Rule2022-15867
Guidance Related to the Foreign Tax Credit; Clarification of Foreign-Derived Intangible Income; Correction
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
July 27, 2022
Effective
July 27, 2022
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains corrections to Treasury Decision 9959, which was published in the Federal Register on Tuesday, January 4, 2022. Treasury Decision 9959 contained final regulations relating to the foreign tax credit, including the disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a dividends-received deduction, the allocation and apportionment of interest expense, foreign income tax expense, and certain deductions of life insurance companies; the definition of a foreign income tax and a tax in lieu of an income tax; the definition of foreign branch category income; and the time at which foreign taxes accrue and can be claimed as a credit.
Full Text
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<title>Federal Register, Volume 87 Issue 143 (Wednesday, July 27, 2022)</title>
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[Federal Register Volume 87, Number 143 (Wednesday, July 27, 2022)]
[Rules and Regulations]
[Pages 45018-45021]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-15867]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9959]
RIN 1545-BP70
Guidance Related to the Foreign Tax Credit; Clarification of
Foreign-Derived Intangible Income; Correction
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final rule; correction and correcting amendments.
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SUMMARY: This document contains corrections to Treasury Decision 9959,
which was published in the Federal Register on Tuesday, January 4,
2022. Treasury Decision 9959 contained final regulations relating to
the foreign tax credit, including the disallowance of a credit or
deduction for foreign income taxes with respect to dividends eligible
for a dividends-received deduction, the allocation and apportionment of
interest expense, foreign income tax expense, and certain deductions of
life insurance companies; the definition of a foreign income tax and a
tax in lieu of an income tax; the definition of foreign branch category
income; and the time at which foreign taxes accrue and can be claimed
as a credit.
DATES:
Effective date: These corrections are effective on July 27, 2022.
Applicability dates: For dates of applicability, see Sec. Sec.
1.245A(d)-1(f), 1.338-9(d)(4), 1.367(b)-4(h), 1.861-20(i), 1.901-2(h),
1.904-4(q), 1.905-1(h), 1.951A-7(b), 1.960-7(b).
FOR FURTHER INFORMATION CONTACT: Concerning Sec. Sec. 1.245A(d)-1,
1.336-2, 1.338-9, 1.861-20, 1.960-1, and 1.960-2, Suzanne M. Walsh,
(202) 317-4908 and Teisha Ruggiero, (202) 317-5282; concerning
Sec. Sec. 1.861-8 and 1.861-13, Jeffrey P. Cowan, (202) 317-4924;
concerning Sec. Sec. 1.901-2 and 1.905-1, Tianlin (Laura) Shi, (202)
317-6987; concerning Sec. 1.367(b)-4, Arielle Borsos, (202) 317-4939;
concerning Sec. 1.904-4, Jeffrey L. Parry, (202) 317-4916; concerning
Sec. 1.951A-2, Jorge M. Oben and Larry Pounders, (202) 317-6934 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
The final regulations (TD 9959) that are the subject of this
correction are issued under sections 245A, 338, 367, 861, 901, 904,
905, 951A, and 960 of the Internal Revenue Code.
Need for Correction
As published on January 4, 2022 (87 FR 276), the final regulations
(TD 9959) contain errors that need to be corrected.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Corrections to the Federal Register
Accordingly, the final regulations (TD 9959) that are the subject
of FR Doc. 2021-27887, starting on page 276 in the Federal Register of
January 4, 2022, are corrected as follows:
Sec. 1.861 13(a) [Corrected]
0
1. On page 326, in the third column, amendatory instruction 20,
amending Sec. 1.861-13(a), is removed.
0
2. On page 326, in the second column, through page 375, in the third
column, amendatory instructions 21 through 34 are redesignated as
amendatory instructions 20 through 33.
Sec. 1.861-20 [Corrected]
0
3. On page 327, in the second column, in newly redesignated amendatory
instruction 21, amending Sec. 1.861-20, instruction 12 is removed and
instructions 13 through 15 are redesignated as instructions 12 through
14.
Sec. 1.960-1 [Corrected]
0
4. On page 374, in the second and third columns, in newly redesignated
amendatory instruction 31, amending Sec. 1.960-1, the second
instruction 21 and instructions 22 and 23 are redesignated as
instructions 22 through 24, respectively.
