The Treasury and IRS released the final foreign tax credit (“FTC”) regulations on December 28, 2021. These final regulations are the latest set of regulations to modify the FTC rules since the enactment of the Tax Cuts and Jobs Act in 2017.
The new regulations significantly modify the rules for determining when a foreign tax credit is creditable, how income and deductions are sourced and allocated for FTC calculation purposes among other modifications. These changes are effective March 7, 2022.
Below is a more complete list of issues addressed in the final regulations:
- Creditability of foreign income taxes
- Allocation and apportionment of other expenses for computing the FTC limitation
- The allocation of the liability for foreign income taxes in connection with certain mid-year transfers or reorganizations
- The foreign branch category rules
- Timing for claiming a FTC
- The sourcing of inclusions under Sections 951, 951A and 1293
- Clarification on “electronically supplied services” under Section 250 (FDII)
Based on these regulations taxpayers may find that Foreign Tax Credits that were allowed in the past are no longer creditable or available to be used as a credit against their U.S. tax liability. Additionally, taxpayers may also find that their foreign sourced income in various categories has diminished in applying the new sourcing and allocation rules.
Taxpayers who have benefited from significant foreign tax credits in the past should review these changes in detail to understand the impact on their overall tax liability.
Author: Calvin Yung, JD, LLM | [email protected]
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For assistance in analyzing the impact of these changes on your tax liability please reach out to a Withum International Tax Specialist.
