On January 4, 2022, the Internal Revenue Service (IRS) and the U.S. Treasury Department (Treasury) issued final regulations (Regulations) that provided significant guidance on the determination of foreign tax eligibility for the U.S. foreign tax credit (FTC).[1] These Regulations substantially modify prior regulations issued under Internal Revenue Code (Code) sections 901-905.[2] The Regulations can preclude certain foreign withholding taxes and other taxes that have historically been considered creditable from being claimed as an FTC. These Regulations apply to foreign taxes paid in tax years beginning on or after December 31, 2021.
Several comments have been submitted to the Treasury and the IRS regarding the final Regulation regarding the impact they will have on taxpayers’ ability to claim a foreign tax credit. In response to those comments, the Treasury and the IRS have indicated that they will issue proposed regulations to provide some taxpayer relief. Peter Blessing, the Associate Chief Counsel (International) at the IRS, recently stated that he hopes such regulations will be issued before the Thanksgiving holiday.
What are the Proposed FTC Regulations Expected to Address?
The Proposed Foreign Tax Credit Regulations are expected to address:
- The Cost Recovery requirement of the final Regulations
- The source-based Attribution Requirement as it applies to royalties
- The allocation of foreign taxes in situations involving the disregarded sales of property
Blessing also indicated that the provided Cost Recovery requirement guidance “should provide some comfort” as to how this will be applied by taxpayers and the IRS. Regarding the source-based attribution requirements, the requirement will remain, but some provided guidance will clarify how taxpayers can change their contract to reflect their place of use so taxes qualify as a creditable withholding tax assistance.
As the FTC regulations are effective for taxable years beginning on or after December 31, 2021, we recommend taxpayers perform a year-end assessment to determine which foreign taxes are creditable for U.S. federal income tax purposes.
How Can We Help?
For assistance or questions regarding creditability of foreign taxes or help with year-end planning, please contact your Cherry Bekaert advisor or a member of the International Tax Services practice.
References:
[1] T.D. 9959, 87 Fed. Reg. 276 (Jan. 4, 2022).
[2] All section references are to the Internal Revenue Code, as amended (the Code), or related Treasury regulations, unless otherwise indicated.