Corrections to the Regulations
Accordingly, 26 CFR part 1 is corrected by making the following
correcting amendments:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2.Section 1.245A(d)-1 is amended:
0
a. In paragraph (c)(26) by adding the language ``in'' after the word
``forth'';
0
b. In the second sentence of paragraph (d)(4)(i) by removing the third
parenthesis at the end;
0
c. In the fourth sentence of paragraph (d)(4)(ii)(B)(2) by removing the
language ``Year 2'' and adding the language ``Year 3'' in its place;
0
d. By revising paragraph (d)(6)(i); and
0
e. By revising the fifth and seventh sentences of paragraph
(d)(6)(ii)(B) and
[[Page 45019]]
the third and fifth sentences of paragraph (d)(6)(ii)(C).
The revisions read as follows:
Sec. 1.245A (d)-1 Disallowance of foreign tax credit or deduction.
* * * * *
(d) * * *
(6) * * *
(i) Facts. CFC is a reverse hybrid. In Year 1, CFC earns a $500x
item of gain described in section 907(c)(1)(B) that is non-inclusion
income. CFC also earns for Federal income tax purposes and Country A
tax purposes a $1,000x item of royalty income, of which $500x is gross
included tested income and $500x is non-inclusion income. USP includes
the $500x item of foreign gain and the $1,000x item of foreign gross
royalty income in its Country A taxable income, and the items are
foreign law pass-through income. If CFC included these items under
Country A tax law, its $1,000x of royalty income for Federal income tax
purposes would be the corresponding U.S. item for the foreign gross
royalty income, and its $500x of gain for Federal income tax purposes
would be the corresponding U.S. item for the foreign gain. Country A
imposes a $150x foreign income tax on USP with respect to $1,500x of
foreign gross income.
(ii) * * *
(B) * * * CFC is therefore treated as including a $1,000x foreign
gross royalty item and a $500x foreign gross income item of gain and
paying $150x of Country A tax in Year 1. * * * No foreign gross income
is assigned to the section 245A(d) income group because neither the
corresponding U.S. item of royalty income nor the corresponding U.S.
item of gain is assigned to the section 245A(d) income group. * * *
(C) * * * For the reasons described in paragraph (d)(6)(ii)(B) of
this section, under Sec. 1.861-20(d)(3)(i)(C) CFC is treated as
including a $1,000x foreign gross royalty item and a $500x foreign
gross income item of gain and paying $150x of Country A tax in Year 1.
* * * For Federal income tax purposes, the $500x item of gain and $500x
of the $1,000x item of royalty income are items of non-inclusion income
that are therefore assigned to the non-inclusion income group. * * *
* * * * *
Sec. 1.338 -9 [Amended]
0
Par. 3. Section 1.338-9 is amended by removing the language ``Sec.
1.901-2(a)(1))'' from the first sentence of paragraph (d)(1) and adding
the language ``Sec. 1.901-2(a))'' in its place.
Sec. 1.367 (b)-4 [Amended]
0
Par. 4. Section 1.367(b)-4 is amended by removing ``2020 resulting''
and ``2020 but'' in the last sentence of paragraph (h) and adding
``2020, resulting'' and ``2020, but'', respectively, in their place.
Sec. 1.861-8 [Amended]
0
Par. 5. Section 1.861-8 is amended by removing the language ``and
example 17 of paragraph (g) of this section'' from the third sentence
of paragraph (b)(2).
0
Par. 6. Section 1.861-20 is amended:
0
a. By revising the seventh sentence of paragraph (d)(3)(v)(A);
0
b. By revising paragraphs (d)(3)(v)(D), (d)(3)(v)(E)(2), and
(d)(3)(v)(E)(8); and
0
c. In paragraph (g)(14)(i) by removing the language ``Sec. ``FDE2
tested unit'','' and adding the language ````FDE2 tested unit,'' '' in
its place.
The revisions read as follows:
Sec. 1.861-20 Allocation and apportionment of foreign income taxes.
* * * * *
(d) * * *
(3) * * *
(v) * * *
(A) * * * The rules of paragraph (d)(3)(v)(D) of this section apply
to assign to statutory and residual groupings items of foreign gross
income arising from disregarded payments, other than the portions of
disregarded payments that are reattribution payments, in connection
with disregarded sales or exchanges of property. * * *
* * * * *
(D) Disregarded payments in connection with disregarded sales or
exchanges of property. An item of foreign gross income that is
attributable to gain recognized under foreign law by reason of a
disregarded payment, other than the portion of the disregarded payment
that is a reattribution payment, received in exchange for property is
characterized and assigned under the rules of paragraph (d)(2) of this
section. See paragraph (d)(3)(v)(B) of this section for rules for
assigning an item of foreign gross income attributable to the portion
of a disregarded payment that is a reattribution payment, including a
reattribution payment received in exchange for property.
