H. Jacob Lager

Fiscal cliff fallout: Did you survive?

In Business entities, Fiscal cliff, Foreign taxes on January 9, 2013 at 4:39 pm

Fiscal cliff:  did you survive?

For roughly 24 hours we dangled – no, fell – off the dreaded “Fiscal Cliff.”  Then Congress saved us.  Well, saved us from uncertainty at any rate.

While Cliff coverage focused primarily on individual tax rates, two very important tax provisions for multinational firms were extended for another year.

First, the “active financing exception,” which allows domestic corporations to exclude foreign  interest income earned by their active foreign subsidiaries was, again, extended until 2014.  This rule was created in 1997 as a temporary measure to help U.S. banks and manufacturers compete internationally.  It has been annually renewed every year since.  We examined it here a few months ago.  So Morgan Stanley, Ford, and GE can rest easy for another twelve months.

Second, Congress also extended the “look-through” treatment of certain payments between related foreign subsidiaries (known as “controlled foreign corporations” or “CFCs”) for one more year.   With this rule, passive income (namely dividends, interest, rents, and royalties) received by one CFC from a related CFC will not be subject to the Subpart F rules.  The Subpart F regime would otherwise force the CFCs’ common U.S. parent to recognize a taxable dividend on such inter-company income.  The key to this exemption is that the character of the income in the hands of the payor CFC must not be Subpart F income itself.  In other words, once one foreign sub earns foreign income from an active trade or business, the multinational family is free to move it around with no U.S. tax consequences.

For another year, at least.

Photo by mith_y.

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  1. I survived, but barely. Although the US is potentially losing out on millions with these corporate tax exceptions, the individual is paying the price. I wonder when everyone will catch on to the payroll tax increase we all get to pay? Something tells me somewhere around the 2nd Friday of the month, we’ll hear about it…

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