US multinational corporations
US MULTINATIONAL CORPORATIONS with European subsidiaries may have trouble claiming some foreign credits in the United States after a decision by the European Court of Justice in the Marks & Spencer case.
The United States taxes US companies on worldwide income, but lets them claim credit for income taxes paid on the same income to other countries. However, taxes that a company pays voluntarily are not creditable. IRS regulations require a company to make a reasonable interpretation of foreign law, to avail itself of treaty benefits, and to take “all effective and practical remedies” to minimize its tax burden in other countries. In the Marks & Spencer case, the European Court of Justice said that the United Kingdom must let Marks & Spencer use tax losses from subsidiaries in other member countries of the European Union to reduce the taxable income the parent company must report in Britain.
This is one of the consequences of the treaty creating the European Union. However, losses must be allowed to the parent in Britain only in situations where the losses cannot be used in the country of residence of the subsidiary in any past or future year, including future use by a purchaser of the subsidiary. Thus, for example, a group of companies could not simply choose to use losses anywhere in the group in the country where the tax rates are highest.
The decision appears to be retroactive, opening the door to refund claims for taxes paid in past years. It has created uncertainty about when losses can be used across borders within Europe. US companies could find foreign tax credits disallowed if they fail to take full advantage of the decision.