Guidance Related To The Foreign Tax Credit, Including Guidance Implementing Changes Made By The Tax Cuts And Jobs Act

IRS - Foreign Tax Credit Guidance

Background

The Act made several significant changes to the Internal Revenue Code with respect to the foreign tax credit rules and related rules for allocating and apportioning expenses for purposes of determining the foreign tax credit limitation. In particular, the Act repealed the fair market value method of asset valuation for purposes of allocating and apportioning interest expense under section 864(e)(2), added section 904(b)(4), added two foreign tax credit limitation categories in section 904(d), amended section 960(a) through (c), added section 960(d) through (f), and repealed section 902 along with making other conforming changes. The Act also added section 951A, which requires a United States shareholder of a controlled foreign corporation (“CFC”) to include certain amounts in income (a “global intangible low-taxed income inclusion” or “GILTI inclusion”).

This document contains proposed regulations (the “proposed regulations”) addressing (1) the allocation and apportionment of deductions under sections 861 through 865 and adjustments to the foreign tax credit limitation under section 904(b)(4); (2) transition rules for overall foreign loss, separate limitation loss, and overall domestic loss accounts under section 904(f) and (g), and for the carryover and carryback of unused foreign taxes under section 904(c); (3) the addition of separate categories under section 904(d) and other necessary updates to the regulations under section 904 including revisions to the look-through rules and other updates to reflect pre-Act statutory amendments; (4) the calculation of the exception from subpart F income for high-taxed income under section 954(b)(4); (5) the determination of deemed paid credits under section 960 and the gross up under section 78; and (6) the application of the election under section 965(n).

Explanation of Provisions

Allocation and Apportionment of Deductions and the Calculation of Taxable Income for Purposes of Section 904(a).  The foreign tax credit limitation under section 904 is determined, in part, based on a taxpayer’s taxable income from sources without the United States. Regulations under sections 861 through 865 provide rules for allocating and apportioning deductions to determine, among other things, a taxpayer’s taxable income from sources without the United States for purposes of applying section 904. Section 904(b)(4) makes certain adjustments to both the taxpayer’s taxable income from sources without the United States and the taxpayer’s entire taxable income for purposes of computing the applicable foreign tax credit limitation. Proposed §§1.861-8 through 1.861-13 and 1.861-17 amend existing regulations to clarify how deductions are allocated and apportioned in general, and provide new rules to account for the specific changes made to sections 864(e) and 904 by the Act. Proposed §1.904(b)-3 provides rules regarding the application of section 904(b)(4) for purposes of determining a taxpayer’s foreign tax credit limitation.

The Department of the Treasury (“Treasury Department”) and the Internal Revenue Service (“IRS”) have received comments suggesting that section 951A, in combination with section 904(d)(1)(A) (the “section 951A category”), was intended to provide that the income of a United States shareholder derived through the CFC would be subject to additional U.S. tax if the foreign effective tax rate is below a particular rate, and should be effectively exempt from U.S. tax if the foreign effective tax rate is at or above that rate. These comments generally cite language in H.R. Rep. 115-466 (2017) (the “Conference Report”) illustrating that no U.S. “residual tax” applies to foreign earnings subject to a foreign effective tax rate of 13.125 percent or more.

View Full Document Here: https://www.irs.gov/pub/irs-drop/reg-105600-18.pdf

 

 

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