TAX TREATIES do not override statutes enacted later by Congress, a US appeals court said.

TAX TREATIES do not override statutes enacted later by Congress, a US appeals court said.

October 01, 2002
TAX TREATIES do not override statutes enacted later by Congress, a US appeals court said.

Air Liquide, a French company, paid royalties to its US subsidiary. The US subsidiary wanted to put the royalties into the “general limitation basket” for purposes of calculating foreign tax credits.

American companies are allowed to claim credit for any taxes they already paid to another country on their incomes. In theory, this is supposed to prevent the same income from being taxed twice — once abroad and again in the United States. However, foreign tax credits are almost impossible for US companies in capitalintensive industries to use in practice because of fine print in the US rules. One way the US inhibits use of credits is by requiring that income be divided into different “baskets” depending on the type of income. Credits put into one basket cannot be used to shield income in a different basket from US tax.

Air Liquide argued that an anti-discrimination clause in the US-France tax treaty requires the US to treat the royalties as “active” business income. The Internal Revenue Service insisted the royalties belong in the “passive” basket. The 9th circuit court of appeals noted that the US Congress enacted the basket regime in 1986. The treaty was signed in the 1960’s. The court said that later legislation — and IRS regulations issued under later legislation — override treaties.

The case is American Air Liquide, Inc. v. Commissioner.

Keith Martin