Publish Date

Dec 03, 2018

Last Week’s Double Feature – Proposed Foreign Tax Credit Regulations Released

A&M Tax Advisor Weekly

For those of us not satisfied with only one voluminous set of regulations per week, the IRS has heard our cries. On Wednesday, the IRS released 312 pages (including the preamble) of proposed regulations on foreign tax credits (FTCs). This guidance provides the first insights into the IRS’s interpretation of numerous FTC related questions arising out of the transformation of the U.S. international tax system by the 2017 tax reform legislation. These rules not only address FTC-related questions surrounding the new tax on Global Intangible Low-Taxed Income (GILTI), but also feature substantial changes to legacy FTC rules, a necessary step to allow for the determination of FTCs in a post-Tax Cuts and Jobs Act (TCJA) environment.

Most notably, interest expense apportionment, including for GILTI purposes, continues to follow legacy section 861 principles, with certain modifications. In that regard, the Service declined to provide the complete exemption from expense allocation and apportionment to GILTI that so many taxpayers and commentators had requested. Beyond this, the proposed regulations provide vast and detailed guidance on the new section 904 (FTC limitation) income categories and on allocating foreign taxes to those categories. Although these proposed regulations provide many such long-awaited answers, they do not do so simply. These proposed regulations add great complexity, and the retroactive implications of the proposed regulations may be particularly burdensome for taxpayers faced with imminent year-end calculations. The following is a brief overview of some of the highlights.

  • Treatment of CFC Stock Under Section 861: The proposed regulations include a special rule that treats a portion of CFC stock that gives rise to a GILTI inclusion as an exempt asset. A domestic corporation that is a United States shareholder (USSH) calculates the exempt portion of its CFC stock based on a fraction, the numerator of which is its allowable section 250 deduction and the denominator of which is its GILTI inclusion. For some taxpayers, this could mean up to 50 percent less interest apportionment to GILTI income than previously expected. In addition, the proposed regulations provide that the portion of a CFC’s stock (including stock of CFCs with current losses) deemed to generate GILTI is determined by reference to the taxpayer’s GILTI inclusion percentage.
  • FTC Carryovers and Carrybacks: FTC carryovers from pre-2018 generally remain with the same section 904 category post-2017. However, taxpayers may assign unused general category FTCs to the new foreign branch category to the extent such taxes would have been in that category when incurred, had the branch category existed at that time. A taxpayer may elect to apply this exception on a timely filed return (including extensions). Similarly, in the first tax year beginning after 2017, taxpayers carry back excess FTCs in the foreign branch category to the general limitation category for the previous tax year.