Procter & Gamble Co. v. U.S. and the Foreign Tax Credit Noncompulsory Payment Requirement and Competent Authority Assistance

Author(s): Rufus Rhoad­es and Alex­ey Man­a­suev Date: Jan­u­ary 2011

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 …

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