Debt Push Downs and the Curious Application of the Debt-Netting Rule

By: William R. Skinner

The reduced rate of tax on GILTI and overall reduction in the U.S. corporate tax rate has left more U.S.-based multinational companies in an excess foreign tax credit position, often due to an allocation and apportionment of interest expense under Code Sec. 861 to the GILTI basket. For a U.S. taxpayer that suffers from a loss of foreign tax credits due to allocation and apportionment of interest expense, the taxpayer might consider various means of having the CFCs bear a portion of the interest expense, either through locating third-party borrowing at the CFC level, or more commonly by having the U.S. Parent advance or “push down” the debt to the CFC level through an intercompany loan.

From a Code Sec. 904 perspective, a debt push down might secure two benefits. First, the interest expense at the CFC level may reduce foreign taxes that would be otherwise be subject to the Code Sec. 904 limitation. Second, the additional foreign source interest income generated on the intercompany loan might increase the U.S. Parent’s total foreign source income. Code Sec. 904(d) generally will provide for foreign source general basket treatment for the U.S. Parent’s interest income on a loan to a related CFC. This additional, presumably low-taxed foreign source income could offset the excess foreign tax credits on the CFC’s remaining earnings.

As with most other areas of international planning, the 2017 Tax changes the fundamentals here. With GILTI in place, the U.S. Parent will not increase its foreign source income through an intercompany loan, but rather “re-basket” the income from GILTI to the general basket. Whether this effect is favorable or not will depend on the taxpayer’s facts and circumstances, but in many cases, will be unfavorable. However, as discussed below, a push down of debt through a CFC finance co remains viable from a U.S. tax perspective and would allow for cross-crediting the interest income on the loan against the foreign taxes on CFC operations in the GILTI basket.

To learn more, read the full article.

Originally published in the May-June 2021 issue of International Tax Journal.