[Federal Register Volume 71, Number 180 (Monday, September 18, 2006)]
[Proposed Rules]
[Pages 54598-54601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-7731]



[[Page 54598]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-105248-04]
RIN 1545-BE09


Elimination of Country-by-Country Reporting to Shareholders of 
Foreign Taxes Paid by Regulated Investment Companies

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that would 
generally eliminate country-by-country reporting by a regulated 
investment company (RIC) to its shareholders of foreign source income 
that the RIC takes into account and foreign taxes that it pays. RICs 
will continue to report this information directly to the IRS. The 
regulations will affect certain RICs that pay foreign taxes and the 
shareholders of those RICs.

DATES: Written or electronic comments and requests for a public hearing 
must be received by December 18, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-105248-04), Internal 
Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 
20044. Submissions may be sent electronically via the IRS Internet site 
at: http://www.irs.gov/regs or Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-105248-04).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Susan Thompson Baker, (202) 622-3930; concerning submissions of 
comments and requests for a public hearing, Kelly Banks, (202) 622-7180 
(not toll free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by November 17, 2006. Comments are specifically requested 
concerning:
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in this proposed regulation is in 
Sec.  1.853-4(c) and (d). A RIC is required to notify the IRS of 
amounts of income received from sources within foreign countries and 
possessions of the United States and taxes paid to each such foreign 
country or possession in order that the IRS may monitor shareholder 
compliance with the foreign tax credit provisions. The collection of 
information is required if a RIC elects to pass through the benefits of 
the foreign tax credit to its shareholders.
    Estimated total annual reporting burden: 80 hours.
    Estimated average annual burden hours per respondent: 2.
    Estimated annual frequency of responses: 1.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed amendments to 26 CFR part 1 under 
section 853 of the Internal Revenue Code (Code). Section 853 provides a 
foreign tax credit or deduction to shareholders of a RIC that makes an 
election under, and that meets the requirements set forth in, that 
section.
    A RIC more than 50 percent of the value of whose total assets at 
the close of a taxable year consists of stock or securities in foreign 
corporations may make an election under section 853 (a ``foreign tax 
passthrough election''). If the RIC makes this election for that 
taxable year, it forgoes a deduction or credit for certain taxes paid 
to foreign countries and possessions of the United States 
(collectively, ``foreign taxes'') (but the amount of the foreign taxes 
is allowed as an addition to the RIC's deduction for dividends paid for 
the year). Instead, the RIC passes through to its shareholders a credit 
or deduction for the foreign taxes it has paid during its taxable year. 
If the RIC makes this election, each shareholder includes the 
shareholder's proportionate share of these foreign taxes in gross 
income and treats this proportionate share as paid by the shareholder. 
Each shareholder of an electing RIC further treats as gross income from 
sources within foreign countries and possessions of the United States 
the sum of the shareholder's proportionate share of these taxes and the 
portion of any dividend paid by the RIC that represents income derived 
from sources within foreign countries and possessions of the United 
States. Each shareholder may then deduct or claim a credit for the 
payment of a proportionate share of these taxes.
    A RIC electing this treatment must provide information to its 
shareholders and to the IRS. First, under section 853(c) of the Code, 
the RIC must designate, in a written notice mailed to shareholders not 
later than 60 days after the close of its taxable year, each 
shareholder's proportionate share of foreign taxes paid by the RIC and 
each shareholder's proportionate share of the RIC's gross income 
derived from sources within any foreign country or possession of the 
United States. Section 1.853-3(a) of the current Income tax regulations 
(the regulations) requires that this notice designate the shareholder's 
portion of foreign taxes paid to each such foreign country or 
possession of the United States and the portion of the dividend that 
represents income derived from sources within each foreign country or 
possession of the United States.
    Second, under Sec.  1.853-4(a) of the regulations, the RIC must 
file with Form 1099-DIV, ``Dividends and Distributions'', and Form 
1096, ``Annual Summary and Transmittal of U.S. Information Returns'', a 
statement as part of its income tax return (Form 1120-RIC or its 
successor) that sets forth the total amount of income received

