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Ringing in the New Year with New Foreign Tax Credit Regulations

January 19, 2022

The Internal Revenue Service and the Department of the Treasury have released new final foreign tax credit regulations. 87 Fed. Reg. 276 (Jan. 4, 2022). The regulations overhaul what it means for a foreign tax to be claimed as a credit. Under the new rules, you now must determine whether the foreign tax satisfies a new “attribution requirement” for it to be creditable under I.R.C. Sections 901 or 903. Taxpayers and practitioners should evaluate the creditability of a tax by examining the tax imposed by a foreign country on income to ensure it has sufficient nexus to an activity in that foreign country (for example, operations, employees, factors of production). If the sufficient nexus test cannot be met, then the tax is not creditable.

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Related Content 

  • Foreign Tax Credits: Fundamentals
    Learn more on the foreign tax credit (FTC), and how to calculate the FTC by exploring the following key FTC tests: (1) the tax must be imposed on the taxpayer, (2) the taxpayer must have paid or accrued the tax, (3) the tax must be a legal and actual foreign tax liability, and (4) the tax must be an income tax (or a tax instead of an income tax). This practice note also discusses IRS Form 1118, Foreign Tax Credit – Corporations, and its related compliance procedures.
  • Foreign Tax Credits: Proposed Regulations Explained
    Review how the final FTC regulations largely follow the proposed regs in denying credits for offshore income taxes paid by remote U.S. companies where the levies are not connected to those jurisdictions based on certain business activities. However, the final rules eliminate the term "jurisdictional nexus requirement" in the test set forth in the proposed regs for whether offshore levies are creditable.

 

Practical Guidance Updates 
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  • Tax Key Legal Developments Tracker (Federal)
    Stay informed on new developments: 
    • Business Entities. IRS notifies taxpayers regarding the standard mileage rates to use in computing the deductible costs of operating an automobile for business, charitable, medical, or moving purposes in 2022. The standard mileage rate for transportation or travel expenses rises to 58.5 cents per mile for all miles of business use (i.e., the business standard mileage rate).R.S. Notice 2022-03.
    • Individual Income Tax. The IRS announced that January 24, 2022 starts the “tax season” for individual taxpayers, at which time the IRS will begin accepting and processing individual income tax returns for 2021. The deadline for filing those returns (or an extension to file) is Monday, April 18, 2022, for most taxpayers. However, taxpayers living in Maine or Massachusetts have an extra day, until April 19, 2022, to file their 2021 income tax returns (Patriots' Day holiday). IR 2022-08.
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