On December 28, the US Internal Revenue Service released the latest round of final regulations on the foreign tax credit, further amending the rules in response to the 2017 Tax Cuts and Jobs Act and other issues. The final regulations adopt with some changes the proposed regulations published on November 12, 2020.
The new rules cover the jurisdictional nexus requirement, the disallowance of credits or deductions in connection with dividends-received deductions, the allocation and apportionment of interest and certain other expenses, the time at which credits accrue, and various definitions. The final regulations also clarify rules relating to foreign-derived intangible income (FDII).
The final regulations revise the definition of a foreign income tax, including revisions to the net gain requirements. Despite receiving several critical comments on the jurisdictional nexus requirement included in the proposed rules for purposes of determining if a foreign tax is an income tax in the US sense, the final regulations adopt the requirement, renaming it “attribution requirement.” The IRS expects that these changes will restrict the creditability of foreign taxes to some extent relative to the existing rules.
The regulations address the determination of foreign income taxes subject to the credit and deduction disallowance provisions of Internal Revenue Code (IRC) section 245A(d). The final rule has been revised in response to comments that the proposed rule lacked clarity.
With respect to the FDII provisions under IRC section 250, the regulations include a rule on the determination of oil and gas extraction income from domestic and foreign sources and of electronically supplied services under the corresponding regulations. The final rules slightly modify the proposed rules’ definition of “electronically supplied services.”
The rules also cover the allocation and apportionment of expenses under IRC section 861. This includes finalizing without change the proposed rule on the allocation and apportionment of IRC section 818(f)(1) items of life insurance companies that are members of consolidated groups. The regulations also finalize the general proposed rules on the allocation and apportionment of foreign income taxes – declining recommended changes with respect to dispositions of stock and partnership transactions, while accepting some revisions with respect to disregarded payments.
Other provisions in the final regulations address the rules regarding the time when foreign tax credits can be claimed, the allocation and apportionment of interest deductions of certain regulated utilities, the allocation of the liability for foreign income taxes in connection with certain mid-year transfers or reorganizations, and other issues.
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