An ABC approach to reducing excess foreign tax credits

Article Abstract:

American tax laws have forced many domestic corporations with foreign interests to exceed their foreign tax credits. By reducing the proportion of selling, general and administrative (SG&A) expenses apportioned to foreign source income, excess credits could be minimized. This involves the use of activity-based apportionment bases, rather than volume-related bases, which have too much room for error in today's multi-product global environment. The SG&A expenses that should be given first priority in developing apportionment bases include marketing and distribution expenses.

Analysis, Foreign investments

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Expense apportionment practices of U.S. multinational corporations

Article Abstract:

Multinational corporations with excess foreign tax credits may benefit from apportioning selling, general and administrative expenses away from foreign source income to ameliorate foreign tax credit limitations. Activity-based apportionment will often be preferred to volume-based apportionment when the multinational engages in diverse activities. A survey of 28 multinationals showed that many were concerned about IRS scrutiny in the use of apportionment bases. In fact, 19 firms had excess foreign tax credits and only seven of the 28 changed apportionment positions.

Planning, international

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Would formula apportionment for international transactions be a more efficient approach?

Article Abstract:

Proponents of formula apportionment for international transactions as a replacement to the US Dept of Treasury-favored comparable price method have exaggerated its successes in US state taxation schemes. The method ignores profit situs and apportions income by reference to activity level in each relevant country. Proponents argue it is simpler and more efficient at taxing service transactions especially between companies that are interdependent. A better approach is to revise the comparable price method to address its deficiencies.

Laws, regulations and rules

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