On December 2, 2019, the Treasury Department published final regulations (T.D. 9882; Final Regulations) on determining the foreign tax credit under the Internal Revenue Code. The Final Regulations are generally consistent with the proposed regulations published on November 28, 2018, but make certain, important modifications and clarifications.

Notable provisions and changes in the Final Regulations include:

• Adding safe harbor methods for applying transition rules for the carryover of foreign taxes and loss accounts required as a result of the TCJA's addition of the foreign branch category
• Applying special rules for allocating income to the foreign branch category only to disregarded transfers of intellectual property occurring on or after December 7, 2018, and not if the intellectual property is repatriated to the US
• Consolidating the 16 PTEP groups introduced by Notice 2019-01 to 10
• Requiring an upper-tier CFC to take the gross tested income (net of interest expense) of lower-tier CFCs into account for purposes of allocating and apportioning its interest expense under the modified gross income method

Treasury also proposed new regulations (REG-105495-19; New Proposed Regulations) addressing the allocation and apportionment of expenses. Notable changes in those regulations include:

• Mandatory sales-based apportionment to R&E of all gross intangible income related to the relevant product SIC code, but specifically excluding dividends, subpart F income and GILTI
• Apportionment of stewardship expenses to dividends, subpart F income and GILTI (including IRC Section 78 gross-ups) based on the asset method used for interest expense apportionment
• Allocation of product liability claims to the class of gross income produced by the specific sales or services that give rise to the claims, as if that gross income were recognized in the year in which the deduction is allowed
• Clarification that certain assets are not connected with capitalized, deferred or disallowed interest, including interest disallowed under IRC Section 163(l)
• Matching interest income and expense on upstream loans from certain controlled partnerships

New Proposed Treas. Reg. Section 1.861-20 provides guidance on the allocation and apportionment of foreign taxes to separate IRC Section 904(d) categories of income. This section also provides specific allocation and apportionment rules on:

• Timing and base differences, including an exclusive list of base differences
• Distributions that are recognized for US and/or foreign tax purposes
• Disregarded payments by a foreign branch, which are deemed to be made ratably out of its accumulated after-tax income
• Disregarded payments by an owner, which are generally allocated to US income
• Taxes paid by a US shareholder on inclusions from reverse hybrids, which are allocated and apportioned by reference to the reverse hybrid's foreign income
• Gain on the sale of a disregarded entity, as if the assets were disposed of for foreign tax purposes

The New Proposed Regulations also address TCJA-related changes to IRC Section 905(c) by re-proposing and modifying the prior 2007 proposed regulations, specifically those dealing with foreign tax redeterminations that affect deemed paid taxes and notification of those redeterminations. Of note, the New Proposed Regulations clarify that adjustments are also required to earnings and profits and inclusions for the year to which the taxes relate.

A more detailed Tax Alert is forthcoming, and a webcast is scheduled for December 13, 2019, from 2pm to 3:30pm EST. An invitation will be sent shortly.