IRS Issues Final Foreign Tax Credit Regulations
Mike Godfrey, Tax-News.com Washington
06 December, 2019
On December 2, 2019, the United States Internal Revenue Service (IRS) issued final regulations on the foreign tax credit following major changes to the US tax code.
According to a summary of the document, the final regulations provide guidance relating to the determination of the foreign tax credit under the Internal Revenue Code as a result of changes made to the applicable law by the 2017 Tax Cuts and Jobs Act (TCJA).
The document finalizes the proposed regulations published on December 7, 2018, and also finalizes proposed regulations on overall foreign losses that were published on June 25, 2012. Additionally, certain portions of proposed regulations published on November 7, 2007, relating to a US taxpayer's obligation to notify the IRS of a foreign tax redetermination are also finalized.
With respect to foreign tax credit rules, the TCJA changed several provisions, including repeal of section 902, which allowed deemed-paid credits in connection with dividend distributions based on foreign subsidiaries' cumulative pools of earnings and foreign taxes. The TCJA also added two separate limitation categories for foreign branch income and amounts includible under the Global Intangible Low-Taxed Income (GILTI) provisions.
Intended to discourage US corporations from shifting high-yielding intangible assets such as intellectual property rights to low-tax jurisdictions, GILTI is defined as the portion of the income of a controlled foreign corporation owned by US shareholders that exceeds a notional 10 percent return – a rate that is intended to reflect the normal rate of return on tangible assets. After a 50 percent deduction, GILTI is subject to an effective corporate tax rate of 10.5 percent.
Additionally, the TCJA changed how taxable income is calculated for purposes of the foreign tax credit limitation by disregarding certain expenses and repealing the use of the fair market value method for allocating interest expense.
Finally, the TCJA introduced a participation exemption through a dividends received deduction for certain dividends in section 245A.
The IRS also issued on December 2 proposed regulations relating to the allocation and apportionment of deductions and creditable foreign taxes, foreign tax redeterminations, availability of foreign tax credits under the transition tax, and the application of the foreign tax credit limitation to consolidated groups.