Final Regulations Address Foreign Tax Credit Issues
Recently released final regulations on the foreign tax credit (“FTC”) substantially overhauls longstanding FTC regulations involving the determination of creditable foreign income taxes. The final regulations (“2021 FTC Regulations”) also provide rules on the allocation and apportionment of deductions (including foreign income taxes) in determining the FTC limitation. The 2021 FTC Regulations were published in the Federal Register on January 4, 2022 (T.D. 9959).
The 2021 FTC Regulations address the following:
- Determination of foreign income taxes subject to the credit and deduction disallowance provisions of section 245A(d)
- Allocation and apportionment of foreign income taxes, including taxes imposed with respect to disregarded payments
- Definitions of foreign income tax and a tax in lieu of an income tax, including changes to (a) the net gain requirement, (b) the replacement of the jurisdictional nexus rule with an attribution rule contained in the net gain requirement, (c) the treatment of certain tax credits provided under foreign law, (d) the treatment of foreign tax law elections for purposes of the compulsory payment rules, and (e) the substitution requirement under section 903
- Allocation of the liability for foreign income taxes in connection with certain mid-year transfers or reorganizations including the foreign branch category rules in Treas. Reg. section 1.904-4(f) and the time at which credits for foreign income taxes can be claimed pursuant to sections 901 and 905(a).
The 2021 FTC Regulations also address certain miscellaneous aspects of the FTC rules including:
- Sourcing of inclusions under sections 951, 951A and 1293
- Allocation and apportionment of interest deductions of regulated utilities
- Revising the controlled foreign corporation (“CFC”) interest netting rules
- Characterization of assets for purposes of the allocation and apportionment of interest expense
- Allocation and apportionment of section 818(f) items of life insurance companies that are members of consolidated groups
The 2021 FTC Regulations also finalize proposed rules not directly related to the determination of the FTC that address (a) the determination of oil and gas extraction income from domestic and foreign sources, (b) the meaning of electronically supplied services under the section 250 regulations, and (c) the impact of the repeal of section 902 on certain regulations issued under section 367(b).
The 2021 FTC Regulations did not finalize the following proposed regulations from 2020:
- Rules for an election to capitalize certain expenses in determining the tax book value of assets (Prop. Reg. section 1.861-9(k))
- Rules requiring the direct allocation of interest expense in the case of certain foreign banking branches (Prop. Reg. section 1.861-10(g))
- Rules defining financial services income (Prop. Reg. sections 1.904-4(e)(1)(ii) and 1.904-5(b)(2)).