[Federal Register Volume 72, Number 164 (Friday, August 24, 2007)]
[Rules and Regulations]
[Pages 48551-48555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-16737]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9357]
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: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations that 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. This change is 
necessary to conform the regulations to changes in the tax law relating 
to the foreign tax credit. These final regulations will affect certain 
RICs that pay foreign taxes and the shareholders of those RICs.

DATES: Effective Date: These regulations are effective August 24, 2007.
    Applicability Date: These regulations are applicable for RIC 
taxable years ending on or after December 31, 2007. For reporting 
purposes, however, a taxpayer may rely on the current regulations for a 
taxable year ending on or after December 31, 2007, and beginning before 
August 24, 2007.

FOR FURTHER INFORMATION CONTACT: Richard C. LaFalce, (202) 622-3930 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-2035. Comments on the accuracy of 
the estimated burden and suggestions for reducing the burden should be 
sent to the Internal Revenue Service, Attn: IRS Reports Clearance 
Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224.
    The collection of information in these final regulations 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 recordkeeping burden: 80 hours.
    Estimated average annual burden per recordkeeper: 2 hours.
    Estimated number of recordkeepers: 40.
    Estimated frequency of recordkeeping: Annually.
    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.
    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

[[Page 48552]]

are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to 26 CFR part 1 under section 
853 of the Internal Revenue Code (Code). On September 18, 2006, a 
notice of proposed rulemaking (REG-105248-04) was published in the 
Federal Register (71 FR 54598). Comments were specifically requested 
with respect to the effective date of the final regulations. In 
response, a trade association sent a letter requesting that RICs be 
allowed to rely on the proposed regulations for 2006. This request was 
not granted. No public hearing was requested or held.
    The proposed regulations are adopted by this Treasury decision with 
minor modifications. The applicability date for these regulations as 
adopted, balances the industry's desire promptly to eliminate unneeded 
RIC reporting with the IRS's need for time in which to update its forms 
and instructions, thereby reducing potential taxpayer confusion that 
may arise from the new reporting requirements.
    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 
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 current Sec.  1.853-4(a), 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 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 current Sec.  1.853-3(a) that an electing RIC 
provide country-by-country information to its shareholders on foreign-
source income received and foreign taxes paid was 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 of the Code, 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 final regulations revise Sec.  
1.853-3 and Sec.  1.853-4 to require that a RIC provide aggregate per-
country information on a statement filed with its tax return and 
require that only summary foreign income and foreign tax amounts be 
reported to its shareholders. 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

    The final regulations update Sec.  1.853-1 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

[[Page 48553]]

holding period requirements are not met), or any similar provision.
    The final regulations 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) 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, are 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 RIC's 
shareholder's (or the record shareholder nominee's principal'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, the final regulations extend various deadlines in Sec.  
1.853-3(b) 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 is 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 is 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 
is increased to 60.
    Section 1.853-4 is 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 eliminated. The final 
regulations 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) also requires 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) continues to provide that this required 
information is to be provided on or with a modified Form 1118 but adds 
that it may instead be provided in such other form or manner as may be 
prescribed by the Commissioner. This change facilitates future changes 
in administrative practice if, for example, forms are renumbered or 
become obsolete.

Special Analyses

    It has been determined that this Treasury decision 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 Act (5 
U.S.C. chapter 5) does not apply to these regulations because these 
regulations do not impose a collection of information on small 
entities.
    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b), it has also been determined that the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply to these 
regulations because these regulations do not have a significant 
economic impact on a substantial number of small entities. According to 
the Small Business Administration definition of a ``small business,'' 
13 CFR 121.201, a RIC is classified as a Portfolio Management company, 
NAICS code 523920, and is considered a small entity if it accumulates 
less than 6.5 million dollars in annual receipts. It has been 
determined that RICs affected by these regulations generally will have 
greater than 6.5 million dollars in annual receipts and therefore will 
not generally be classified as small business entities.
    Because the summary reporting of the foreign tax credit information 
provided by these regulations is universally less burdensome than the 
reporting of country-by-country information previously required, it is 
also clear that these regulations do not have a significant economic 
impact on affected RICs. Pursuant to section 7805(f) of the Internal 
Revenue Code, the proposed regulations preceding these regulations were 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal author of this regulation is Richard C. LaFalce of 
the Office of Associate Chief Counsel (Financial Institutions and 
Products).

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
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. * * *


0
Par. 2. Section 1.853-1 is amended by adding a sentence at the end of 
paragraph (a) and adding paragraph (c) 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).
* * * * *
    (c) Effective/applicability date. The final sentence of paragraph 
(a) of this section is applicable for RIC taxable years ending on or 
after December 31, 2007.

0
Par. 3. Section 1.853-2 is amended by revising paragraph (d) and adding 
paragraph (e) 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

[[Page 48554]]

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 
distributed to its shareholders the entire $645,000 income that was 
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).

    (e) Effective/applicability date. Paragraph (d) of this section is 
applicable for RIC taxable years ending on or after December 31, 2007. 
Notwithstanding the preceding sentence, for a taxable year that ends on 
or after December 31, 2007, and begins before August 24, 2007, a 
taxpayer may rely on this section as it was in effect on August 23, 
2007.

0
Par. 4. Section 1. 853-3 is amended by:
0
1. Revising paragraph (a).
0
2. Removing the number ``55th'' and adding the number ``70th'' in its 
place in the first sentence of paragraph (b).
0
3. Revising the second sentence of paragraph (b).
0
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).
0
5. Adding paragraph (c).
    The revisions and addition 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 Sec.  
1.853-2(b), the amount that a shareholder may treat as the 
shareholder's proportionate share of foreign taxes paid 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) * * * 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 pursuant to paragraph (a) of this 
section. * * *
    (c) Effective/applicability date. This section is applicable for 
RIC taxable years ending on or after December 31, 2007. Notwithstanding 
the preceding sentence, for a taxable year that ends on or after 
December 31, 2007, and begins before August 24, 2007, a taxpayer may 
rely on this section as it was in effect on August 23, 2007.

0
Par. 5. Section 1.853-4 is revised to 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 thereof), 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

[[Page 48555]]

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 ``Foreign 
Tax Credit--Corporations'' filed as part of the RIC's timely filed 
Federal income tax return for the taxable year.
    (e) Effective/applicability date. This section is applicable for 
RIC taxable years ending on or after December 31, 2007. Notwithstanding 
the preceding sentence, for a taxable year that ends on or after 
December 31, 2007, and begins before August 24, 2007, a taxpayer may 
rely on this section as it was in effect on August 23, 2007.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 6. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 7. In Sec.  602.101, paragraph (b) is amended by revising the 
entries for 1.853-3 and 1.853-4 to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
    CFR part or section where identified or described       control No.
------------------------------------------------------------------------
 
                                * * * * *
1.853-3.................................................       1545-2035
1.853-4.................................................       1545-2035
 
                                * * * * *
------------------------------------------------------------------------


Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
    Approved: August 9, 2007.
Karen G. Sowell,
Deputy Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E7-16737 Filed 8-23-07; 8:45 am]
BILLING CODE 4830-01-P