by John Anthony Castro, J.D., LL.M.
Although this article concludes that the Lifetime Allowance Charge, also known as the LTA Charge, is claimable as a Foreign Tax Credit, this article does not constitute Reasonable Cause to avoid the imposition of penalties if the IRS challenges the legal position. You need to secure a written Tax Opinion from our firm to allow you to claim the LTA Charge as a Foreign Tax Credit without the risk of penalties.
The concern with the Lifetime Allowance (LTA) Charge is that it may not be creditable as a Foreign Tax Credit.
An example drives this point home the best. If you have $100 in the U.K., and the LTA charge is 25%, you pay $25 to the U.K. On the U.S. side, let’s assume your tax rate is also 25%. If the LTA charge is creditable as a foreign tax credit, your U.S. tax liability is $0. If, however, the LTA charge is only deductible, your U.S. taxable income is reduced from $100 to $75 but then taxed at 25%, which means you would owe the U.S. an additional $18.75. That puts the real cost of the LTA charge at 43.75%.
As you can see, if you can find legal authority to make the LTA charge creditable in the U.S., it would be much more beneficial than a deduction.
Statute and Regulations
Section 903 unequivocally holds that “term ‘income, war profits, and excess profits taxes’ shall include a tax paid in lieu of a tax on income… otherwise generally imposed by any foreign country.”
Treasury Regulation § 1.903-1(b)(1) states that "A foreign tax satisfies... if the tax in fact operates as a tax imposed in substitution for, and not in addition to, an income tax."
Despite that seemingly fatal language in the Treasury Regulation, the U.S. Supreme Court in PPL Corp v. C.I.R., 133 S.Ct. 1897 (U.S. 2013) applied a unique interpretation of the statute and regulations to make the UK Windfall Tax creditable back in 2013. Our legal position builds upon the logic and reasoning as outlined in the U.S. Supreme Court’s PPL decision to take the position that the LTA Charge is creditable.
The Penalty-Shielding Effect of Tax Opinions
Our legal article entitled The Necessity of Tax Opinions explains why formal, written Tax Opinions are critical and how the failure to secure one recently cost a taxpayer $39 million in penalties. Reliance on this article does not constitute Reasonable Cause to avoid penalties. We can issue a Tax Opinion that will allow you to claim the LTA charge as a creditable foreign tax credit.
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About the Author
John Anthony Castro, J.D., LL.M., is the Managing Partner of Castro & Co., the author of International Taxation in Plain English as well as International Estate Planning in Plain English, an esteemed graduate of Georgetown University Law Center in Washington DC, an OPM Fellow at Harvard Business School, and an internationally recognized tax attorney with offices in New York, Los Angeles, Miami, Chicago, Dallas, and Washington DC.