Monday, April 21, 2014
Jordan M. Barry (San Diego) presents PPL and the Arbitrary Foreign Income Tax Credit at Pepperdine today as part of its Tax Policy Colloquium Series hosted by Paul Caron:
Last year, the Supreme Court decided PPL v. Commissioner, ruling that the United Kingdom’s windfall tax qualifies for a U.S. foreign income tax credit. Even though the windfall tax only applies to a handful of taxpayers, economists and tax experts nationwide closely followed the PPL litigation: The foreign income tax credit a key provision of the U.S. tax code and a major component of U.S. economic policy. The rules surrounding the foreign income tax credit are quite intricate, and there is relatively little authoritative guidance to help taxpayers navigate them. And since the Supreme Court decides foreign income tax credit cases so rarely, the Court’s reasoning in PPL will likely influence courts’ thinking—and taxpayers’ pocketbooks—for many years to come.
Unfortunately, the Court’s decision in PPL does little to clarify the law and guide taxpayers. Instead, it reveals the fundamentally arbitrary nature of the foreign income tax credit.
The Court justifies its ruling as a triumph of substance over form. But the Court’s opinion itself demonstrates how two taxes can be the same in substance, yet be treated quite differently for purposes of the foreign income tax credit. The Court describes a specific hypothetical tax that would not be creditable—yet there are multiple taxes that are substantively identical to the Court’s hypothetical tax, but qualify for significant foreign income tax credits.
This Article explores these conceptual problems with the foreign income tax credit, as demonstrated by PPL, and suggests several ways in which Congress and the IRS might wish to ameliorate them.
Update: Post-presentation lunch: