Foreign Tax Credits Clarified in Proposed Regulations
In December of 2017, the Tax Cuts and Jobs Act (“TCJA”) brought sweeping tax reform to the U.S. The U.S. moved from a worldwide tax system to a partial territorial tax system. The TCJA significantly changed the way the U.S. taxes foreign activities for businesses and individuals. New provisions, including a dividend received deduction for dividends from foreign subsidiaries, the addition of Global Intangible Low Taxed Income (“GILTI”) and the modified foreign tax credit rules caused ambiguity in the application of the foreign tax credit system. The foreign tax credit system generally provides a mechanism for U.S. taxpayers to offset their U.S. tax liability with taxes paid abroad to limit double taxation. On Wednesday, November 28th, 2018, proposed regulations were issued by the IRS to address some of the open questions being asked for the past year.
Proposed Regulation Details
The proposed regulations provide additional guidance in the following areas:
- Allocation and apportionment of deductions
- Transition rules for overall foreign loss, separate limitation loss, and overall domestic loss accounts and the carryover and carryback of unused foreign taxes
- Addition of separate categories for the foreign tax credit limitation
- Calculation of the exception from subpart F income for high taxed income
- The determination of deemed paid credits and corresponding gross up
- The application of the election to not apply the net operating loss deduction to the Section 965 inclusion.
The guidance also clarifies several questions relating to the mechanics of the foreign tax credit computation with respect to GILTI. It was unclear if the “gross up” associated with GILTI would be included in the general basket or GILTI basket. It would generally be an unfavorable taxpayer result if the “gross up” was included in the general basket. The proposed regulations provide that the “gross up” would be included in the GILTI basket. The proposed regulations also provide additional clarity on the allocation of expenses to GILTI.
The current proposed regulations are open for comment and more questions will arise as the regulations are digested. The Barnes Dennig Tax Team is happy to assist in any question you have regarding your specific tax situation. Contact us here, or call 513-241-8313 to learn more, or to see if your tax situation will be impacted by these regulations.