Proposed Regs Address Foreign Tax Credit Changes
Highly anticipated foreign tax credit regulations have been issued
that provide guidance on the significant changes made to the foreign tax
credit rules by the Tax Cuts and Jobs Act ( P.L. 115-97). The proposed
Deduction Allocation and Apportionment
- allocation and apportionment of the deductions under Code Secs. 861
through 865, and adjustments to the foreign tax credit limitation under
Code Sec. 904(b)(4);
- transition rules for overall foreign loss, separate limitation loss,
and overall domestic loss accounts under Code Sec. 904(f) and (g), and
for the carryover and carryback of unused foreign taxes under Code Sec.
- addition of separate foreign tax credit limitation categories for
foreign branch income and global intangible low-taxed income (GILTI),
and other updates to the foreign tax credit limitation rules;
- calculation of the high-tax income exception from subpart F income;
- determination of the Code Sec. 960 deemed paid credits and the gross-up under Code Sec. 78; and
- the election under Code Sec. 965(n) not to apply the net operating
loss deduction when calculating the Code Sec. 965 transition tax.
The proposed regulations generally apply the existing approach of the
expense allocation rules to income in the new Code Sec. 951A (GILTI) and
foreign branch categories. The proposed regulations also provide for
exempt income and exempt asset treatment for income in the GILTI
category that is offset by the Code Sec. 250 deduction. This will reduce
the amount of expenses apportioned to the GILTI category.
Rules are provided for the allocation and apportionment of the Code
Sec. 250 deduction. A new rule addresses loans to partnerships by
certain partners and their affiliates to prevent abusive borrowing
arrangements that artificially increase foreign source income. Under the
proposed regulations, interest income attributable to borrowing through
a partnership is allocated across the foreign tax credit separate
categories in the same manner as the associated interest expense.
The proposed allocation and apportionment regulations also revise the
netting rule for controlled foreign corporations (CFCs), and provide
rules for: valuing assets, characterizing stock for elections related to
research and experimentation (R&E) expenses, and applying the Code
Sec. 904(b)(4) adjustment.
Because the existing expense allocation rules have not been updated
since 1988, the Treasury Department and IRS expect to reexamine existing
approaches to allocating and apportioning expenses, including for
example the rules for allocating interest, R&E expenses, stewardship
and general and administrative expenses.
The proposed regulations eliminate deadwood, and reflect statutory
amendments made prior to the TCJA. New and transitional rules account
for the separate categories for GILTI and foreign branch income. For
example, foreign tax credit carryovers will by default remain in the
general category, but taxpayers are allowed to allocate the transitional
FTC carryovers to the foreign branch category. Also, the look-through
rules are revised to clarify that nonpassive look-through payments
cannot be assigned to a Code Sec. 951A category, and are generally
assigned to the general category or the foreign branch category.
Additionally, changes are made to the rules relating to the passive
category for high-taxed income, export financing income, and financial
services income. Also addressed is the separate category for income
resourced under a treaty, and rules for assigning the Code Sec. 78
gross-up and Code Sec. 986(c) gain or loss to a separate category.
Deemed Paid Tax Credits
The proposed regulations provide rules for determining a domestic
corporation’s deemed paid taxes under Code Sec. 960, as revised by the
TCJA. The proposed regulations treat a GILTI inclusion as a subpart F
inclusion for purposes of Code Sec. 960(c). The proposed regulations
also reflect the changes made by the TCJA to the Code Sec. 78 gross-up.