Procter & Gamble Co. v. U.S. and the Foreign Tax Credit Noncompulsory Payment Requirement and Competent Authority Assistance
One of tax life’s significant attractions for U.S. multinationals is the capacity to claim a foreign tax credit (FTC) for taxes paid in foreign jurisdictions. Much like many attractions, however, the opportunity to avoid double taxation by having recourse to that unilateral U.S. credit mechanism comes with its own obstacles and hurdles to cross before one can avail oneself of that benefit. One of those hurdles, Treasury’s requirement that the foreign tax be compulsory, took the spotlight in Procter & Gamble Co. v. United States, 106 AFTR2d 5311 (SD Ohio 2010).
The Case. The court, on cross motions for summary judgment, disallowed a FTC for taxes paid to Japan that were claimed by Procter & Gamble (“P&G”) on the grounds that P&G had not complied with the compulsory element of the regulations. Specifically, the court treated certain taxes withheld in Japan as noncompulsory payments because P&G failed to “exhaust all effective and practical remedies” with respect to those taxes. The fact background is that P&G’s Singapore subsidiary manufactured and sold P&G products in Japan through its principal office in Kobe. P&G Singapore also sold products in Korea, although it did not have employees or an office in Korea.
P&G Singapore paid a royalty to P&G for its operations in Japan and in Korea. P&G Singapore withheld and paid Japanese withholding tax on the full amount of those royalties and claimed FTCs in 2001 through 2004. P&G Singapore did not, however, pay Korean tax on the royalty stream. In 2006, the Korean tax administrators audited P&G Singapore and determined that, to the extent the royalties related to Korean sales, they were subject to Korean tax. P&G Singapore paid the assessed tax, but also considered seeking a refund. Based on the advice of a reputable Korean law firm, P&G Singapore concluded that the possibility of a successful appeal or seeking the competent authority assistance1 on the Korean tax would be unsuccessful. P&G then filed amended U.S. tax returns claiming FTCs for the Korean taxes and seeking a U.S. tax …