(E) * * *
(2) Contribution. The term contribution means the excess amount of
a disregarded payment, other than a disregarded payment received in
exchange for property, made by a taxable unit to another taxable unit
that the first taxable unit owns over the portion of the disregarded
payment, if any, that is a reattribution payment.
* * * * *
(8) Remittance. The term remittance means the excess amount, other
than an amount that is treated as a contribution under paragraph
(d)(3)(v)(E)(2) of this section, of a disregarded payment, other than a
disregarded payment received in exchange for property, made by a
taxable unit to a second taxable unit (including a second taxable unit
that shares the same owner as the payor taxable unit) over the portion
of the disregarded payment, if any, that is a reattribution payment.
* * * * *
0
Par. 7.Section 1.901-2 is amended:
0
a. By revising paragraph (a)(1)(iii);
0
b. In the first sentence of paragraph (b)(4)(i)(A) by removing the
language ``including significant capital expenditures'' and adding the
language ``including capital expenditures'' in its place;
0
c. By revising the fourth and fifth sentences of paragraph
(b)(4)(i)(C)(1);
0
d. By revising paragraph (b)(4)(i)(C)(3);
0
e. In paragraph (b)(5)(ii) by removing the language ``resident, but''
and adding the language ``resident. The foreign tax law'' in its place;
and
0
f. By adding a sentence before the second sentence of paragraph (h).
The revisions read as follows:
Sec. 1.901-2 Income, war profits, or excess profits tax paid or
accrued.
(a) * * *
(1) * * *
(iii) Coordination with treaties. A foreign levy that is treated as
an income tax under the relief from double taxation article of an
income tax treaty entered into by the United States and the foreign
country imposing the levy is a foreign income tax if the levy is, as
determined under such income tax treaty, paid by a citizen or resident
of the United States that elects benefits under the treaty. In
addition, a foreign levy (including a foreign levy paid by a controlled
foreign corporation) that is modified by an applicable income tax
treaty to which the foreign country imposing the levy is a party may
qualify as a foreign income tax notwithstanding that the unmodified
foreign levy does not satisfy the requirements in paragraph (b) of this
section or the requirements of Sec. 1.903-1(b) if the levy, as
modified by such treaty, satisfies the requirements of paragraph (b) of
this section or the requirements of Sec. 1.903-1(b). See paragraph
(d)(1)(iv) of this section for rules treating as a separate levy a
foreign tax that is limited in its application or
[[Page 45020]]
otherwise modified by the terms of an income tax treaty to which the
foreign country imposing the tax is a party.
* * * * *
(b) * * *
(4) * * *
(i) * * *
(C) * * *
(1) * * * Foreign tax law is considered to permit recovery of
significant costs and expenses even if recovery of all or a portion of
certain costs or expenses is disallowed, if such disallowance is
consistent with any principle underlying the disallowances required
under the Internal Revenue Code, including the principles of limiting
base erosion or profit shifting and public policy concerns. For
example, a foreign tax is considered to permit recovery of significant
costs and expenses if the foreign tax law limits interest deductions
based on a measure of taxable income (determined either before or after
depreciation and amortization), disallows deductions in connection with
hybrid transactions, disallows deductions attributable to gross
receipts that in whole or in part are excluded, exempt or eliminated
from taxable income, or disallows certain deductions based on public
policy considerations similar to those underlying the disallowances
contained in section 162. * * *
* * * * *
(3) Timing of recovery. A foreign tax law permits recovery of
significant costs and expenses even if such costs and expenses are
recovered earlier or later than they are recovered under the Internal
Revenue Code unless the time of recovery is so much later as
effectively to constitute a denial of such recovery. The amount of
costs and expenses that is recovered under the foreign tax law is
neither discounted nor augmented by taking into account the time value
of money attributable to any acceleration or deferral of a tax benefit
resulting from the foreign law cost recovery method compared to when
tax would be paid under the Internal Revenue Code. Therefore, a foreign
tax satisfies the cost recovery requirement if items deductible under
the Internal Revenue Code are capitalized under the foreign tax law and
recovered either immediately, on a recurring basis over time, or upon
the occurrence of some future event (for example, upon the property
becoming worthless or being disposed of), or if the recovery of items
capitalized under the Internal Revenue Code occurs more or less rapidly
than under the foreign tax law.
