Final and proposed foreign tax credit regulations: Additional analysis

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December 2019

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Overview

Treasury and the IRS on December 2 released final regulations under Sections 861, 901, 904, 905, 954, 960, 965, 986, and 988, and proposed regulations under Sections 704, 861, 904, 905, 954, 960, 965, 1502, 6227, and 6889. The Final Regulations are the first comprehensive binding administrative guidance with respect to the new foreign tax credit (FTC) regime following the enactment of the 2017 tax reform act. Of relevance to the Final Regulations, the Act limited the FTC for US corporate taxpayers by repealing the indirect credit under Section 902, amending the deemed-paid credit under Section 960, introducing two new FTC limitation baskets under Section 904, and modifying the treatment of certain foreign tax redeterminations under Section 905.

The takeaway

The Final Regulations provide needed guidance with respect to calculating the amount of foreign taxes that are treated as paid or accrued, the separate limitation categories with respect to which those taxes are allocable, and the extent to which a credit is allowed for those taxes. This guidance includes limiting FTCs with respect to GILTI inclusions, which can result in incremental US tax. The Final Regulations also provide complex rules for categorizing and tracking foreign subsidiary stock and earnings. 

Taxpayers and their advisors should review the guidance carefully and model the effect of the new regulations to assess the impact of the final and proposed rules.

 

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Doug McHoney

International Tax Services Leader, PwC US

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