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from sources within foreign countries and possessions of the United 
States; the total amount of foreign taxes paid; the date, form, and 
contents of the notice to its shareholders; and the proportionate share 
of this income received and these taxes paid during the taxable year 
attributable to one share of its stock. The RIC must also file as part 
of its return for the taxable year a Form 1118, ``Foreign Tax Credit--
Corporations'', that has been modified so that it is a statement in 
support of the RIC's foreign tax passthrough election.
    The requirement of Sec.  1.853-3(a) of the regulations that an 
electing RIC provide country-by-country information to its shareholders 
on foreign-source income received and foreign taxes paid was originally 
adopted at a time when many shareholders generally needed the 
information to apply a per-country limitation on the foreign tax 
credit. Because of changes to the foreign tax credit provisions, 
shareholders generally no longer need country-by-country information on 
the amounts of foreign-source income and foreign taxes paid.
    The Treasury Department and the IRS have received comments 
suggesting that the section 853 regulations should be amended to 
eliminate per-country reporting to shareholders and that Form 1116, 
``Foreign Tax Credit--Individual, Estate or Trust'', should be modified 
to indicate that distributions from RICs are exempt from per-country 
shareholder reporting. According to these comments, eliminating the 
reporting of this information not only would reduce the time and 
expense required of RICs to compile and disseminate this tax 
information but also would reduce the confusion that their shareholders 
experience upon receipt of the extensive tables used to report this 
per-country information.
    Even though the section 904 foreign tax credit limitation has been 
applied on a separate category of income basis, instead of on a per-
country basis, since 1976, the Treasury Department and the IRS have 
continued to require the reporting of per-country information by RICs. 
This per-country information remains relevant to the IRS's monitoring 
compliance with the section 901 rules that disallow credits for 
refundable and noncompulsory payments and for taxes paid to certain 
countries. See Sec.  1.901-2(e)(2) and (5), providing that credit is 
not allowed for amounts that are in excess of final liability under 
foreign law for tax, and section 901(j), denying credit for tax paid to 
countries described in section 901(j)(2)(A) and subjecting income from 
sources in those countries to separate foreign tax credit limitations.
    Although per-country information with respect to foreign income and 
foreign taxes is needed for the IRS to monitor compliance, the Treasury 
Department and the IRS believe that taxpayer burden can be reduced by 
continuing to require this information to be supplied with the RIC's 
tax return but generally not requiring it to be reported to the RIC's 
shareholders as well. Accordingly, the proposed regulations would 
revise Sec. Sec.  1.853-3 and 1.853-4 to require that a RIC provide 
aggregate per-country information on a statement filed with its tax 
return and would require that only summary foreign income and foreign 
tax amounts be reported to its shareholders. Once this proposed rule 
becomes final, the instructions to Forms 1116 and 1118 will be modified 
to permit summary reporting at the shareholder level similar to the 
summary reporting currently permitted with respect to ``section 863(b) 
income'' on Forms 1116 and 1118.

