Foreign corps must conform their tax year.

International

FOREIGN CORPS MUST CONFORM TAX YEAR

A provision in the Revenue Reconciliation Bill of 1989, now before Congress, requires controlled foreign corporations (CFCs) and foreign personal holding companies (FPHCs) to conform their taxable years to those of their U.S. shareholders. If enacted, this would end the deferral of subpart F income that currently arises if a CFC or FPHC has a taxable year ending after that of its U.S. shareholders.

Subpart F income and FPHC income are deemed to be distributed on the last day of the taxable year of the CFC or FPHC. Consequently, if either has a taxable year ending after its U.S. shareholders', inclusion in U.S. taxable income would be deferred into the U.S. shareholders' following taxable year.

The U.S. shareholders referred to in the bill are those that on a particular day or days would own more than 50% of the outstanding stock of the CFC or FPHC.

If no group of U.S. shareholders owning more than 50% has the same taxable year, the appropriate taxable year would be prescribed by regulations. The House report indicates regulations would prescribe the appropriate taxable year as that of the U.S. shareholder resulting in the least deferral.

Income that is no longer deferred as a result of the short taxable year resulting from these rules would be taken into account ratably over the first four taxable years beginning after July 10, 1989. However, the ratable inclusion rule would be applicable only if the short taxable year is the first taxable year beginning after July 10, 1989.

The Senate proposal is similar except that a CFC would be allowed a one-month deferral so its tax year could end one month before that of the U.S. shareholder.

Observation: This provision affects all CFCs, not just those with subpart F income. As a result, this legislation would impose significant administrative burdens for U.S.-based multinationals that earn relatively little or no subpart F income.