Foreign Tax Credits Guidance: Final and Proposed Regulations Are Released

On December 2, 2019, the Treasury Department and IRS released final and proposed regulations that provide guidance related to foreign tax credits (FTCs) made under the 2017 Tax Cuts and Jobs Act (TCJA).

The final and proposed regulations impact US taxpayers who have paid credible foreign taxes that may reduce their US income tax liability. Due to the large volume of regulations, this Alert focuses on updates to the foreign tax credit regime.

Final Regulations

The final regulations:

  • Specify methodologies and approaches necessary to conform to the existing regulations specified in the TCJA
  • Provide guidance for taxpayers to determine the amount of their foreign tax credits and how to compute their FTC limitation
  • Provide details regarding how income is assigned and expenses are apportioned to the new separate categories of income created by the TCJA

The last bullet is the most notable.

Exempt Income

In particular, the final regulations state, for purposes of applying the expense allocation and apportionment rules, the following:

  • The portion of income related to foreign-derived intangible income (FDII) or a global intangible low tax income (GILTI) inclusion that’s offset by the IRC 250 deduction is treated as exempt income.
  • The stock giving rise to GILTI that’s offset by the IRC 250 deduction is treated as a partially exempt asset.

In theory, this results in fewer expenses that will be allocated to GILTI leading to higher computed foreign source taxable income, a larger foreign tax credit limitation, and a larger foreign tax credit offset with GILTI income.

Ultimately, these final regulations should reduce the tax burden of US multinational businesses with GILTI income and allocable expenses.

Allocation for Carryovers, Taxes

The final regulations address how FTC carryovers are allocated across the new separate categories of income. The two new categories require a determination regarding how to balance the FTC carryovers in existence to be allocated across the new and existing separate categories of income.

The final regulations also clarify the Treasury Regulation Section 1.904-6 rules concerning how allocation of taxes across separate categories of income should be calculated regarding base and timing differences that also fill technical gaps in how to implement that statue in practice.

Proposed Regulations

Additionally, the proposed regulations address the following technical issues.

Definitions

  • Definition of financial services income under IRC 904(d)(2)(D)
  • Definition of foreign personal holding company under IRC 954

Allocations

  • Allocation and apportionment of deductions under IRC 861 through 865, including new rules on the allocation and apportionment of research and experimentation expenditures and certain deductions of life insurance companies
  • Allocation of foreign income taxes to foreign income that’s related

FTC Application

  • Application of the FTC disallowance under 954(g)
  • Application of the FTC limitation to consolidated groups

Other Items

  • Interaction of the branch loss and dual consolidated loss recapture rules with IRC 904(f)
  • Effect of foreign tax redeterminations of foreign corporations on the application of the high-tax exception described in 954(b)(4) and required notification of 905(c) to the IRS of the foreign tax redeterminations and related penalty provisions

 We’re Here to Help

In preparation for the upcoming tax filing season, contact your Moss Adams professional to consider the application of the new regulations in determining the availability and use of FTC to offset US tax liability.