Explanation of Provisions

    Proposed amendments to Sec.  1.853-1 of the regulations would 
update the regulations to reflect statutory amendments providing that 
the foreign tax passthrough election is not applicable to taxes for 
which the RIC would not be allowed a credit by reason of section 901(j) 
(denying credit for taxes paid to certain countries, including those 
with which the United States does not have diplomatic relations), 
section 901(k) and (l) (denying credit for withholding taxes paid on 
certain income where certain holding period requirements are not met), 
or any similar provision.
    The proposed amendments would change in two ways the regulations 
that set forth requirements for a RIC seeking to make and to notify 
shareholders of a foreign tax passthrough election:
    First, references in Sec.  1.853-3(a) and (b) of the regulations to 
required statements to shareholders of dollar amounts of taxes paid to 
specific countries, and to dollar amounts of income considered as 
received from specific countries, would be changed to require that a 
RIC (or a shareholder of record of the RIC who is a nominee acting as a 
custodian of a unit investment trust) state only the total amount of 
the shareholder's proportionate share of creditable foreign taxes paid, 
income from sources within countries described in section 901(j), if 
any, and income derived from sources within other foreign countries or 
possessions of the United States.
    Second, proposed amendments to Sec.  1.853-3(b) extend various 
deadlines to reflect statutory changes since the regulations were 
issued. Thus the number of days following the close of its taxable year 
by which a RIC must notify its shareholders in writing of the making of 
a foreign tax passthrough election would be increased to 60. References 
to the number of days following the close of the taxable year by which 
a nominee acting as a custodian of a unit investment trust must notify 
holders of interests in the unit investment trust would be increased to 
70. Similarly, references to the number of days following the close of 
a RIC's taxable year by which a statement that holders of interests in 
unit investment trusts have been directly notified by the RIC (or a 
statement that the RIC has failed or is unable to notify these holders 
of interests) must be filed with the IRS and transmitted to a nominee 
would be increased to 60.
    Section 1.853-4 of the regulations would be modified to create more 
flexibility in the references to specific forms. The current 
regulations require a RIC to file statements with Form 1099 and Form 
1096 and to file, as a part of its return for the taxable year, a Form 
1118, modified so that it becomes a statement in support of the 
election made by a RIC to pass through taxes paid to a foreign country 
or a possession of the United States. The first of these requirements, 
the requirement to file statements with Forms 1099 and 1096, is 
proposed to be eliminated. The proposed regulations would retain the 
general requirement that a RIC must file as part of its return a 
statement that elects the application of section 853 for the taxable 
year.
    Section 1.853-4(a) of the regulations would also require that a RIC 
agree to provide certain information on foreign-source income received 
and foreign taxes paid. The information required to be provided is set 
forth in Sec.  1.853-4(c). Section 1.853-4(d) would provide that this 
required information is to be provided on or with a modified Form 1118 
but would add that it may instead be provided in such other form or 
manner as may be prescribed by the Commissioner. This change would 
facilitate future changes in administrative practice if, for example, 
forms are renumbered or become obsolete.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure

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Act (5 U.S.C. chapter 5) does not apply to these regulations, and, 
because the regulations do not impose a collection of information on 
small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
does not apply. Pursuant to section 7805(f) of the Internal Revenue 
Code, this regulation has been submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and 8 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and the Treasury Department request comments on the clarity of 
the proposed rules and how they can be made easier to understand. All 
comments will be available for public inspection and copying. A public 
hearing will be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the public hearing will be 
published in the Federal Register.
    The Treasury Department and the IRS invite suggestions regarding 
any provisions that should be added to the proposed regulations if the 
reporting of per-country information to shareholders is to be 
eliminated for calendar year 2006. In addition, the Treasury Department 
and the IRS invite comments both on the date by which final regulations 
should be published in order for a change in reporting practice to be 
practical for 2006 and on any effective date concerns regarding the 
reporting of per-country information to the IRS.

Drafting Information

    The principal author of this regulation is Susan Thompson Baker of 
the Office of Associate Chief Counsel (Financial Institutions and 
Products).

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.853-1 also issued under 26 U.S.C. 901(j).
    Section 1.853-2 also issued under 26 U.S.C. 901(j).
    Section 1.853-3 also issued under 26 U.S.C. 901(j).
    Section 1.853-4 also issued under 26 U.S.C. 901(j) and 26 U.S.C. 
6011. * * *

    Par. 2. Section 1.853-1 is amended by adding a sentence at the end 
of paragraph (a) to read as follows:


Sec.  1.853-1  Foreign tax credit allowed to shareholders.

