In some instances, foreign corporations may have US withholding tax that is refundable. These scenarios might include:
- A US subsidiary withholds on payments to its foreign parent when a treaty allows for a lower rate.
- There was withholding tax because the foreign corporation did not send in a Form W-8BEN-E prior to the US source payment being made.
- Taxes were withheld by some US payors, but not others on the same type of US source income not subject to tax.
The question then becomes, when should interest start accruing on the refund since the payment is often delayed. The Internal Revenue Service (IRS) occasionally issues Chief Counsel Advice to advise IRS personnel on legal issues. The tax agency is required to also release this information to the public.
IRS Chief Counsel Discusses Overpayment Interest for Foreign Corporations with No Filing Obligation
In Chief Counsel Advice 202144027, the IRS recently addressed whether overpayment interest accrues from the original due date of a corporation return for an overpayment claimed on the corporation’s Form 1120-F. In short, the Chief Counsel’s response was, “it depends.”
Overpayment Interest
For example, Corporation X, which is a foreign corporation, claimed a refund for withholding taxes on its Form 1120-F, the original due date for which was June 15. The taxes were withheld from interest paid to X by its US subsidiary.
Corporation X didn’t file its return by the original June 15 due date. Although it requested an extension, whether Corporation X filed its return by the extended due date was unclear. Nonetheless, the IRS issued its claimed refund and paid overpayment interest that ran from the day after the Form 1120-F was received.
Potential Scenarios
The question at issue in the Chief Counsel Advice was: should the overpayment interest have accrued from the June 15 due date?
According to Chief Counsel, the answer generally depends on whether Corporation X knew its withholding would result in an overpayment for which it would seek a refund. This creates two potential scenarios:
- If Corporation X knew the withholding would result in an overpayment for which it would seek a refund, it would be required to timely file an income tax return. If the return was timely filed, overpayment interest would accrue from June 15. However, if the return was not timely file, overpayment interest would accrue from the date it filed a processible return.
- If Corporation X didn’t know its withholding would result in an overpayment for which it would seek a refund, overpayment interest would accrue from June 15 even though the return was filed after that date. This is because the provisions of Internal Revenue Code Section 6611(b)(3) relating to the payment of interest on late returns wouldn’t apply.
In this case, it remains unclear when Corporation X knew its withholding would result in an overpayment for which it would seek a refund.
For example, if Corporation X discovered the overpayment after June 15, and claimed a refund on a valid and processible return filed by the extended due date, the return isn’t late for purposes of Sec. 6611(b)(3), which takes extensions into consideration.
On the other hand, if the return was filed after the extended due date, the return wouldn’t be late because Corporation X doesn’t have a filing obligation. In this scenario, Sec. 6611(d) and Sec. 6513(b)(3) apply so “the last day prescribed for filing the return under Code Sec. 6012” (in this case June 15) is the date overpayment interest began to run.
Insight of a Sort
Although this Chief Counsel Advice appears to raise more questions than it answers, it nevertheless provides insight into what the tax agency is looking at when it assesses whether and how overpayment interest accrues in the situation described. Moore Doeren Mayhew can help you navigate this complex issue if it applies to your tax situation. Contact us today to learn more.
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