IRS corrects 2019 FTC regulations, clarifies R&E expense rules

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May 2020

Overview

The IRS on May 15 issued correcting amendments to the final and proposed foreign tax credit (FTC) regulations released last December.  While primarily addressing clerical issues (such as updating incorrect cross references), the amendments make important corrections with respect to the waiver of the five-year binding rule regarding the method for allocating and apportioning R&E expense and the pre-effective date application scope of the proposed regulations.  

In particular, the IRS updated Treas. Reg. sec. 1.861-17(e)(3) (the Final Regulations Correction) and the preamble pre-effective date reliance language in the proposed FTC regulations (Proposed Regulations Correction).  The corrections clarify that the waiver election to the five-year binding rule can be made as long as it applies to all tax years beginning after December 31, 2017 and before January 1, 2020, or solely to the tax year that begins before January 1, 2020.  Furthermore, the corrections clarify that the waiver election can be made on an amended return.  

The correction to the proposed regulations clarifies the possible pre-effective date application of the proposed R&E regulations - to both tax years beginning after December 31, 2017 and ending before January 1, 2020 if the taxpayer is using the sales method for both tax years or to the tax year that begins before January 1, 2020 if the taxpayer is using the sales method only for this year.

The takeaway

In order to change methods without regard to the five-year binding requirement, taxpayers simply need to file an original or amended return indicating the method they wish to adopt (i.e., if taxpayers wish to early adopt the December Regulations, they must utilize the sales method). This change in method must apply to all tax years beginning after December 31, 2017 and before January 1, 2020, or solely to the tax year that begins before January 1, 2020.  A change to the sales method for a tax year or years before the effective date of the proposed regulations, however, does not require the taxpayer to rely on the proposed regulations, but provides the option to do so if the taxpayer is not already using the sales method.

See also

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Doug McHoney

International Tax Services Leader, PwC US

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