New IRS Foreign Tax Credit Regulations: IRC 904 Limitation, Allocation/Apportionment Rules and Transition Guidance

Description

On Nov. 28, 2018, the IRS issued a vast set of proposed regulations on FTCs, outlining the Service's initial interpretation of the impact of changes brought about by the 2017 tax reform law. Over 312 pages, the new regs address the application of the new GILTI regime to FTC calculations and also makes substantial changes to existing FTC rules for purposes of determining available credits. These rules are to be applied retroactively, to the 2018 tax year, which presents significant and immediate complications for tax advisers.

The most significant element of the new guidance relates to the apportionment of interest expenses, which modifies existing Section 861 principles. Notably, Treasury declined to follow practitioners' requests to provide a complete exemption from expense allocation to GILTI calculations. The proposed regulations also offer extensive guidance on the new FTC limitation provisions in Section 904, including additional income categories or "buckets."

While the new guidance provides some long-awaited answers, they are complex and, in many aspects, disadvantageous to many taxpayers. Because the new regulations are effective immediately, they will likely be especially burdensome for taxpayers faced with year-end calculations.

Listen as our experienced panel provides a critical first look at the practical implications of the Service's recently proposed FTC regulations.