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KPMG report: Analysis of final and proposed foreign tax credit regulations

Analysis of final and proposed foreign tax credit

Final regulations (T.D. 9922) and proposed regulations (REG-101657-20) were published in the Federal Register on November 12, 2020, and relate to the determination of the foreign tax credit (FTC).

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These final and proposed regulations are the third significant revision of the FTC regulations since enactment of the 2017 U.S. tax law (Pub. L. No. 115-97)—the law that was enacted December 22, 2017, and is often referred to as the “Tax Cuts and Jobs Act” (TCJA)—that made changes to the FTC rules. The prior major regulatory revisions were published in December 2018 and December 2019.

The 2020 final regulations finalize aspects of the proposed regulations (December 2019) generally without significant substantive changes but with certain exceptions. The 2020 final regulations provide guidance related to the allocation and apportionment of foreign taxes and other expenses for purposes of determining a taxpayer’s FTC limitation.

  • Expenses addressed include stewardship, research and experimental (R&E) expenditures, interest, damages, and other payments arising from litigation.
  • Detailed rules are provided for associating foreign income taxes with related income.
  • Guidance related to foreign tax redeterminations as proposed in the 2019 proposed regulations is finalized and generally requires the filing of amended returns upon a foreign tax redetermination.
  • Other issues include the disallowance of a portion of a taxpayer’s FTCs attributable to distributions of earnings and profits (E&P) previously taxed under section 965 and the application of the FTC limitation to consolidated groups.
  • Guidance regarding hybrid instruments and entities included in proposed regulations released in April 2020, as well as guidance in respect of the treatment of certain deductions attributable to prepayments that were not included in income by the recipient under the “global intangible low-taxed income” (GILTI) provisions is finalized.

The 2020 proposed regulations contain newly proposed guidance, as well as re-proposed portions of the 2019 proposed regulations where Treasury and the IRS materially revised their approach and sought to afford taxpayers additional opportunity to comment. The 2020 proposed regulations re-propose certain rules relating to the allocation and apportionment of foreign income taxes, including with respect to foreign income taxes that arise in connection with disregarded payments. The 2020 proposed regulations also include or introduce:

  • Rules related to the allocation and apportionment of interest expense
  • A substantial overhaul of the existing 901 and 903 regulations that address the creditability of foreign taxes as foreign income taxes or “in lieu of” taxes
  • A new jurisdictional nexus requirement in respect of foreign taxes, reflecting a concern by Treasury that an increasing number of taxes are being adopted worldwide that diverge from traditional international norms of income taxation
  • Guidance on a number of miscellaneous aspects of the FTC, including the sourcing of shareholder inclusions, the application of the technical taxpayer rules to mid-year transactions, the definition of financial services income, the disallowance of a credit or deduction for foreign taxes related to earnings eligible for the dividends-received deduction afforded by section 245A, the carryover of E&P and taxes in connection with non-recognition transactions under section 367(b), and transition rules necessary to coordinate the carryback of net operating losses allowed by the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act), with the determination of a taxpayer’s FTC limitation
  • Guidance clarifying the treatment of electronically provided services under the “foreign-derived intangible income” (FDII) regime


Read a November 2020 report [PDF 751 KB] (70 pages) prepared by KPMG LLP: Analysis of final and proposed foreign tax credit regulations

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