Welcome Relief for Taxpayers on Foreign Tax Credit Regulations
It’s no secret that navigating tax regulations surrounding when you’re required to pay foreign taxes can be murky. The Internal Revenue Service (IRS) has attempted to provide some clarity on tax credit regulations over the past few years.
Sections 901 and 903 provide rules for taxpayers to credit foreign taxes that are either directly paid or paid in lieu of taxes. New foreign tax credit regulations were issued on December 28, 2021, which revised existing regulations to determine which foreign taxes were creditable.
The intent of the new regulations was to limit novel extraterritorial taxes from being creditable, but there was initial concern from taxpayers that the regulations were too restrictive. The IRS not only released revisions to the regulations and additional proposed regulations to provide relief to taxpayers during 2022, but taxpayers still find the new regulations too restrictive. Comments have focused on royalty and service withholding taxes potentially not being creditable anymore.
In further response the IRS issued Notice 2023-55 on July 21, 2023, to allow for some additional relief for taxpayers. For foreign taxes paid during 2022 and 2023, taxpayers may apply old foreign tax credit rules to determine if the tax is creditable:
- Former § 1.901-2(a) and (b), before it was amended by the 2022 foreign tax credit regulations, but subject to a modification to the “non-confiscatory gross basis tax rule” with “No foreign tax whose base is gross receipts or gross income satisfies the net income requirement, except in the case of a foreign tax whose base consists solely of investment income that is not derived from a trade or business, or wage income (or both);”, and
- Existing § 1.903-1 without the attribution requirement
The notice also announces that the IRS is considering allowing additional relief past 2023. Taxpayers may need to amend their 2022 tax return based on this relief.
Our team of international tax experts is staying on top of the IRS’ decision and will release information as they obtain it. To keep up-to-date on the latest news, subscribe to our blog. You may also be interested in Foreign Bank Account Report (FBAR) filing requirements or insights into Global Minimum Tax updates or the latest on K-2 and K-3 filing relief. In the meantime, if you need assistance with determining if foreign taxes paid qualify for a foreign tax credit or other international tax questions, please contact us. We’re here to help.