Final regulations clarify safe harbor for allocation of CFTEs

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July 2019

Overview

Treasury on July 24, 2019 published final regulations (the Final Regulations) with respect to the allocation of creditable foreign tax expenditures (CFTEs).  The Final Regulations adopt with minor changes the temporary regulations released in 2016 under Section 704(b) (the Temporary Regulations), providing a safe harbor rule that deems certain allocations of CFTEs to be in accordance with the partners’ interests in the partnership (PIP).  

Consistent with the Temporary Regulations, the Final Regulations address how to take into account Section 743(b) adjustments, certain allocations, distributions, and guaranteed payments that give rise to foreign-law deductions, and disregarded payments between branches of a partnership, when determining the income in a CFTE category, or the income attributable to an activity in such category, for purposes of applying the safe harbor rule.  (For prior coverage on the Temporary Regulations, see the ‘See also’ section at the end of this Insight.) 

Only minor changes were made in the Final Regulations adding a cross-reference to the disregarded payment rule to clarify that such payments effectively may reduce net income in a CFTE category by subdividing an activity and assigning related CFTEs to a different CFTE category.  The Final Regulations also restore paragraphs that unintentionally were deleted by the Temporary Regulations. 

The Final Regulations affect partnerships that pay or accrue foreign income taxes and partners in such partnerships, and are generally effective on July 24, 2019. Key highlights with respect to the Final Regulations are set forth in this Insight.

The takeaway

The Final Regulations clarify the operation of the safe harbor for allocations of CFTEs, and, with minor modifications, adopt the Temporary Regulations issued in 2016.  Taxpayers with global structures involving partnerships and hybrid entities, or that may enter into such arrangements, should consider the Final Regulations in drafting their partnership agreements and providing for the allocation of CFTEs.   

See also:

Revised Section 704(b) regulations clarify partnership allocations of creditable foreign tax expenditures

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Craig Gerson

Principal, M&A Tax, PwC US

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