The IRS on Thursday proposed rules for the allocation and apportionment of expenses for purposes of determining the limitation on the foreign tax credit to reflect changes to the law made by the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 (REG-105600-18). The Sec. 901 foreign tax credit allows U.S. taxpayers to offset their taxes by the amount of foreign income taxes paid or accrued.
The IRS noted that the TCJA made a number of changes to the tax law that affected the Sec. 904 limitation on the foreign tax credit, not the least of which was the reduction in the corporate tax rate to 21%, which made it more likely that corporate taxpayers would be subject to the limitation on the foreign tax credit. The TCJA also added a dividends-received deduction for domestic corporate shareholders equal to the foreign-source portion of dividends received from certain foreign corporations under Sec. 245A (subject to limitations in Sec. 246).
Other significant changes in the rules that had to be addressed in the proposed rules are the repeal of the fair market value (FMV) method of asset valuation for purposes of allocating and apportioning interest expense under Sec. 864(e)(2); new Sec. 904(b)(4), which provides for alternative adjustments; two new foreign tax credit limitation categories in Sec. 904(d); amended Secs. 960(a) through (c); added new Secs. 960(d) through (f); and repealed Sec. 902, the deemed paid credit for taxes paid by a foreign corporation. The TCJA also added Sec. 951A, which requires a U.S. shareholder of a controlled foreign corporation (CFC) to include certain amounts in income (a global intangible low-taxed income (GILTI) inclusion).
The proposed rules address the following topics:
- The allocation and apportionment of deductions under Secs. 861 through 865 and adjustments to the foreign tax credit limitation under Sec. 904(b)(4);
- Transition rules for overall foreign loss, separate limitation loss, and overall domestic loss accounts under Secs. 904(f) and (g), and for the carryover and carryback of unused foreign taxes under Sec. 904(c);
- The addition of separate categories under Sec. 904(d) and other necessary updates to the regulations under Sec. 904, including revisions to the lookthrough rules and other updates to reflect pre-TCJA statutory amendments;
- The calculation of the exception from Subpart F income for high-taxed income under Sec. 954(b)(4);
- The determination of deemed paid credits under Sec. 960 and the gross-up under Sec. 78; and
- The application of the election under Sec. 965(n).
The IRS is requesting comments and any request for a public hearing by 60 days after the regulations are published in the Federal Register.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.