Treasury Releases Foreign Tax Credit Regulations

Summary

On September 29, 2020, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) released an early version of final regulations (the 2020 FTC final regulations) for publication in the Federal Register. These new regulations contain guidance relating to the following:

• The allocation and apportionment of deductions and creditable foreign taxes
• The definition of financial services income
• Foreign tax redeterminations
• The availability of foreign tax credits under the transition tax
• The application of the foreign tax credit limitation to consolidated groups
• Adjustments to hybrid deduction accounts to take into account certain inclusions in income by a U.S. shareholder
• Conduit financing arrangements involving hybrid instruments
• The treatment of certain payments under the global intangible low-taxed income provisions

 

On the same date, Treasury also released an early version of proposed regulations relating to the foreign tax credit (the 2020 FTC proposed regulations) for publication in the Federal Register. These new proposed regulations include the following guidance:

• The disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a dividends-received deduction
• The allocation and apportionment of interest expense, foreign income tax expense and certain deductions of life insurance companies
• The definition of a foreign income tax and a tax in lieu of an income tax
• Transition rules relating to the impact on loss accounts of net operating loss carrybacks allowed by reason of the Coronavirus Aid, Relief, and Economic Security (CARES) Act
• The definition of foreign branch category and financial services income
• The time at which foreign taxes accrue and can be claimed as a credit
• Clarifying rules relating to foreign-derived intangible income

 

The proposed regulations affect taxpayers that claim credits or deductions for foreign income taxes, or that claim a deduction for foreign-derived intangible income.

 

Background

On December 7, 2018, Treasury published proposed regulations (REG-105600-18) relating to foreign tax credits in the Federal Register (83 FR 63200) (the 2018 FTC proposed regulations). The 2018 FTC proposed regulations addressed several significant changes that the Tax Cuts and Jobs Act (TCJA) made with respect to the foreign tax credit rules and related rules for allocating and apportioning deductions in determining the foreign tax credit limitation. For a summary discussion of the 2018 FTC proposed regulations, see our December 2018 tax alert. Certain provisions of the 2018 FTC proposed regulations relating to Treasury Regulation §§1.78-1, 1.861-12(c)(2) and 1.965-7 were finalized as part of TD 9866, published in the Federal Register (84 FR 29288) on June 21, 2019.
 
The remainder of the 2018 FTC proposed regulations were finalized on December 17, 2019, in TD 9882, and published in the Federal Register (84 FR 69022) (the 2019 FTC final regulations). On the same date, Treasury published proposed regulations (REG-105495-19) relating to foreign tax credits in the Federal Register (84 FR 69124) (the 2019 FTC proposed regulations). The 2019 FTC proposed regulations related to changes made by the TCJA and other foreign tax credit issues. Correcting amendments to the 2019 FTC final regulations and the 2019 FTC proposed regulations were published in the Federal Register on May 15, 2020, see 85 FR 29323 (2019 FTC final regulations) and 85 FR 29368 (2019 FTC proposed regulations). For a summary discussion of the 2019 FTC final regulations and proposed regulations, see our December 2019 tax alert.
 
On November 7, 2007, the Federal Register published temporary regulations (TD 9362) at 72 FR 62771 and a notice of proposed rulemaking by cross-reference to the temporary regulations at 72 FR 62805 relating to Sections 905(c), 986(a) and 6689 of the Internal Revenue Code. Portions of these temporary regulations were finalized in the 2019 FTC final regulations, while certain portions were re-proposed in the 2019 FTC proposed regulations.

 

The 2020 FTC Final Regulations

The 2020 FTC final regulations finalize the 2019 FTC proposed regulations with substantial modifications. The 2020 FTC final regulations address the following issues:

• The allocation and apportionment of deductions under Sections 861 through 865, including rules on the allocation and apportionment of expenditures for research and experimentation (R&E), stewardship, legal damages and certain deductions of life insurance companies
• The allocation and apportionment of foreign income taxes
• The interaction of the branch loss and dual consolidated loss recapture rules with Section 904(f) and (g)
• The effect of foreign tax redeterminations of foreign corporations, including for purposes of the application of the high-tax exception described in Section 954(b)(4) (and for purposes of determining tested income under Section 951A(c)(2)(A)(i)(III)) and required notifications under Section 905(c) to the IRS of foreign tax redeterminations and related penalty provisions
• The definition of foreign personal holding company income under Section 954
• The application of the foreign tax credit disallowance under Section 965(g)
• The application of the foreign tax credit limitation to consolidated groups

 

For applicability dates, see the 2020 FTC final regulations.

 

The 2020 FTC Proposed Regulations

The 2020 FTC proposed regulations address the following issues:

• The determination of foreign income taxes subject to the credit and deduction disallowance provision of Section 245A(d)
• The determination of oil and gas extraction income from domestic and foreign sources and of electronically supplied services under the Section 250 regulations
• The impact of the repeal of Section 902 on certain regulations issued under Section 367(b)
• The sourcing of inclusions under Sections 951, 951A and 1293
• The allocation and apportionment of interest deductions, including rules for allocating interest expense of foreign bank branches and certain regulated utility companies, an election to capitalize research and experimental expenditures and advertising expenses for purposes of calculating tax basis and a revision to the controlled foreign corporation netting rule
• The allocation and apportionment of Section 818(f) expenses of life insurance companies that are members of consolidated groups
• The allocation and apportionment of foreign income taxes, including taxes imposed with respect to disregarded payments
• The definitions of a foreign income tax and a tax in lieu of an income tax, including the addition of a jurisdictional nexus requirement and changes to the net gain requirement, the treatment of certain tax credits, the treatment of foreign tax law elections for purposes of the noncompulsory payment rules and the substitution requirement under Section 903
• The allocation of the liability for foreign income taxes in connection with certain mid-year transfers or reorganizations
• Transition rules to account for the effect on loss accounts of net operating loss carrybacks to pre-2018 taxable years that are allowed under the CARES Act
• The foreign branch category rules in §1.904-4(f) and the definition of a financial services entity for purposes of Section 904
• The time at which credits for foreign income taxes can be claimed pursuant to Sections 901(a) and 905(a)

 

For applicability dates, see the 2020 FTC proposed regulations.