Foreign tax credit allocation and apportionment rules finalized

By Alistair M. Nevius, J.D.

Taxpayers received guidance Tuesday on how to allocate and apportion deductions and creditable foreign taxes and on other issues relating to foreign tax and the foreign tax credit in final regulations posted by the IRS (T.D. 9922). The IRS also posted wide-ranging proposed regulations regarding the foreign tax credit (REG-101657-20).

Final regulations

In addition to discussing the allocation and apportionment of deductions under Secs. 861 through 865 and creditable foreign taxes, the regulations cover:

  • The definition of financial services income;
  • The effect of foreign tax redeterminations of foreign corporations;
  • The availability of foreign tax credits under the Sec. 965 transition tax;
  • The application of the foreign tax credit limitation to consolidated groups;
  • Adjustments to hybrid deduction accounts to take into account certain inclusions in income by a U.S. shareholder;
  • Conduit financing arrangements involving hybrid instruments; and
  • The treatment of certain payments under the global intangible low-taxed income (GILTI) provisions.

The nearly 300-page final regulations finalize provisions of proposed regulations (REG-105495-19) issued in December 2019. Those proposed regulations reproposed portions of temporary regulations that had been issued in 2007 (T.D. 9362). Other portions of those temporary regulations were finalized in T.D. 9882, also issued in December 2019. The regulations also finalize provisions in proposed regulations relating to hybrid arrangements (REG-106013-19) issued in April 2020.

The final regulations will be effective 60 days after they are published in the Federal Register. The IRS has posted them on its website and has sent them to the Office of the Federal Register, but a publication date has not yet been announced.

Proposed regulations

The proposed regulations posted on Tuesday cover a large number of topics related to the foreign tax credit. These include guidance on:

  • The disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a dividends-received deduction;
  • The allocation and apportionment of interest expense, foreign income tax expense, and certain deductions of life insurance companies;
  • The definition of a foreign income tax and a tax in lieu of an income tax;
  • Transition rules relating to the impact on loss accounts of net operating loss carrybacks allowed by reason of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136;
  • The definition of foreign branch category and financial services income;
  • The time at which foreign taxes accrue and can be claimed as a credit; and
  • Clarifying rules relating to foreign-derived intangible income.

The IRS is asking for comments within 90 days after the proposed regulations are published in the Federal Register. That date has not yet been announced.

Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor in chief.

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