MULTINATIONAL CORPORATIONS have been making retroactive elections to increase foreign tax credits. The IRS said in late October that it will fight most such elections.

US multinational corporations must allocate the interest they pay each year on loans partly to their foreign operations on the theory that money is fungible. Interest expense is allocated between US and foreign operations in the same ratio as assets are deployed at home and abroad. The more interest allocated abroad, the fewer foreign tax credits a company will be allowed to claim in the United States.

Historically, most US companies have allocated between US and foreign assets based on the “tax bases” of their assets. However, in recent years, many companies have moved to allocate based on the relative fair market values of assets, and many companies have elected to do this retroactively in amended tax returns covering several years in the past.

The IRS said in a “coordinated issues paper” in late October that it plans to challenge companies on these retroactive elections. The agency said it would only allow a change in allocation method to be made up to the due date for the original tax return for the year in question.

Courts sometimes allow retroactive elections in other circumstances, but the IRS suggested that, if necessary, it would fight this issue in court.

Keith Martin