Preliminary highlights from the final and proposed foreign tax credit regulations

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December 2019

Overview

Treasury and the IRS, on December 2, 2019, released final regulations (the Final Regulations) under Sections 861, 901, 904, 905, 954, 960, 965, and 986, and proposed regulations (the New Proposed Regulations) under Sections 704, 861, 904, 905, 954, 960, 965, 1502, 6227, and 6889.  The Final Regulations provide guidance with respect to the foreign tax credit (FTC) regime under the 2017 tax reform legislation (the Act). Various effective dates apply under the Final and New Proposed Regulations.

Of relevance to the Final Regulations, the Act limited the FTC for US corporate taxpayers by repealing the indirect credit under Section 902, amended the deemed-paid credit under Section 960, introduced two new FTC limitation baskets under Section 904, modified the sourcing rules related to inventory and interest expense, and altered the manner in which foreign tax redeterminations are taken into account under Section 905.  (For prior coverage of the Act’s FTC provisions, see the ‘See also’ section below.) 

The Final Regulations provide guidance related to the mechanics of determining the FTC limitation under Section 904 (including the allocation and apportionment of expenses), the scope of the new foreign branch basket, the extent of deemed paid FTCs with respect to subpart F and global intangible low-taxed income (GILTI) inclusions, and foreign tax redeterminations, while clarifying and amending several notable provisions of prior proposed regulations published on December 7, 2018 (the Prior Proposed Regulations).  

The New Proposed Regulations supplement the Final Regulations and provide important guidance with respect to other aspects of the new FTC regime, including: the allocation and apportionment of creditable foreign taxes; the allocation and apportionment of other expenses; and certain aspects of foreign tax redeterminations. PwC is in the process of reviewing the Final and New Proposed Regulations in detail; some of the key highlights we have identified thus far are set forth below.  An in-depth Insight on the Final and New Proposed Regulations will be published in the coming days.  In addition, we will discuss the FTC guidance on a PwC webcast: Tax Readiness: The Final, Temporary and Proposed FTC regulations, scheduled for December 16 at 2:00 pm ET.

The takeaway

The Final Regulations provide needed guidance related to the mechanics of determining the FTC limitation under Section 904 (including the allocation and apportionment of expenses), the scope of the new foreign branch basket, the extent of deemed-paid FTCs with respect to subpart F and GILTI inclusions, certain aspects of foreign tax redeterminations, and other FTC issues.

The New Proposed Regulations provide additional important guidance related to the allocation and apportionment of various expenses (such as stewardship expenses and R&E expenditures), the treatment of foreign income taxes attributable to base and timing differences, retroactive adjustments for foreign tax redeterminations, and other FTC issues.  Taxpayers should review and assess the impact of the provisions in the New Proposed Regulations, and consider commenting on issues that Treasury should address.

The above-mentioned highlights are not an exhaustive list of the provisions in the Final and New Proposed Regulations.  We expect to publish an in-depth Insight in the coming days.

See also

Contact us

Doug McHoney

International Tax Services Leader, PwC US

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