By Reynolds Holding
NEW YORK, Nov 6 (Reuters Breakingviews) - The U.S. taxman
should give credit where credit's due. American companies can
typically subtract foreign levies from their income tax bill.
But a hyper-technical decision by the Internal Revenue Service
puts that rule, and investment abroad, at risk. The Supreme
Court has a chance to make things right.
The justices will hear a tax dispute between the IRS and
U.S. energy company PPL - a rare step for America's top court,
which usually steers clear of such battles. PPL is contesting a
decision that may cost it about $150 million in tax credits.
The company assumed it could claim a credit for the 1997
windfall assessment it paid on income from a British utility
acquired seven years before. The IRS disagreed, claiming the
charge wasn't a tax on the utility's income but on its value,
which was merely measured by income.
The agency cited the arcane rules about applying foreign tax
credits to back up its stance. If the "predominant character" of
another nation's levy is an income tax "in the U.S. sense," the
credit applies. That allows the IRS a slice of offshore revenue
while saving companies from a double hit.
The logic of the agency's argument escaped many experts,
including two U.S. courts, which stressed that oddly structured
foreign levies are often income taxes in substance. But a
federal appeals court backed the IRS last year.
If the Supreme Court rules in favor of the IRS, the
potential impact on all American companies operating abroad
would be considerable. More than 7,200 U.S.-based firms claimed
over $100 trillion of foreign tax credits in 2008, according to
the most recently available IRS statistics. Disallowing even a
small fraction of that amount would prompt years of litigation.
It would also inject new uncertainty into decisions to
invest abroad. If U.S firms had to pay foreign and domestic
taxes on the same income, they'd probably do a lot less business
in other countries. And those countries would have to choose
between encouraging American investment and raising revenue from
income earned on their turf. Global economic growth could
The justices should make the most of this rare opportunity
to tackle tax policy and remind federal pencil pushers that form
doesn't trump substance.
- The U.S. Supreme Court on Oct. 29 agreed to hear an appeal
of an Internal Revenue Service ruling that PPL Corp, a
Pennsylvania-based utility and energy holding company, cannot
offset its income taxes with an assessment paid to Britain. A
victory for the IRS would give it more power to stop American
companies from claiming a tax credit for foreign levies that
might not technically meet the agency's definition of an income
tax but, in substance, are based on a company's income. At stake
are potentially trillions of foreign tax credits granted U.S.
companies every year.
- PPL is appealing a December 2011 decision by the U.S.
Court of Appeals in Philadelphia favoring the IRS. The U.S. Tax
Court had ruled for PPL, and another federal appellate court
agreed with the company's position in a separate case involving
a different firm.
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
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