The Internal Revenue Service has announced that the final regulations have been issued on the revamped Foreign Tax Credit, which was modified as a result of tax reform in 2017. The credit generally allows taxpayers and businesses to claim a credit for income taxes paid or accrued to foreign governments.
So What’s Different?
The tax reform legislation, termed the Tax Cuts and Jobs Act (TCJA), made major changes to the international tax system in the U.S.
Several Foreign Tax Credit provisions were changed. One was the repeal of section 902, which allowed deemed-paid credits in connection with dividend distributions based on foreign subsidiaries’ cumulative pools of earnings and foreign taxes.
The legislation also added two limitation categories for foreign branch income and amounts that are includible under the Global Intangible Low-Taxed Income (GILTI) provisions.
How taxable income is calculated when figuring the Foreign Tax Credit limitation was also changed by the tax reform package. Certain expenses have now been disregarded and the use of the fair market value for allocating interest expense has been repealed.
The IRS says the TJCA made “systemic” changes to taxation of international income that impact the Foreign Tax Credit calculation. These include the introduction of a participation exemption through a dividends-received deduction for certain section 245A dividends.
IRS changes also introduced the GILTI provisions which subjects certain foreign earnings to current U.S. taxation. Previously, these earnings would have been deferred – at a lower tax rate – and subject to extra Foreign Tax Credit restrictions.
Other Regulations Issued
Proposed regulations have also been issued that apply to the allocation and apportionment of deductions and creditable foreign taxes, foreign tax redeterminations, availability of Foreign Tax Credits under the Transition Tax, and the application of the Foreign Tax Credit limitation to consolidated groups.
For more information on the implementation of the Tax Cuts and Jobs Act, check out the Tax Reform Page of IRS.gov.