IRS proposes new foreign tax credit regulations

By Sally P. Schreiber, J.D.

On Nov. 29, the IRS issued proposed regulations providing guidance relating to the determination of the foreign tax credit after the statutory change made by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 (REG-105600-18). The Sec. 901 foreign tax credit allows U.S. taxpayers to offset their taxes by the amount of foreign income taxes paid or accrued. The proposed regulations will affect individuals and corporations claiming foreign tax credits.

The TCJA made significant changes in the Code with respect to the foreign tax credit rules and related rules for allocating and apportioning expenses for purposes of determining the foreign tax credit limitation. Included in the changes made by the TCJA are the repeal of the fair market value method of asset valuation for purposes of allocating and apportioning interest expense under Sec. 864(e)(2); new Sec. 904(b)(4), which provides for alternative adjustments; two new foreign tax credit limitation categories in Sec. 904(d); amended Secs. 960(a) through (c); added new Secs. 960(d) through (f); and repealed Sec. 902, the deemed paid credit for taxes paid by a foreign corporation. The TCJA also added Sec. 951A, which requires a U.S. shareholder of a controlled foreign corporation (CFC) to include certain amounts in income (a global intangible low-taxed income (GILTI) inclusion).

In response to these changes, the proposed regulations address the following topics:

  • The allocation and apportionment of deductions under Secs. 861 through 865 and adjustments to the foreign tax credit limitation under Sec. 904(b)(4);
  • Transition rules for overall foreign loss, separate limitation loss, and overall domestic loss accounts under Secs. 904(f) and (g), and for the carryover and carryback of unused foreign taxes under Sec. 904(c);
  • The addition of separate categories under Sec. 904(d) and other necessary updates to the regulations under Sec. 904, including revisions to the lookthrough rules and other updates to reflect pre-TCJA statutory amendments;
  • The calculation of the exception from Subpart F income for high-taxed income under Sec. 954(b)(4);
  • The determination of deemed paid credits under Sec. 960 and the gross-up under Sec. 78; and
  • The application of the election under Sec. 965(n).
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