CCA 200920043: Foreign withholding tax on interest accrued when the interest was paid

Plain-English summary

Chief Counsel advised when foreign withholding tax on interest accrues for a credit or deduction. Economic accrual of interest does not itself create a daily legal duty to withhold and pay the foreign tax. A sale before the coupon date, the holder’s treaty status on that date, or a payment default could change or eliminate the tax, so its existence and amount are not reasonably certain before payment. The all-events test therefore is not met until the interest is paid and the withholding liability arises. Although creditable foreign taxes are exempt from the economic-performance requirement, they are credited or deducted in the payment year rather than earlier years when the associated interest accrued.

Ruling snapshot

• Question: In which year does creditable foreign withholding tax on interest accrue for purposes of a credit or deduction?
• Outcome: Advice given: it accrues in the year the interest is paid and the foreign-law withholding liability arises.
• Key authorities: IRC §§ 461, 905; Treas. Reg. § 1.461-4(g)(6)(iii)(B).

Full text (IRS public release)

ID: CCA_2009040112481135 Number: 200920043
Release Date: 5/15/2009
Office: ------------------
UILC: 905.01-00, 461.16-00

From: --------------------
Sent: Wednesday, April 01, 2009 12:48:16 PM
To: --------------------------------------------------
Cc:
Subject: RE: FTC Calc

Generally, as under US law, foreign withholding taxes on interest do not accrue until a cash payment is made. There is no liability to "withhold" and pay over tax to the foreign taxing authority on a daily basis, even if interest income and expense are considered to accrue economically over the period covered by the interest coupon, as under US law. If the taxpayer sold the note before the interest payment became due, it would have no legal liability under foreign law to pay tax on the accrued interest income. The withholding rate on interest could vary depending on whether the holder of the note on the date the coupon is due qualifies for treaty benefits. Finally, if the creditor defaulted and did not make the payment, withholding tax generally would not be payable by the lender. These considerations confirm that the fact and amount of withholding tax liability cannot be determined with reasonable certainty until the coupon is in fact paid and the tax liability arises. Therefore, the all events test for a foreign withholding tax is not met, and the tax does not accrue, until the date the payment is made. (Note that the economic performance requirement does not apply to creditable foreign taxes, regardless of whether the taxpayer elects to deduct or credit the tax. Section 1.461-4(g)(6)(iii)(B). However, in the case of a creditable withholding tax, the foreign law legal liability to pay the tax ordinarily will not arise until an actual payment of interest is made, at which point the tax is required to be withheld and paid.) Therefore, creditable foreign withholding taxes on interest are considered to accrue, and are eligible to be credited or deducted, in the year the payment is made, not in the prior year or years when the associated interest income accrued for US or foreign tax purposes.

Let me know if you have additional questions on this timing issue. Thanks.