Foreign Electricity Sales

Foreign Electricity Sales

August 01, 2004

Foreign electricity sales must be registered as potential corporate tax shelters, the IRS said.

The result was not intended, but the agency said that is what its rules require. IRS regulations identify six features that the US government believes are signs that a transaction may be a corporate tax shelter. US companies must report any transactions possessing any one of the six features to the IRS.

One such feature is if the transaction results “in the taxpayer claiming a tax credit exceeding $250,000 (including a foreign tax credit) if the underlying asset giving rise to the credit is held by the taxpayer for 45 days or less.”

US utilities that own power plants in other countries earn revenue abroad from their electricity sales and pay taxes locally. The taxes can be claimed as a foreign tax credit in the United States. The big four accounting firms have been advising such companies that because the electricity is held for fewer than 45 days before it is sold, all such electricity sales must be reported as potential tax shelters. The IRS confirms this is how it reads its rules, but acknowledges it makes no sense.

All US manufacturing industries are in the same position since, with just-in-time inventory practices, no one manufactures and hold goods in a warehouse for more than six weeks before making sales.

US Treasury officials are studying the problem. The Electric Power Supply Association urged the Treasury in July to issue a quick announcement before the government is buried in forms reporting mundane commercial activities. Other industry trade associations are expected to weigh in, as well.

Keith Martin