On Monday, the US Supreme Court dismissed bids made by three companies to recover hundreds of millions of dollars in foreign tax credits rejected by the Internal Revenue Service as the government agency tries to restrain corporate abuse of such credits.
Reuters reported that the high court left in place lower court rulings in favor of the US Department of Treasury in cases which involve the Bank of New York Mellon Corp, BB&T, and American International Group Inc. IRS enacted foreign tax credits to prevent companies that conduct business abroad face double taxation.
Federal law requires resident aliens and US citizens to report any worldwide income, including income from a foreign bank, foreign trusts, and securities accounts. The IRS posted on their website that affected taxpayers need to complete and attach Schedule B to their tax return. US businesses or companies, which are taxed on their international income, are entitled to claim a credit for taxes paid to governments abroad.
The IRS warned big companies to avoid committing foreign tax credit abuses. According to Channel News Asia, IRS was concerned about whether certain transactions made by companies had an actual legitimate business purpose or were arranged to simply reap illegal tax credits.
According to court documents, AIG had sought $48.2 million in credits for the transactions made in 1997, following several cross-border businesses in which it borrowed $1.6 billion and then reinvested it at higher rates to make a profit. In 2015, the 2nd US Circuit Court of Appeals said that AIG's calculation of $168.8 million of pre-tax profit over the life if the transactions failed to take account several tax credits claimed and taxes paid. Meanwhile, Bank of New York Mellon had sought $200 million of credits and BB&T sought a credit for $500 million in taxes to Britain.
The US Court of Appeals for the Federal Circuit ruled in May 2015 that the cross-border transactions that led to the tax liability have insufficient economic substance.
