Final Regulations For Foreign Tax Credits

The IRS and the Treasury have now issued the final regulations for foreign tax credits. These will apply to anyone who is trying to claim deductions on foreign income taxes and/or people who have “foreign derived intangible income.” As of January 5th 2022, we finally have guidance on foreign tax issues such as: when the credits can be claimed, allocation and apportionment rulings and foreign branch rules.

A large part of this final ruling was new definitional changes for foreign tax credits. The IRS defines one in particular as the “attribution requirement.” All this means is that the entity/taxpayer has to have a certain amount of relationship with the country in question along with the activities responsible for generating the taxable income for foreign tax credits to become applicable. In addition to this, foreign tax must now meet a net gain requirement (gross receipts and net income tests) to determine whether or not the tax applied results in taxing more than just the taxpayers profits. In relation to this, to get foreign taxes to be creditable they must be on realized receipts excluding expenses.

Easily the most interesting and important part of this though is on contested taxes for foreign based income. The final regulations have given provisions for you to be able to claim a provisional credit for contested taxes that have already been paid to the foreign government. You must notify the IRS of this but this could potentially be very helpful for foreign taxes in contention.

By: Luke Hamilton, Tax Staff at CROFT & FROST