The Tax Cuts and Jobs Act (TCJA) (Pub. L. No. 115-97) made several significant changes to the foreign tax credit rules and related expense allocation and apportionment rules for purposes of determining the foreign tax credit limitation.
Specifically, the TCJA:
- Repealed the fair market value method or asset valuation for purposes of allocating and apportioning interest expense under 864(e)(2)
- Added 904(b)(4), which provides rules for the treatment of §245A dividends
- Added two new foreign tax credit limitation categories to 904(d)(1)
- Amended 960(a) through §960(c) and added §960(d) through §960(f), with respect to foreign tax credits for deemed paid subpart F inclusions and inclusions of global intangible low-taxed income (GILTI)
- Repealed 902, which allowed a deemed paid foreign tax credit to a domestic corporation that owned 10% or more of the voting stock in certain foreign corporations along with making several conforming changes
The TCJA also added §951A, which requires a U.S. shareholder of a controlled foreign corporation (CFC) to include GILTI in gross income and amended §965 to deem a repatriation of all untaxed post-1986 foreign earnings of foreign corporations that have a domestic corporation as a 10% (or more) shareholder. The TCJA added §245A to the code, which provides a 100% dividends received deduction (DRD) to domestic corporations that are 10% (or more) shareholders of foreign corporations for the foreign portion of dividends paid by the foreign corporation. As a result of the amendment of §965 and addition of §245A, Congress determined that §902 was no longer necessary. However, significant changes to the regulations under the foreign tax credit and the foreign tax credit limitation were deemed necessary and the significant amount of previously taxed earnings and profits §965 and §245A would produce.
Treasury and the IRS have released several sets of FTC regulations that address the changes made by the TCJA to the FTC regime. T.D. 9882, published in December 2019, and, to a lesser extent, T.D. 9866, published in June 2019 (the 2019 final regulations), generally finalize the first set of proposed regulations published in December 2018 (REG-105600-18).
The 2019 final regulations also updated the gross up rules under §78 and the application of the election not to use a net operating loss under §965(n). The 2019 final regulations also updated the gross up rules under §78 and the application of the election not to use a net operating loss under §965(n). The 2019 final regulations also include changes relating to pre-TCJA statutory amendments.
In addition, T.D. 9922, published in November 20202020 (the 2020 final regulations), generally finalizes the second set of proposed FTC regulations published in December 2019 (REG-105495-19). The 2020 final regulations address the allocation and apportionment of certain deductions, including foreign income taxes, the definition of financial services income, and foreign tax redeterminations under §905(c). The 2020 final regulations also finalize certain proposed hybrid regulations issued in April 2020 (REG-106013-19) relating to hybrid deduction accounts, conduit financing arrangements, and certain payments under §951A. These rules are not discussed in this roadmap.
Finally, T.D. 9959, published in January 2022 (2022 final regulations), and, to a lesser extent T.D. 9956, published in September 2021, finalize certain portions of the third set of proposed FTC regulations published in November 2020 (REG-101657-20). The 2022 final regulations address various FTC topics including the definitions of foreign income tax and in-lieu-of tax for purposes of §901 and §903, the timing rules for claiming a FTC, the allocation and apportionment of foreign income taxes, and the disallowance of a FTC or deduction under §245A(d). T.D. 9959 also clarifies certain foreign-derived intangible income (FDII) rules. These FDII clarifications are not discussed in this Roadmap.
Taxpayers should make careful note of the varying applicability dates of the final regulations.
This roadmap highlights key takeaways from the final regulations relating to the foreign tax credit; it does not contain a comprehensive list of every rule.
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