For those of us not satisfied with only one voluminous set of regulations per week, the IRS has heard our cries. On Wednesday, the IRS released 312 pages (including the preamble) of proposed regulations on foreign tax credits (FTCs). This guidance provides the first insights into the IRS’s interpretation of numerous FTC related questions arising out of the transformation of the U.S. international tax system by the 2017 tax reform legislation. These rules not only address FTC-related questions surrounding the new tax on Global Intangible Low-Taxed Income (GILTI), but also feature substantial changes to legacy FTC rules, a necessary step to allow for the determination of FTCs in a post-Tax Cuts and Jobs Act (TCJA) environment.
Most notably, interest expense apportionment, including for GILTI purposes, continues to follow legacy section 861 principles, with certain modifications. In that regard, the Service declined to provide the complete exemption from expense allocation and apportionment to GILTI that so many taxpayers and commentators had requested. Beyond this, the proposed regulations provide vast and detailed guidance on the new section 904 (FTC limitation) income categories and on allocating foreign taxes to those categories. Although these proposed regulations provide many such long-awaited answers, they do not do so simply. These proposed regulations add great complexity, and the retroactive implications of the proposed regulations may be particularly burdensome for taxpayers faced with imminent year-end calculations.