In a move designed to encourage charitable giving by multinational corporations, the Treasury on July 27 released proposed regulations regarding the treatment of charitable contributions for foreign tax credit purposes. The new rules mandate a simpler method of allocating and apportioning charitable deductions than the method contained in current regulations or in regulations that were proposed in 1991. The new rules generally provide that a charitable contribution that is deductible for U.S. income tax purposes is allocated and apportioned solely to U.S.- source income for foreign tax purposes; a position that is more favorable to corporations than existing or proposed rules.
Because the proposed regulations will also serve as temporary regulations, these new rules are now in effect and will remain so until Treasury withdraws them or issues permanent regulations. The proposed regulations that were published back in 1991 are now withdrawn.
Background. In 1986, Congress revised the Tax Code. One change Congress made was to Section 864(e)(6) of the Code to address the use by multinational companies of multiple affiliated corporations to maneuver costs and expenses in order to lower their U.S. income tax liability. To end this drain on the Treasury, Congress revised Section 846(e) to require that expenses not directly traceable to a particular activity be allocated and apportioned as if all the members of the affiliated group were one corporation.
Initially, the Treasury Department intended to apply these sourcing rules to charitable contributions as well as to other company expenditures. Had Treasury done this, companies would have had to allocate part of their charitable gifts to their foreign source income, causing some companies--those that already had more credits for taxes paid to foreign governments than they could use--to lose part of the value of their charitable deduction. Treasury did propose a modified rule for comment in 1991 that was less severe, but still would have discouraged contributions by multinational corporations with excess foreign tax credits to charities that performed most of their services abroad (such as disaster relief organizations). Not surprisingly, these international8221; charities testified in strong opposition to the proposed regulations at an August 1, 1991, hearing. In the end, Treasury never made the proposed regulations final, legislative efforts to address the problem also died, and the issue did not resurface for many years.
The New Rules. Under the rules issued on July 27, all charitable contributions that are deductible for U.S income tax purposes will be allocated to U.S.-source income, providing tax savings even where a corporation has foreign income. Applied to an example, the new rules work out as follows: U.S. multinational corporation with excess foreign tax credits gives $10,000 to the local United Way. Its total gross income is 60 percent domestic and 40 percent foreign. All $10,000 is deductible from U.S. source income.
Like individuals, corporations may only take income tax charitable deductions for gifts to charitable organizations exempt from income tax under Section 501(c)(3) of the Code that are organized in the United States. Gifts to charities that are not organized in the United States are not eligible for charitable tax deductions (although corporations may treat them as deductible business expenses under certain circumstances). Like individuals, corporations often make gifts to U.S. organizations that will be used abroad, including gifts to disaster relief groups with international activities and gifts to American friends of; organizations that exist to gather support for foreign charities. U.S. corporations are also making increasing use of U.S.-based donor advised funds through which they can request donations to foreign charities. Under the rules issued on July 27, all of these charitable contributions should be allocable to U.S-source income as they are all deductible for U.S income tax purposes.
A copy of T.D. 9143, containing the Treasury's explanation of the Temporary Regulations and a copy of the new rules is available for download in pdf at http://www.irs.ustreas.gov/pub/irs-regs/td_9143.pdf.