules and minimize complexity.  Legislative proposals have been introduced that would further simplify these rules.  We look forward to working with Congress on those proposals. We expect to issue regulations incorporating this guidance early next year and look forward to taxpayer’s comments."

The 1997 Act included a provision significantly reforming the treatment for foreign tax credit purposes of dividends paid by certain foreign corporations with U.S. ownership (so-called “10/50 corporations”).   The 1997 Act provision, which is effective for taxable years beginning after December 31, 2002, eliminates the separate foreign tax credit baskets for dividends from each 10/50 corporation and instead provides “look-through” treatment for dividends paid by a 10/50 corporation out of earnings and profits accumulated in post-2002 taxable years. 

The notice provides guidance on the application of the new look-through rules and the transition from the previous treatment.  The notice indicates that Treasury and the IRS intend to issue regulations incorporating this guidance and that taxpayers may rely on the notice.  The transition issues addressed include the carryover and carryback of excess foreign tax credits and the treatment of separate limitation losses and overall foreign losses.  Other issues addressed include ordering rules for distributions and the treatment of distributions of pre-acquisition earnings. 

The text of the notice is attached.

Related Documents:

• Notice 2003-5