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September 29, 2020

BREAKING TAX NEWS | Treasury releases final and newly proposed foreign tax credit regulations

On September 29, 2020, the Treasury Department released final regulations (T.D. 9922; Final Regulations) and proposed regulations (REG-101657-20; Proposed Regulations) on determining the foreign tax credit, and allocating and apportioning deductions, under the Internal Revenue Code. The Final Regulations generally follow proposed regulations published on December 2, 2019, but make certain changes.

Highlights of the Final Regulations include provisions that:

  • Allocate and apportion foreign income taxes to gross income under Treas. Reg. Section 1.861-20, including for purposes of categorizing taxes to separate IRC Section 904(d) categories, by:
    • Allocating taxes on foreign income items with no corresponding US income item
    • Identifying an exclusive list of "base differences" (for which a foreign tax credit under IRC Section 960 is effectively denied) that no longer includes foreign law distributions treated as a return of basis for US federal income tax purposes
    • Describing the treatment of (regarded) distributions
  • Retain mandatory sales-based apportionment of R&E expense to all gross intangible income related to the relevant product SIC code, specifically excluding GILTI, subpart F inclusions and dividends
  • Provide that exclusive apportionment of R&E expense does not apply for purposes of computing foreign-derived intangible income (FDII)
  • Clarify that stewardship expenses are allocated to domestic and foreign dividends, GILTI, and subpart F inclusions, and apportioned based on the value of the domestic and foreign stock
  • Add an election under IRC Section 905(c) to account for certain foreign tax redeterminations of a CFC for pre-2018 tax years as if they occurred in the CFC's last tax year beginning before January 1, 2018
  • Reduce hybrid deduction accounts under IRC Section 245A(e) by reason of certain subpart F income and GILTI, and provide guidance on the treatment of certain stock as a financing transaction under the conduit financing rules of Treas. Reg. Section 1.881-3

Notable provisions of the Proposed Regulations would:

  • Fundamentally overhaul the creditability requirements of a foreign income tax under IRC Sections 901 and 903 by requiring jurisdictional nexus for the tax to be creditable (without considering the location of customers or users as a significant factor)
  • Introduce new rules under Treas. Reg. Section 1.861-20 for allocating and apportioning foreign income taxes imposed on (i) dispositions of stock and partnership interests, and (ii) disregarded payments made between "taxable units" that generally would categorize foreign taxes based on the income of the payor making the disregarded payment
  • Disallow foreign tax credits and deny deductions under IRC Section 245A(d) for foreign income taxes attributable to any dividend for which a deduction under IRC Section 245A would be allowed
  • Add an election to capitalize and amortize R&E and advertising expenditures for purposes of apportioning interest expense under Treas. Reg. Section 1.861-9
  • Treat, for purposes of computing the IRC Section 250 FDII deduction, services as electronically supplied services if the value of the service to the end user is derived primarily from the service's automation or electronic delivery, as opposed to human effort (e.g., legal, accounting, medical, or teaching services)

A more detailed Tax Alert is forthcoming, and an invitation for a webcast will be sent shortly.