Understanding the International Tax Provisions of the Education Jobs and Medicaid Assistance Act of 2010

September 13, 2010

On August 10th, 2010 President Obama signed into law House Resolution (H.R.) 1586, which has been referred to as the Education Jobs and Medicaid Assistance Act ( the “Act”). The Act allocates approximately $10 billion to local school districts to prevent teacher layoffs due to state revenue shortfalls, and approximately $16 billion to help states pay rising Medicaid costs without having to lay off public and private sector employees. However, to help pay this expense, the Act is funded through a number of provisions that will affect the U.S. tax treatment of the foreign operations of many U.S. based multinational companies. On Wednesday, September 1st Translation Source participated in a seminar hosted by Baker and McKenzie, focused on the implications of the Act and on immediate planning considerations. A summary of tax provisions and key takeaways follows.

Specific Tax Provisions

The Act includes specific tax provisions that tighten regulations around techniques that the government perceives as abusive and, in general, avoids the acceleration of tax credits. The bill also encourages repatriation of income before December 31st, 2010 and intends to capture additional residual tax. Tax provisions include the following:

  • Suspend foreign tax credits that are split form the income to which they relate
  • Repeal the benefit of the “hopscotch rule” for section 956 inclusions
  • Disallow foreign tax credits in the case of a covered asset acquisition
  • Narrow the scope of certain suspensions of the statute of limitations for failing to provide information
  • Limit the use of section 304 transactions involving foreign parent companies, including for “out-from-under” planning
  • Repeal the 80/20 company sourcing and withholding tax rules, with grandfathering
  • Treat a foreign corporation as a member of an affiliated group of interest expense allocation for purposes if ECI(Effective Connected Income) exceeds 50%
  • Separately basket income re-sourced under a treaty
  • Enacts provisions that are the same as those introduced in the extenders bill except for the effective dates
  • Takes action in response to the foreign tax credit and section 956 provisions by December 31 or by the end of third quarter may make sense for many taxpayers
  • Enacts all but two of the major extenders bill international tax provisions

Key Takeaways:

  • Your business may be affected by the Act if you are a U.S. business with international operations, and either
    • have more than two foreign subsidiaries, at least one of which is profitable,
    • have a profitable foreign subsidiary that guarantees any U.S. debt,
    • are you considering the purchase of a company located outside the U.S. or
    • your U.S. company generate more than 80% of its revenue from outside the U.S.
  • The effective date changes provide U.S. multinationals with a narrow window of opportunity to respond to some of the new international tax provisions before they come into effect – many of which need to be implemented before by December 31st, 2010. Some of the changes in tax law may require you to revise your operating structure to minimize the tax impact.  Some of the changes are unavoidable, and will require improved planning and cash management. 
  • The bill creates taxpayer’s uncertainty and adds complexity to tax legislation. Most provisions bring negative consequences to taxpayers, with the exception of the provision that narrows the scope of certain suspensions of the statute of limitations for failing to provide information.

For more information regarding the International Tax Provisions, how it may affect your business and your communication/translation strategy, please contact Camilo Muñoz, Founder and CEO of Translation Source at camilo.munoz@translation-source.com.   Translation Source helps law firms and international tax departments to streamline their international operations by offering comprehensive translation and communication solutions in any language.

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