Information Exchange With the United Kingdom Leads to Adjustment in Foreign Tax Credit Claimed

By:
Charles Ladas, CPA, and Joseph Neri, CPA
Published Date:
Oct 1, 2017

As the global economy becomes more aligned, it is common for businesses and individuals today to have income and tax compliance issues in more than one country. With the complexity of varying tax regimes and the difficulty in monitoring offshore tax compliance, governments and taxing authorities around the world are looking for ways to collaborate and ensure taxpayers are paying their fair share, wherever they may be. 

Collaborative efforts among many countries have led to the formation of various Tax Information Exchange Agreements (TIEAs). A TIEA is a model information exchange agreement designed by the Organisation for Economic Cooperation and Development (OECD). According to the OECD, “The purpose of this Agreement is to promote international co-operation in tax matters through exchange of information.” The United States has TIEAs with countries throughout the world, and it has also instituted its own information-sharing program via Intergovernmental Agreements (IGAs) under the Foreign Account Tax Compliance Act (FATCA).

The OECD has also worked with G20 countries to develop a global form of FATCA, formally known as the Common Reporting Standard (CRS). The CRS is expected to become the global standard for automatic exchange of information. While FATCA-implemented IGAs are tailored to address U.S. tax issues with another specific country, CRS is implemented under Competent Authority Agreements (CAA) and can be structured to include two or more countries. CAAs are expected to better represent the tax compliance needs of all countries involved, rather than just those of the United States, as IGAs are often perceived to do. According to the OECD, as of June 2017, over 90 taxing jurisdictions have signed CAAs to participate in the automatic exchange of information. The information exchange for many of the participating countries is scheduled to begin in September 2017.

Although these agreements are primarily notorious for exchanging information regarding undisclosed foreign brokerage and bank accounts, a recent U.S. Tax Court case reduced a taxpayer’s foreign tax credits claimed after the IRS discovered that substantially all of the foreign taxes originally paid were refunded.

In Sotiropoulos v. Commissioner, the taxpayer, a U.S. citizen who resided and worked in London from 2002 to 2006, had U.K. compensation and taxes withheld that were reported on a U.K. tax return. As a U.S. citizen, the taxpayer was also required to file U.S. tax returns for the corresponding years, which reported her U.K. compensation and claimed foreign tax credits for the taxes withheld/paid to Her Majesty’s Revenue and Customs (HMRC), the U.K. taxing authority.

The taxpayer subsequently filed amended U.K. returns for the relevant years to report losses attributable to U.K. film investments she made. The results of these losses produced significant overpayments of U.K. taxes, which the taxpayer elected to have refunded. The taxpayer however, did not notify the Secretary regarding the U.K. tax refunds as required by IRC section 905(c)(1)(C), because it was uncertain if the claimed losses would be sustained upon examination by HMRC.

Although the taxpayer had failed to disclose the U.K. refunds, the IRS was notified of the taxpayer’s U.K. refunds received under the terms of the U.S./U.K. information exchange agreement. The IRS consequently reduced the taxpayer’s foreign tax credits claimed and issued the taxpayer a notice of deficiency for the years in question. The Tax Court concluded that the term “refund” does not connote finality or the final determination of a tax liability for U.S. federal income tax. Even though the taxpayer might have to repay the amounts originally refunded, it does not mean the taxpayer did not receive a refund reportable under IRC section 905(c)(1)(C).

Tax preparers dealing with international tax compliance issues should take notice of the Sotiropoulos opinion. With information exchange agreements becoming more prevalent among governments and taxing authorities, taxpayers must be aware that events that often went unnoticed may now reveal themselves. As the enforcement of international tax compliance increases worldwide, preparers and taxpayers alike should be advised to consider the potential tax implications resulting from the open exchange of information.


ladasCharles Ladas, CPA, is a tax supervisor at Citrin Cooperman & Company, LLP.  He is involved with a wide array of tax services for domestic and international clients. The services include tax compliance for businesses and high-net-worth individuals, tax provisions for corporations, and tax research, with an emphasis on international tax issues.  Mr. Ladas is licensed in New York State and is a member of the NYSSCPA and AICPA.  He is also a member of the NYSSCPA’s International Taxation Committee. He can be reached at cladas@citrincooperman.com.

neriJoseph Neri, CPA, is a tax manager at Citrin Cooperman & Company, LLP. Mr. Neri provides state, local, and federal tax compliance and consulting services related to high-net-worth individuals, partnerships, corporations, trusts, and private foundations. Mr. Neri is licensed in New York State and is a member of the NYSSCPA and AICPA. He is also a member of the NYSSCPA’s International Taxation Committee.  He can be reached at jneri@citrincooperman.com.

 
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