Deborah Paul of the New York State Bar Association Tax Section has submitted a report on proposed foreign tax credit regulations (REG-105600-18), identifying some clarifications and changes to further the policies underlying the foreign tax credit regime.

The proposed regs modify the determination of the foreign tax credit limitation under section 904 in response to changes made to the foreign tax credit rules and related provisions by the Tax Cuts and Jobs Act.

The tax section expressed agreement with the treatment of hybrid debt issued by a controlled foreign corporation under the proposed regs for purposes of the CFC netting rule. However, section members noted that circumstances in which an interest expense deduction is disallowed under reg. section 1.861-12T(f)(1) may result in foreign assets funded by that debt not being included for purposes of calculating the interest amount that is allocated to foreign sources under reg. section 1.861-9. The tax section recommends narrowing the scope of that provision.

The proposed regs provide an election for allocating excess foreign tax credit carryforwards from pre-TCJA years for the general category to the foreign branch income category to the extent they would have related to that category if the post-TCJA basketing rules had applied in the year the foreign income taxes were originally paid or accrued. Noting that the reallocation election under the proposed regs is administratively challenging, the tax section proposed a simpler alternative. The regs also provide transition year guidance for overall foreign losses and separate limitations losses that generally follows the allocation of unused foreign taxes. However, the tax section has questioned why reallocation of those loss accounts is tied to unused foreign tax carryforwards that appear otherwise unrelated to the loss. Section members suggest that Treasury and the IRS consider an approach that provides greater administrative convenience and reflects the fact that loss accounts relate to the reduction of foreign income, rather than foreign tax carryforwards.

The tax section addressed basketing under section 904, seeking clarification regarding the definition of a qualified business unit, the requirement to maintain a separate set of books and records, and the treatment of transfers of intellectual property from a foreign branch to a foreign branch owner. Section members also addressed the proposed regs’ new category of section 951A income for global intangible low-taxed income inclusions that are not passive income.

The proposed regs define base differences between foreign and U.S. tax law narrowly and give two examples. Section members have asked that Treasury and the IRS further elaborate the elements of a base difference and provide further examples illustrating what a base difference is. To address timing differences of income inclusions and the accrual or payment of taxes for section 906(a) and (d), the tax section has suggested alternative approaches that more closely attributes foreign income taxes to the foreign income on which they are imposed and subpart F income inclusions. Section members also asked that final regs clarify the scope and mechanism for allocating foreign taxes imposed on disregarded payments.

NYSBA Tax Section Comments on Proposed FTC Regs