Highly anticipated foreign tax credit regulations have been issued that provide guidance on the significant changes made by the Tax Cuts and Jobs Act (P.L. 115-97) to the foreign tax credit rules.
The proposed regulations address:
(1) the allocation and apportionment of the deductions underCode Sec. 861 through Code Sec. 865 and adjustments to the foreign tax credit limitation under Code Sec. 904(b)(4);
(2) 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. 904(c);
(3) the addition of separate foreign tax credit limitation categories for foreign branch income and global intangible low-taxed income (GILTI) and other updates needed to the foreign tax credit limitation rules;
(4) the calculation of the high-tax income exception from subpart F income;
(5) the determination of the Code Sec. 960 deemed paid credits and the gross up under Code Sec. 78, and
(6) the application of the election under Code Sec. 965(n) not to apply the net operating loss deduction when calculating the Code Sec. 965 transition tax.
Allocation and apportionment of deductions
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 with respect to income in the GILTI category that is offset by the deduction allowed under Code Sec. 250-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.
The proposed regulations relating to allocation and apportionment of deductions also:
– revise the netting rule for controlled foreign corporations (CFCs);
– provide rules for the valuation of assets;
– provide rules for characterizing stock for elections related to R&E expenses;
– and provide rules for 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, research and experimentation expenses (R&E), stewardship and general and administrative expenses.
Foreign tax credit limitations
The proposed regulations eliminate deadwood and reflect statutory amendments made prior to the TCJA. New and transitional rules are provided to account for the separate categories for GILTI and foreign branch income.
Additionally, changes are made to the rules relating to the passive category with respect to 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 Under New Code Sec. 960 and Code Sec. 78
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.
Proposed Regulations, NPRM REG-105600-18IR-2018-235
Code Sec. 78
– CCH Reference – 2018FED ¶6351BB
– Code Sec. 861
– CCH Reference – 2018FED ¶27,138B
– CCH Reference – 2018FED ¶27,139CB
– CCH Reference – 2018FED ¶27,140GB
– CCH Reference – 2018FED ¶27,141EB
– CCH Reference – 2018FED ¶27,142GB
– CCH Reference – 2018FED ¶27,143B
– CCH Reference – 2018FED ¶27,144CB
– CCH Reference – 2018FED ¶27,149B
– Code Sec. 901
– CCH Reference – 2018FED ¶27,825D
– Code Sec. 904
– CCH Reference – 2018FED ¶27,882B
– CCH Reference – 2018FED ¶27,883B
– CCH Reference – 2018FED ¶27,884B
– CCH Reference – 2018FED ¶27,885BB
– CCH Reference – 2018FED ¶27,886BB
– CCH Reference – 2018FED ¶27,887B
– CCH Reference – 2018FED ¶27,891
– CCH Reference – 2018FED ¶27,900AA
– Code Sec. 952
– CCH Reference – 2018FED ¶28,492
– Code Sec. 954
– CCH Reference – 2018FED ¶28,531F
– Code Sec. 960
– CCH Reference – 2018FED ¶28,651B
– CCH Reference – 2018FED ¶28,652B
CCH Reference – 2018FED ¶28,653B
CCH Reference – 2018FED ¶28,654B
CCH Reference – 2018FED ¶28,655B
CCH Reference – 2018FED ¶28,656B
CCH Reference – 2018FED ¶28,657B
Code Sec. 965
CCH Reference – 2018FED ¶28,726JB
CCH Reference – 2018FED ¶28,726NB
Tax Research Consultant
CCH Reference – TRC INDIV: 45,106.10