July 21, 2023
BREAKING TAX NEWS | Treasury temporarily delays foreign tax credit regulations
On July 21, 2023, the Treasury Department (Treasury) released a notice (Notice 2023-55; Notice) temporarily relieving taxpayers from the application of regulations under IRC Sections 901 and 903 identifying foreign taxes for which taxpayers may claim a credit (FTC Creditability Regulations). The Notice allows taxpayers to claim a foreign tax credit for many foreign taxes that may not have been creditable under the FTC Creditability Regulations.
Highlights of the Notice include the following:
- For a specified relief period, taxpayers may determine whether a foreign tax qualifies as an "income tax" by applying the version of Treas. Reg. Section 1.901-2(a) and (b) (Prior FTC Regulations) that preceded the FTC Creditability Regulations. The FTC Creditability Regulations otherwise apply to tax years beginning on or after December 28, 2021. The relief period includes tax years beginning on or after December 28, 2021, and ending on or before December 31, 2023.
- For purposes of applying the Prior FTC Regulations, the Notice modifies the non-confiscatory gross basis tax rule to limit gross basis taxes qualifying as income taxes to taxes on investment income. As a result, gross basis taxes (including digital services taxes) would be creditable only to the extent that they were treated as an "in lieu of" tax under IRC Section 903.
- The Notice allows taxpayers to determine whether a foreign tax qualifies as an "in lieu of tax" for purposes of IRC Section 903 without regard to Treas. Reg. Section 1.903-1(c)(1)(iv) and (c)(2)(iii), which generally incorporate the controversial "attribution requirement" into IRC Section 903.
- To claim relief, taxpayers must apply the Notice to all foreign taxes (i) that they or any other person (for example, a controlled foreign corporation held by the taxpayer) pay in any relief year (a tax year ending "within" the relief period), and (ii) for which the taxpayer would be eligible to claim a credit in the relief year (applying the temporary relief). Furthermore, all members of a consolidated group must apply the temporary relief for any member to be eligible for relief.
The Notice indicates that Treasury continues to analyze, and is considering amendments to, the FTC Creditability regulations. Treasury is also considering whether, and under what conditions, to provide additional temporary relief beyond the relief period.
The Notice provides no relief for other aspects of the foreign tax credit regulations issued with the FTC Creditability Regulations, many of which will continue to pose significant challenges for taxpayers. For example, no relief was granted for Treas. Reg. Section 1.861-20 rules on allocating and apportioning foreign income taxes, Treas. Reg. Section 901 rules on refundable credits, or IRC Section 905 regulations on foreign tax redeterminations.
A detailed Tax Alert is forthcoming.
Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor