Treasury and the IRS on September 29 released final regulations (the ‘2020 Final Regulations’) and proposed regulations (the ‘2020 Proposed Regulations’) addressing various aspects of the foreign tax credit (FTC) regime.
The 2020 Final Regulations finalize, among other provisions, the proposed FTC regulations published on December 17, 2019 (the ‘2019 Proposed Regulations’) and clarify several aspects of the new FTC regime, including the allocation and apportionment of certain deductions and creditable foreign taxes; foreign tax redeterminations; adjustments to hybrid deduction accounts to take into account certain inclusions in income by a US shareholder; conduit financing arrangements involving hybrid instruments; and the treatment of certain payments under the global intangible low-taxed income (GILTI) provisions.
The 2020 Proposed Regulations would narrow the definitions of creditable foreign income taxes and taxes in lieu of income taxes; modify timing rules on the accrual of foreign income tax and the period of limitations for refunds; refine rules coordinating between the deduction and credit of foreign taxes; and revise the allocation of foreign taxes in connection with ownership changes of fiscally transparent entities. They also modify and re-propose provisions of the 2019 Proposed Regulations regarding the definition of financial services income and the allocation of foreign income taxes related to disregarded payments and propose new rules regarding the disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a Section 245A dividends-received deduction (DRD); the source of certain inclusions with respect to the stock of foreign corporations; allocation and apportionment of certain deductions; transition rules relating to the impact on loss accounts of net operating loss carrybacks allowed by reason of the CARES Act; and the definition of foreign branch category income. The 2020 Proposed Regulations also contain clarifying rules relating to FDII and modifications to certain Section 367(b) regulations to account for the repeal of Section 902 in the 2017 tax reform legislation (the Act).
Some of the key highlights we have identified in our review of the 2020 Final and Proposed Regulations are set forth below. An in-depth Insight on the regulations will be published in the coming days. For additional information on the 2019 Proposed Regulations, see PwC’s Tax Insight, Final and proposed foreign tax credit regulations: Additional analysis. For additional information on the anti-hybrid rules under Sections 245A(e) and 1503(d), see PwC’s Tax Insight, Final and Proposed Section 245A(e) regulations: Additional analysis.
Taxpayers should review the impact of the provisions in the 2020 Final and Proposed Regulations, including the key highlights described above, and consider commenting on issues that Treasury should address. Comments on the 2020 Proposed Regulations are due by the 90th day after those regulations are published in the Federal Register.