On November 28, 2018, the United States Treasury Department released proposed regulations (REG-105600-18) providing guidance on determining the foreign tax credit under the Internal Revenue Code. The guidance relates to changes made to the applicable law by the Tax Cuts and Jobs Act (TCJA), which was enacted on December 22, 2017. Guidance on other foreign tax credit issues, including in relation to pre-TCJA statutory amendments, is also included.

Issues addressed by the proposed regulations include:

1. The allocation and apportionment of deductions and adjustments to the foreign tax credit limitation
2. Transition rules for overall foreign loss, separate limitation loss, and overall domestic loss accounts, and for the carryover and carryback of unused foreign taxes
3. The addition of separate categories for the foreign tax credit limitation and other necessary updates to the regulations, including modification to the look-through provisions
4. Calculation of the exception from subpart F income for high-taxed income
5. The determination of deemed paid credits and the corresponding gross-up
6. Application of the election to not apply the net operating loss deduction to the Section 965 inclusion

At a high level, the proposed regulations would:

1. Require deductions to be allocated to the GILTI basket, but treat assets that generate FDII and GILTI as partially-exempt assets for expense apportionment purposes
2. Not treat Section 78 dividends relating to fiscal-year foreign corporations as dividends for purposes of Section 245A (absent this rule, US shareholders owning fiscal-year foreign corporations might claim a Section 245A deduction with respect to Section 78 dividends attributable to Section 965 inclusions in 2018)
3. Require a direct tracing of interest income and interest expense with respect to loans made to certain controlled partnerships
4. Include an election that allows for the carryover of foreign taxes into post-2017 periods to be assigned to the foreign branch basket
5. Modify the CFC netting rules to no longer treat hybrid debt as related group indebtedness
6. Eliminate the foreign tax credit with respect to Section 956 inclusions
7. Not provide for look-through treatment to the GILTI basket for interest, rents and royalties that are paid to a related party and reduce a CFC's tested income
8. Not basket, with limited exceptions, income attributable to the disposition of a foreign branch as foreign branch income
9. Clarify that income attributable to a Section 78 gross-up is basketed based on reference to the underlying income that gave rise to the income inclusion

A Tax Alert on the proposed regulations is forthcoming. A webcast on the proposed regulations will be held on December 6, 2018, at 2pm EST. An invitation for the webcast will be sent soon.