* * * * *
(h) * * * For foreign taxes that relate to (and if creditable are
considered to accrue in) taxable years beginning before December 28,
2021, and that are remitted in taxable years beginning on or after
December 28, 2021, by a taxpayer that accounts for foreign income taxes
on the accrual basis, see Sec. 1.901-2 as contained in 26 CFR part 1
revised as of April 1, 2021. * * *
* * * * *
0
Par. 8. Section 1.904-4 is amended:
0
a. By revising paragraphs (f)(3)(viii) and (x) and (q)(1); and
0
b. By removing the language ``Paragraph (f) of this section applies''
in paragraph (q)(3) and adding the language ``Paragraphs (b)(2)(i)(A),
(c)(4), and (f) of this section apply'' in its place.
The revisions read as follows:
Sec. 1.904-4 Separate application of section 904 with respect to
certain categories of income.
* * * * *
(f) * * *
(3) * * *
(viii) Foreign branch group. The term foreign branch group means a
foreign branch and any non-branch taxable units (other than an
individual or a domestic corporation), to the extent that the foreign
branch owns the non-branch taxable unit (if any) directly or indirectly
through one or more other non-branch taxable units.
* * * * *
(x) Foreign branch owner group. The term foreign branch owner group
means a foreign branch owner and any non-branch taxable units (other
than an individual or a domestic corporation), to the extent that the
foreign branch owner owns the non-branch taxable unit (if any) directly
or indirectly through one or more other non-branch taxable units.
* * * * *
(q) * * *
(1) Except as provided in paragraphs (q)(2) and (3) of this
section, this section applies for taxable years that both begin after
December 31, 2017, and end on or after December 4, 2018.
* * * * *
Sec. 1.905-1 [Amended]
0
Par. 9. Section 1.905-1 is amended by removing the language ``Sec.
1.901-2(a)(3)(i)'' from the third sentence of paragraph (c)(1) and
adding the language ``Sec. 1.901-2(a)(3)'' in its place.
0
Par. 10. Section 1.951A-2 is amended by:
0
a. Removing the language ``current year taxes (as defined in Sec.
1.960-1(b)(4))'' from the first sentence of paragraph (c)(7)(vii) and
adding the language ``eligible current year taxes (as defined in Sec.
1.960-1(b)(5))'' in its place;
0
b. Adding a heading for paragraph (c)(8)(iii)(A)(2)(ii);
0
c. Adding the language ``eligible'' before the language ``current year
taxes'' in the first sentence of paragraph (c)(8)(iii)(A)(2)(iv); and
0
d. Adding the language ``eligible'' before the language ``current year
taxes'' in the first sentence of paragraph (c)(8)(iii)(C)(2)(v).
The addition reads as follows:
Sec. 1.951A-2 Tested income and tested loss.
* * * * *
(c) * * *
(8) * * *
(iii) * * *
(A) * * *
(2) * * *
(ii) Foreign income tax deduction. * * *
* * * * *
0
Par. 11. Section 1.960-2 is amended by revising paragraph (c)(7)(i)(A)
to read as follows:
Sec. 1.960-2 Foreign income taxes deemed paid under sections 960(a)
and (d).
* * * * *
(c) * * *
(7) * * *
(i) * * *
(A) Facts. USP, a domestic corporation, owns 100% of the stock of a
number of controlled foreign corporations, including CFC1. USP and CFC1
each use the calendar year as their U.S. taxable year. CFC1 uses the
``u'' as its functional currency. At all relevant times, 1u = $1x. For
its U.S. taxable year ending December 31, 2018, after application of
the rules in Sec. 1.960-1(d), the income of CFC1 is assigned to a
single income group: 2,000u of income from the sale of goods in a
tested income group within the general category (``tested income
group''). CFC1 has current year taxes, all of which are eligible
current year taxes, translated into U.S. dollars, of $400x that are all
allocated and apportioned to the tested income group. For its U.S.
taxable year ending December 31, 2018, USP has a GILTI inclusion amount
determined by reference to all of its controlled foreign corporations,
including CFC1, of $6,000x, and an aggregate amount described in
section 951A(c)(1)(A) and Sec. 1.951A-1(c)(2)(i) of $10,000x. All of
the income in CFC1's tested income group is included in computing USP's
[[Page 45021]]
aggregate amount described in section 951A(c)(1)(A) and Sec. 1.951A-
1(c)(2)(i).
* * * * *
Oluwafunmilayo A. Taylor,
Branch Chief, Publications and Regulations Branch, Legal Processing
Division, Associate Chief Counsel, (Procedure and Administration).
[FR Doc. 2022-15867 Filed 7-26-22; 8:45 am]
BILLING CODE 4830-01-P
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