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March 07, 2019 The Tax Lawyer

The Compulsory Tax Constraint for Foreign Tax Credits Post TCJA & Coca-Cola Co. v. Commissioner

Vol. 72, No. 2 - Winter 2019

Philip G. Cohen


     One condition imposed by the Treasury Regulations for a foreign levy to be creditable is that the tax must be a “compulsory payment pursuant to the authority of a foreign country to levy taxes.” This Article focuses on the purpose and application of that prerequisite which serves to prevent taxpayers from “pursuing the path of least resistance in dealing with foreign tax authorities.” This restriction was the subject of recent litigation in the United States Tax Court in Coca-Cola Co. v. Commissioner. The Tax Court granted the taxpayer’s motion for partial summary judgment finding that the Service erred as a matter of law in determining that the Mexican taxes in question were not “compulsory” and, therefore, not eligible for foreign tax credit relief. The taxpayer’s attempt at competent authority relief had been thwarted by the Service, which refused to participate in competent authority proceedings until the conclusion of the adjudication because the issue pertaining to transfer pricing adjustments had been designated for litigation. Despite that, the Service asserted that the taxes in question were not compulsory because, inter alia, competent authority proceedings had not yet been undertaken. The Tax Court’s decision in favor of the taxpayer was carefully reasoned, embracing common sense and logic and rejecting the irrational direction proposed by the Service. At a time when many believe Congress has taken the U.S. international tax system in an inappropriate direction as a result of the recent enactment of the Tax Cut and Jobs Act, it is of some comfort to see one court interpret this international tax regulatory requirement in a discerning manner.

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