Treasury released proposed regulations (the Proposed Regulations) under Sections 78, 861, 901, 904, 954, 960, and 965 on November 28. The Proposed Regulations are the first form of administrative guidance with respect to the foreign tax credit (FTC) regime following the enactment of the 2017 tax reform act (the Act). Of relevance to the Proposed 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, and introducing two new FTC limitation baskets under Section 904.
The Proposed 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; and the extent of deemed-paid FTCs with respect to subpart F and global intangible low-taxed income (GILTI) inclusions.
The Proposed Regulations confirm the possibility of incremental US tax on foreign subsidiaries that are subject to high foreign tax rates by apportioning expenses to net GILTI inclusions; provide complex rules for categorizing and tracking foreign subsidiary stock and earnings; and limit the applicability of dividends-received deductions and FTCs allowed under the Act. The Proposed Regulations do not include rules relating to the interaction of FTCs with the Act’s base erosion and anti-abuse tax (BEAT) or the full treatment of earnings and basis adjustments attributable to GILTI inclusions.
Note that today, December 14, the IRS issued Notice 2019-01, which outlines forthcoming previously taxed E&P accounts (PTEP). The Proposed Regulations and the Notice are discussed in greater detail below.
The Proposed 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 Proposed Regulations also provide complex rules for categorizing and tracking foreign subsidiary stock and earnings, and limit the applicability of dividends-received deductions and FTCs allowed under the Act.
Taxpayers and their advisors should review the guidance carefully and model the effect of the new regulations to assess the impact of the proposed rules and develop comments for Treasury in advance of the final regulations.
Note that the Proposed Regulations do not include rules relating to the interaction of FTCs with the Act’s BEAT provisions or the full treatment of earnings and basis adjustments attributable to GILTI inclusions.
Principal, International Tax Services, PwC US