The IRS on Wednesday released final, temporary, and proposed regulations applicable to partnerships that claim the foreign tax credit for foreign income taxes.
The regulations clarify aspects of the section 1.704-1(b)(4)(viii) safe harbor rule that deems allocations to partners of creditable foreign tax expenditures (CFTE) to be in accordance with partners’ interests in a partnership.
The Service said that, for purposes the safe harbor, when there is a transfer of a partnership interest in a partnership that results in a section 743(b) basis adjustment to the transferee partner, that adjustment should not be taken into account when computing a partnership’s net income in a CFTE category.
“The basis adjustment ordinarily would not be taken into account by a foreign jurisdiction in computing its foreign taxable base,” the Service explained.
On the other hand, the IRS said, if a transferee partner has section 743(b) adjustment in its capacity as a direct or indirect partner in a lower-tier partnership under section 1.704-1T(b)(4)(viii)(c)(3)(i), the section 743(b) adjustment is taken into account in determining the partnership’s net income in a CFTE category.
The IRS said in some cases it will be necessary to to alter how the section 743(b) adjustment is taken into account when the adjustment gives rise to basis differences subject to section 901(m). This will be addressed in future guidance, the Service said.
The temporary regulations also make refinements to rules that require an upward adjustment to a partnership’s net income in a CFTE category to the extent that a foreign law does not allow a deduction for a guaranteed payment that is deductible under US law.
The regs revise the special rules to address situations in which allocations (or distributions of allocated amounts) and guaranteed payments that give rise to foreign law deductions are made out of income with related CFTEs.
The regulations further clarify that inter-branch payments, since not make to a partner, can never be treated as a distributive share, and thus are outside the scope of the special rules under section 1.704-1(b)(4)(viii)(c)(3)(ii).
The new regulations state that the special rule for preferential allocations applies only to allocations (or distributions of allocated amounts) to a partner that are deductible under foreign law, and not to other items that give rise to deductions under foreign law.
The Service has requested comments on several aspects of the regulations.
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