Treasury Releases Proposed and Final Foreign Tax Credit Regulations

The Foreign Tax Credit (FTC) is one U.S. taxpayers can claim on foreign source income to minimize double taxation. There are different types of credit (direct and indirect) and different “baskets,” including Sec. 951A (GILTI) category, passive and general.

The Tax Cuts and Jobs Act (TCJA) of 2017 enacted significant changes with respect to FTC rules, which have been addressed in several proposed and final regulations. The latest were released in late 2020. 

Foreign Tax Credit Highlights:

  • New guidelines on allocation and apportionment of expenses under §861 through §865, including research and experimentation expenditures
  • Updates regarding accounting for foreign tax redeterminations, availability of foreign taxes under the transition tax, and application of the FTC limitation to consolidated groups
  • New transition rules to account for the CARES Act's amendment of NOL carryback provisions
  • Revision of the timing rules for claiming an FTC and revising the definition of a “foreign income tax,” including adding a jurisdictional nexus requirement and amending the net gain requirement
  • Significant impact on the future FTC landscape. For example, for digital service tax to be creditable in the U.S., the IRS has determined that the foreign tax law must require a sufficient nexus between the foreign country and the taxpayer’s activities. To achieve this result, the proposed regulations impose a “jurisdictional nexus requirement”

Along with other international provisions included in the TCJA, the new FTC rules will affect many U.S. taxpayers, including multinational companies, and will increase the tax compliance burden. Contact your Schneider Downs professional for guidance on how these rules may impact you.

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