Tax Type
Corporation Income Tax
Description
Foreign Source Income Subtraction Adjustmented
Topic
Returns and Payments
Date Issued
11-18-1999
November 18, 1999
Re: Sec. 58.1-1821 Application: Corporate Income Tax
Dear*****
This will reply to your letter in which you contest an adjustment to the foreign source income subtraction for ***** (the ``Taxpayer') for the taxable years ended December 31, 1995 through 1997.
FACTS
The Taxpayer filed separate Virginia income tax returns for its 1995 through 1997 taxable years and claimed a foreign source income subtraction. Under audit, the foreign source income subtraction was adjusted using amounts reported on the consolidated federal Forms 1118 (Foreign Tax Credit - Corporations) filed on behalf of the affiliated group which includes the Taxpayer. The Taxpayer contests these adjustments claiming the consolidated Forms 1118 are inappropriate for computing amounts for a separate entity.
DETERMINATION
It has been the department's long standing policy that the computation of the Virginia subtraction for foreign source income (considering expenses related to the income) be determined in accordance with Internal Revenue Code (I.R.C.) Sec.861 through Sec.863. See Public Document (P.D.) 91-229 (9/30/91), copy enclosed. Virginia law requires the use of the federal sourcing rules of IRC Sec.861 et seq. whether or not the taxpayer believes that certain expenses have any connection to income from foreign sources and regardless of what expenses would be under generally accepted accounting principles.
The purpose of Form 1118 is to compute the limitation on the amount of foreign taxes which can be claimed as a credit against federal tax liability. When the procedures of the IRC Sec.861 et seq. are used to complete Form 1118, the information reported on this form is considered useful and presumed correct and accurate. Such information is an appropriate starting point for computing the foreign source income subtraction allowed on the Taxpayer's Virginia return.
The department calculated the Taxpayer's expense related to foreign source income by taking the ratio of the expenses reported on the consolidated Forms 1118 to the consolidated foreign source income and applying this ratio against the Taxpayer's foreign source income. The Taxpayer contends the method used by the auditor distorts the amount of expenses related to the Taxpayer's foreign source income.
Title 23 of the Virginia Administrative Code (VAC) 10-120-20 states that the federal procedure in Treasury Regulation Sec.1.861-8 is applied to allocate and apportion expenses to income derived from the U.S. and foreign sources. The auditor properly estimated expenses related to foreign source income based on the Taxpayer's consolidated Form 1118 because no by-entity breakdown of income and expenses was provided at the time of the audit. The Taxpayer has provided schedules which show its foreign source income and its respective foreign source expenses on a separate company basis in accordance with P.D. 91-229.
Accordingly, the assessments have been adjusted for the 1995, 1996 and 1997 taxable years according to the enclosed schedules. Please send the tax and interest due to ***** at the Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the accrual of additional interest. If you have any questions regarding this determination, you may contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25188B
Re: Sec. 58.1-1821 Application: Corporate Income Tax
Dear*****
This will reply to your letter in which you contest an adjustment to the foreign source income subtraction for ***** (the ``Taxpayer') for the taxable years ended December 31, 1995 through 1997.
FACTS
The Taxpayer filed separate Virginia income tax returns for its 1995 through 1997 taxable years and claimed a foreign source income subtraction. Under audit, the foreign source income subtraction was adjusted using amounts reported on the consolidated federal Forms 1118 (Foreign Tax Credit - Corporations) filed on behalf of the affiliated group which includes the Taxpayer. The Taxpayer contests these adjustments claiming the consolidated Forms 1118 are inappropriate for computing amounts for a separate entity.
DETERMINATION
It has been the department's long standing policy that the computation of the Virginia subtraction for foreign source income (considering expenses related to the income) be determined in accordance with Internal Revenue Code (I.R.C.) Sec.861 through Sec.863. See Public Document (P.D.) 91-229 (9/30/91), copy enclosed. Virginia law requires the use of the federal sourcing rules of IRC Sec.861 et seq. whether or not the taxpayer believes that certain expenses have any connection to income from foreign sources and regardless of what expenses would be under generally accepted accounting principles.
The purpose of Form 1118 is to compute the limitation on the amount of foreign taxes which can be claimed as a credit against federal tax liability. When the procedures of the IRC Sec.861 et seq. are used to complete Form 1118, the information reported on this form is considered useful and presumed correct and accurate. Such information is an appropriate starting point for computing the foreign source income subtraction allowed on the Taxpayer's Virginia return.
The department calculated the Taxpayer's expense related to foreign source income by taking the ratio of the expenses reported on the consolidated Forms 1118 to the consolidated foreign source income and applying this ratio against the Taxpayer's foreign source income. The Taxpayer contends the method used by the auditor distorts the amount of expenses related to the Taxpayer's foreign source income.
Title 23 of the Virginia Administrative Code (VAC) 10-120-20 states that the federal procedure in Treasury Regulation Sec.1.861-8 is applied to allocate and apportion expenses to income derived from the U.S. and foreign sources. The auditor properly estimated expenses related to foreign source income based on the Taxpayer's consolidated Form 1118 because no by-entity breakdown of income and expenses was provided at the time of the audit. The Taxpayer has provided schedules which show its foreign source income and its respective foreign source expenses on a separate company basis in accordance with P.D. 91-229.
Accordingly, the assessments have been adjusted for the 1995, 1996 and 1997 taxable years according to the enclosed schedules. Please send the tax and interest due to ***** at the Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the accrual of additional interest. If you have any questions regarding this determination, you may contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25188B
Rulings of the Tax Commissioner