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Proposed regulations on foreign tax credit provision, pending OIRA review

Foreign tax credit provision, pending OIRA review

OMB’s Office of Information and Regulatory Affairs (OIRA) today acknowledged receipt of proposed regulations from the Treasury Department as guidance concerning the foreign tax credit provision under the new U.S. tax law (Pub. L. No. 115-97, enacted December 22, 2017) that is at times referred to as the “Tax Cuts and Jobs Act” (TCJA).

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Background

The new law repealed the deemed-paid foreign tax credit under Code section 902 and retained but modified the deemed-paid foreign tax credit under section 960 of the Code. Section 902 deemed a U.S. corporate shareholder of a 10%-owned foreign corporation to have paid a portion of the foreign corporation’s foreign income taxes when it received or was deemed to receive a dividend from that foreign corporation. Section 960 provided a similar deemed-paid credit for subpart F inclusions. Under the new law, the allowable credit under section 960 is based on current-year taxes attributable to subpart F income rather than the “pooling” approach that applied under sections 902 and 960. 

The new law also provides rules applicable to foreign taxes attributable to distributions of previously taxed income (PTI), including from a lower-tier to an upper-tier CFC. These rules are not explained in any further detail, but appear to allow foreign taxes as credits under section 960 in the year the PTI is distributed. The new law grants the Treasury Secretary authority to promulgate regulations and guidance such that the amended section 960 credit would, as under pre-enactment law, be computed separately for each category or “basket” of income under Code section 904(d). 

The new law makes conforming amendments to other Code provisions to reflect the repeal of Code section 902, including amending Code section 78 to treat the “gross-up” for deemed paid taxes as a dividend.

The repeal of section 902 may have significant consequences for domestic corporations eligible to claim section 902 deemed-paid credits with respect to dividends from 10%-owned foreign corporations that are not CFCs because foreign income taxes paid or accrued by such corporations can no longer be claimed as foreign tax credits. Moreover, the change from the pooling regime to a current-year foreign tax regime may also significantly affect the foreign tax credit calculation, as the pooling regime serves to blend effective foreign tax rates that may differ from year to year due to U.S. and foreign timing differences and rate changes.

OIRA review

Treasury regulations that are identified as “major” regulations are subject to review by OMB’s OIRA before issuance, pursuant to Executive Order 13771. Read TaxNewsFlash

The U.S. Treasury Department and IRS would be expected to release the following proposed regulations once OIRA review is completed (according to information on the OIRA website):

These regulations will provide guidance concerning foreign tax credit issues arising under TCJA.

A notation on the OIRA website indicates that these proposed regulations are designated for “expedited review.”

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