    (a) In general. * * * In addition, the election is not applicable 
to any tax with respect to which the regulated investment company is 
not allowed a credit by reason of any provision of the Internal Revenue 
Code other than section 853(b)(1), including, but not limited to, 
section 901(j), section 901(k), or section 901(l).
* * * * *
    Par. 3. Section 1.853-2 is amended by revising paragraph (d) to 
read as follows:


Sec.  1.853-2  Effect of election.

* * * * *
    (d) Example. This section is illustrated by the following example:

    Example. (i) Facts. X Corporation, a regulated investment 
company with 250,000 shares of common stock outstanding, has total 
assets, at the close of the taxable year, of $10 million ($4 million 
invested in domestic corporations, $3.5 million in Foreign Country A 
corporations, and $2.5 million in Foreign Country B corporations). X 
Corporation received dividend income of $800,000 from the following 
sources: $300,000 from domestic corporations, $250,000 from Country 
A corporations, and $250,000 from Country B corporations. All 
dividends from Country A corporations and from Country B 
corporations were properly characterized as income from sources 
without the United States. The dividends from Country A corporations 
were subject to a 10 percent withholding tax ($25,000) and the 
dividends from Country B corporations were subject to a 20 percent 
withholding tax ($50,000). X Corporation's only expenses for the 
taxable year were $80,000 of operation and management expenses 
related to both its U.S. and foreign investments. In this case, 
Corporation X properly apportioned the $80,000 expense based on the 
relative amounts of its U.S. and foreign source gross income. Thus, 
$50,000 in expense was apportioned to foreign source income ($80,000 
x $500,000/$800,000, total expense times the fraction of foreign 
dividend income over total dividend income) and $30,000 in expense 
was apportioned to U.S. source income ($80,000 x $300,000/$800,000, 
total expense times the fraction of U.S. source dividend income over 
total dividend income). During the taxable year, X Corporation 
distributes to its shareholders the entire $645,000 income that is 
available for distribution ($800,000, less $80,000 in expenses, less 
$75,000 in foreign taxes withheld).
    (ii) Section 853 election. X Corporation meets the requirements 
of section 851 to be considered a RIC for the taxable year and the 
requirements of section 852(a) for part 1 of subchapter M to apply 
for the taxable year. X Corporation notifies each shareholder by 
mail, within the time prescribed by section 853(c), that by reason 
of the election the shareholders are to treat as foreign taxes paid 
$0.30 per share of stock ($75,000 of foreign taxes paid, divided by 
the 250,000 shares of stock outstanding). The shareholders must 
report as income $2.88 per share ($2.58 of dividends actually 
received plus the $0.30 representing foreign taxes paid). Of the 
$2.88 per share, $1.80 per share ($450,000 of foreign source taxable 
income divided by 250,000 shares) is to be considered as received 
from foreign sources. The $1.80 consists of $0.30, the foreign taxes 
treated as paid by the shareholder and $1.50, the portion of the 
dividends received by the shareholder from the RIC that represents 
income of the RIC treated as derived from foreign sources ($500,000 
of foreign source income, less $50,000 of expense apportioned to 
foreign source income, less $75,000 of foreign tax withheld, which 
is $375,000, divided by 250,000 shares).

    Par. 4. Section 1. 853-3 is amended by:
    1. Revising paragraph (a).
    2. Removing the number ``55th'' and adding the number ``70th'' in 
its place in the first sentence of paragraph (b).
    3. Revising the second sentence of paragraph (b).
    4. Removing the number ``45'' and adding the number ``60'' in its 
place in each place in which it appears in the fifth sentence of 
paragraph (b).
    The revisions read as follows:


Sec.  1.853-3  Notice to shareholders.

