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Revised DCL rules represent a good start, but modifications needed, TEI tells government.

"The current dual consolidated loss rules are incredibly complex and difficult to understand and administer," TEI recently told the Internal Revenue Service and U.S. Department of Treasury. "We agree with the IRS and Treasury Department that a revision of the current rules is warranted." While the revised rules on the use of economic losses across international borders are properly aimed at preventing dual resident corporations from using the same loss against both foreign and U.S. income taxes, TEI said further changes are needed.

TEI filed its comments with the government in late August. The Institute began by commending the IRS and Treasury for their efforts to make the rules more administrable. Noting that the proposed regulations substitute a reasonable cause standard--to be administered by the IRS Directors of Field Operations--for the current requirement to seek 9100 relief, TEI said the new rules would make it easier for taxpayers to obtain relief from the failure to timely file the required notices. The organization recommended, however, that the rule be clarified to permit a DFO's denial of relief to be appealed up the IRS chain of command. "To minimize the administrative burdens of both the taxpayer and the IRS in the future," TEI stated, "we also recommend that the reasonable cause exception be expanded to expressly include pre-effective date defective elections and certifications."

The Institute also endorsed the proposed regulations' reducing the certification period from 15 to 7 years when an election is made that no portion of the DCL has been, or will be, used to offset the income of any other person under the income tax laws of a foreign country. The regulations also clarify that a triggering event cannot occur after the expiration of the certification period. TEI welcomed the clarification, but recommended that a 5-year certification period be adopted. It explained that the shorter time period should be sufficient to deter any perceived double-dipping of losses and deductions and noted that it would be consistent with the recent amendment to the section 367(a) regulations, reducing the length of the required gain recognition agreement from 10 years to 5.

The regulations also eliminate the closing agreement requirement and substitute a new domestic use agreement. The Institute called the new approach "a good start to simplifying this area."

Treatment of Separate Units

In its comments concerning the treatment of separate units as domestic corporations, TEI explained that the rules imply that a loss arising from a foreign branch separate unit will be treated as a DCL even where the branch is not subject to an income tax of a foreign country. "This goes beyond the intent of the statute--to prevent the double dipping of losses," the Institute said. "Carried to its extreme, it suggests that even a branch located in a country with a zero-rate corporate tax--such as Bermuda--would still be subject to the DCL rules." The organization recommended that the regulations expressly provide that a DCL does not arise if the entity in question is not subject to foreign income tax.

Reflecting the view that the application of the combination rule should not be restricted to foreign branch separate units, the proposed regulations would combine all separate units directly or indirectly owned by a single domestic corporation. The losses of each separate unit, however, must be made available to offset the income of the other separate units under the tax laws of a single foreign country. In those cases where a DCL may offset income that would constitute a foreign use--or offset income not constituting a foreign use and the foreign country's laws do not provide rules to determine which income is offset--then the regulations provide that the loss is deemed to offset income not constituting a foreign use and thus a DCL domestic use election may be made for the loss.

Agreeing that this is the correct result, TEI questioned why the taxpayer must track the DCL and file the election. Combining the loss and income would result in no DCL arising in the foreign country in the first place--an administratively easier procedure. It recommended that the combination rule be expanded to include separate units that are owned directly or indirectly by domestic corporations that are members of the same consolidated group, as well as dual resident corporations.

No Foreign Use

The proposed regulations provides a new exception to the general rule prohibiting the domestic use of a DCL. To qualify under this exception, the consolidated group, unaffiliated DRC, or unaffiliated domestic owner of a separate unit must demonstrate that (I) no foreign use of the DCL occurred in the year in which it was incurred; and (ii) no such use can occur in any other year by any other means. Taken to the extreme, TEI said the "no foreign use" provision requires the taxpayer to "prove a negative" by demonstrating no no foreign use in respect of an unlimited number of countries. The Institute recommended a clarification applying the requirement only to applicable countries.

The Mirror Legislation Exception

One of the more controversial areas in the new regulations relates to the mirror legislation rule. The current Treasury regulations provide an election to use a DCL when a taxpayer certifies that the loss has not been, and will not be, used to offset the income of another person under the laws of a foreign country. To make this election, the dual resident corporation or separate entity must not be subject to any "mirror" DCL rule adopted by the foreign country. The proposed regulations retain the mirror legislation rule with certain modifications. Noting the importance of the election to taxpayers, TEI urged the government to narrow the mirror legislation rule, if not abandon it altogether.

Effective Date

Finally, in respect of the effective date of the proposed regulations, TEI urged the IRS and Treasury Department to permit taxpayers to elect to use all or portions of the proposed regulations for all open tax years.

TEI's comments on the dual consolidated loss regulations are reprinted in this issue, beginning on page 480.
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Title Annotation:Recent Activities
Publication:Tax Executive
Date:Sep 1, 2005
Previous Article:TEI comments on 2005 Canadian budget.
Next Article:TEI urges FASB to withdraw uncertain tax positions draft.

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