Final regulations under section 901(m) from the U.S. Treasury Department and IRS were published today, March 23, 2020, in the Federal Register.
Read the “Final Regulations” [PDF 381 KB]
The Final Regulations adopt, with certain revisions and clarifications (discussed below), the regulations proposed under section 901(m) and section 704(b) (Reg-129128-14) (the Proposed Regulations) in December 2016, together with temporary regulations (T.D. 9800) (the Temporary Regulations).
The Final Regulations are generally effective on March 23, 2020—the date of publication in the Federal Register. However, earlier effective dates apply to various portions of the Final Regulations. For example, certain provisions apply in respect of “covered asset acquisitions” (CAAs) occurring on or after January 1, 2011, when the underlying rule was previously introduced by section 901(m) itself. Other provisions apply in respect of CAAs occurring on or after July 21, 2014, when the provisions contain rules introduced in IRS notices issued in 2014 (described below).
Consistent with the Proposed Regulations, the Final Regulations allow a taxpayer to rely on the regulations prior to their effective date provided that the taxpayer consistently applies all of the regulations to CAAs occurring on or after January 1, 2011 (subject to limited exception). Such reliance may be useful for taxpayers that want to make a “foreign basis election” (described below). Read the following discussion about a modification of the consistency requirement included in the Final Regulations with respect to tax years which are closed for assessment.
Section 901(m) was enacted in 2010 and generally limits a taxpayer’s ability to claim foreign tax credits associated with a “covered asset acquisition” (CAA). In general, a CAA is an acquisition transaction that results in the creation of additional asset basis for U.S. tax purposes without a corresponding increase in asset basis for foreign tax purposes. The basis “step-up” resulting from a CAA may allow a taxpayer to claim additional depreciation or amortization deductions, thus reducing its earnings and profits for U.S. tax purposes.
Because there is no basis increase for foreign tax purposes, foreign taxable income—and thus foreign taxes—will generally be higher than if the U.S. basis step-up were taken into account in the foreign jurisdiction.
In 2014, the IRS and Treasury issued limited guidance under section 901(m) in the form of Notice 2014-44 (with a clarification later released in Notice 2014-45). Among other things, Notice 2014-44 provided guidance relating to certain dispositions of assets following a section 901(m) CAA including a definition of “disposition,” certain successor rules, and stated that future regulations would be issued reflecting this guidance. Read TaxNewsFlash [PDF 77 KB] and TaxNewsFlash [PDF 74 KB].
As noted above, Treasury and the IRS issued the Proposed Regulations and the Temporary Regulations in 2016. The Temporary Regulations primarily incorporate guidance provided in Notice 2014-44. The Proposed Regulations provided a more comprehensive set of rules implementing section 901(m), including the adoption of three new classes of transactions that constitute a CAA (with the last of those additional classes being a broad catch-all for any asset transfer which results in a basis increase for U.S. tax purposes without a corresponding basis increase for foreign tax purposes), and were proposed to be effective upon finalization and publication in the Federal Register. However, the Proposed Regulations permitted taxpayers to rely on these rules before their effectiveness subject to consistency requirements.
The Final Regulations largely finalize the Proposed Regulations without significant revision. In this regard, the Final Regulations continue to require a very detailed and complex set of rules in their implementation of section 901(m). Further, the Final Regulations maintain the general organization of the Proposed Regulations as outlined in KPMG’s outline [PDF 64 KB]. For example:
While the Final Regulations significantly track to the Proposed Regulations and Temporary Regulations, there are a few features to note:
Example: USS1 sells a foreign disregarded entity (FDE) to another member of its consolidated group (USS2) in a transaction that is a CAA because it is an asset sale for U.S. income tax purposes and an acquisition of stock of FDE for foreign tax purposes. However, any aggregate basis difference USS2 determines with respect to the RFAs will be adjusted to take into account the gain recognized for U.S. income tax purposes by USS1 on the original sale (provided USS1 and USS2 are still members of the same consolidated group in the year the allocated basis difference is determined).
For more information, contact one of the following KPMG tax professionals or any member of KPMG’s Washington National Tax International Tax practice:
Brett Bloom | +1 (202) 533-4061 | email@example.com
Kevin Brogan | +1 (202) 533-3425 | firstname.lastname@example.org
Jake Burgers | +1 (651) 305-5472 | email@example.com
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