    (a) General rule. If a regulated investment company makes an 
election under section 853(a), in the manner provided in Sec.  1.853-4, 
the regulated investment company is required under section 853(c) to 
furnish its shareholders with a written notice mailed not later than 60 
days after the close of its taxable year. The notice must designate the 
shareholder's portion of creditable foreign taxes paid to foreign 
countries or possessions of the United States and the portion of the 
dividend that represents income derived from sources within each 
country that is attributable to a period during which section 901(j) 
applies to such country, if any, and the portion of the dividend that 
represents income derived from other foreign countries and possessions 
of the United States. For purposes of section 853(b)(2) and paragraph 
(b) of Sec.  1.853-2, the amount that a shareholder may treat as the 
shareholder's proportionate share of foreign taxes paid

[[Page 54601]]

and the amount to be included as gross income derived from any foreign 
country that is attributable to a period during which section 901(j) 
applies to such country or gross income from sources within other 
foreign countries or possessions of the United States shall not exceed 
the amount so designated by the regulated investment company in such 
written notice. If, however, the amount designated by the regulated 
investment company in the notice exceeds the shareholder's proper 
proportionate share of foreign taxes or gross income from sources 
within foreign countries or possessions of the United States, the 
shareholder is limited to the amount correctly ascertained.
    (b) Shareholder of record custodian of certain unit investment 
trusts. * * * The notice shall designate the holder's proportionate 
share of the amounts of creditable foreign taxes paid to foreign 
countries or possessions of the United States and the holder's 
proportionate share of the dividend that represents income derived from 
sources within each country that is attributable to a period during 
which section 901(j) applies to such country, if any, and the holder's 
proportionate share of the dividend that represents income derived from 
other foreign countries or possessions of the United States shown on 
the notice received by the nominee identified as such. * * *
* * * * *
    Par. 5. Section 1.853-4 is amended by:
    1. Revising paragraphs (a) and (b).
    2. Adding paragraphs (c) and (d).
    The revisions and additions read as follows:


Sec.  1.853-4  Manner of making election.

    (a) General rule. To make an election under section 853 for a 
taxable year, a regulated investment company must file a statement of 
election as part of its Federal income tax return for the taxable year. 
The statement of election must state that the regulated investment 
company elects the application of section 853 for the taxable year and 
agrees to provide the information required by paragraph (c) of this 
section.
    (b) Irrevocability of the election. The election shall be made with 
respect to all foreign taxes described in paragraph (c)(2) of this 
section, and must be made not later than the time prescribed for filing 
the return (including extensions). This election, if made, shall be 
irrevocable with respect to the dividend (or portion) and the foreign 
taxes paid with respect thereto, to which the election applies.
    (c) Required information. A regulated investment company making an 
election under section 853 must provide the following information:
    (1) The total amount of taxable income received in the taxable year 
from sources within foreign countries and possessions of the United 
States and the amount of taxable income received in the taxable year 
from sources within each such foreign country or possession.
    (2) The total amount of income, war profits, or excess profits 
taxes (described in section 901(b)(1)) to which the election applies 
that were paid in the taxable year to such foreign countries or 
possessions and the amount of such taxes paid to each such foreign 
country or possession.
    (3) The amount of income, war profits, or excess profits taxes paid 
during the taxable year to which the election does not apply by reason 
of any provision of the Internal Revenue Code other than section 
853(b), including, but not limited to, section 901(j), section 901(k), 
or section 901(l).
    (4) The date, form, and contents of the notice to its shareholders.
    (5) The proportionate share of creditable foreign taxes paid to 
each such foreign country or possession during the taxable year and 
foreign income received from sources within each such foreign country 
or possession during the taxable year attributable to one share of 
stock of the regulated investment company.
    (d) Time and manner of providing information. The information 
specified in paragraph (c) of this section must be provided at the time 
and in the manner prescribed by the Commissioner and, unless otherwise 
prescribed, must be provided on or with a modified Form 1118 filed as 
part of the RIC's timely filed Federal income tax return for the 
taxable year.
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 06-7731 Filed 9-15-06; 8:45 am]
BILLING CODE 4830-01-P