The IRS has issued a statement saying it will no longer challenge claims for foreign tax credits related to the French Contribution Sociale Généralisée (CSG) and Contribution au Remboursement de la Dette Sociale (CRDS) taxes.
Under Internal Revenue Code 901, US taxpayers are generally allowed to claim a foreign tax credit (FTC) for income, war profits and excess profits taxes paid or accrued during the tax year to any foreign country or U.S. possession.
However, Section 317(b)(4) of the Social Security Amendments of 1977 (SSA) provides that taxes paid by an individual to a foreign country “in accordance with the terms of” a totalization agreement shall not be creditable or deductible for Federal income tax purposes.
While there have been two court cases regarding the creditability of French CSG/CRDS taxes, the most notable has been Eshel v. Commissioner. (142 T.C. 197 (2014. In its 2014 decision, the U.S. Tax Court concluded that SSA Sec. 317(b)(4) precluded the taxpayers from claiming FTCs for CSG and CRDS taxes paid to France. The court noted that though they were enacted after the effective date of the U.S.-French Totalization Agreement, and not specifically listed in it, the CSG and CRDS were covered by, or within the scope of, the Totalization Agreement because they “amended or supplemented” the French Social Security laws enumerated in the Totalization Agreement.
The taxpayers in Eshel appealed the Tax Court’s decision to the U.S. Court of Appeals for the District of Columbia (831 F.3d 512 (D.C. Cir. 2016) and the U.S. Court of Appeals reversed and remanded the case to the Tax Court. In its 2016 decision, the appeals court cited numerous flaws in the Tax Court’s approach for supporting the IRS’s reasoning and mis-application of U.S. domestic legal (and non-legal) principles in interpreting a document founded in international law.
For anyone interested in learning how or how not to litigate a case involving an international treaty, I highly recommend reading these two cases involving Eshel…you will not be disappointed!
As part of its filings for the remanded case, the IRS stated that the U.S. and France memorialized through diplomatic communications an understanding that the CSG and CRDS taxes are NOT Social Security taxes covered by the Totalization Agreement. Accordingly, the IRS will not challenge FTCs for CSG and CRDS payments on the basis that the Totalization Agreement applies to those taxes.
This is extremely good news for US taxpayers that have been subjected to CSG/CRDS taxes as the U.S. allows up to 10 years to file a claim for refund of U.S. tax with respect to a foreign tax credit. If you are in this situation contact us for further explanation and assistance.