Treasury, IRS Step Outside Boundaries With FTC Regs, Firm Says

February 8, 2021

CC:PA:LPD:PR (REG‐101657‐20)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Attn: Tianlin (Laura) Shi

Re: November 2020 Proposed Foreign Tax Credit Regulations

Dear Ms. Shi:

On November 12, 2020, Treasury and the IRS published in the Federal Register proposed regulations, REG‐101657‐20, that would (among other things) make a number of fundamental changes to the determination of what constitutes a creditable foreign income tax. Most notably, the proposed regulations would introduce a new “jurisdictional nexus requirement” that would significantly narrow the foreign income taxes and “in lieu of” taxes that could be claimed as a credit. Other proposed changes would substantially erode the long‐established “normal circumstances” and “predominant character” tests for deciding whether foreign taxes are creditable income taxes.

These proposals would fundamentally change existing U.S. tax laws and policies to such a degree that they should be implemented, if at all, only by Congress.

As an administrative agency, Treasury's role is to carry out the laws enacted by Congress. In this regard, Article I, Clause 8, of the U.S. Constitution provides that Congress shall have the power to lay and collect taxes. The Sixteenth Amendment to the Constitution similarly provides that Congress shall have power to lay and collect taxes on income.

In Section 901 of the Code, Congress has announced that the foreign tax credit is allowed for any “income, war profits, and excess profits taxes” (referred to in this letter simply as “income taxes”) imposed by a foreign country or U.S. possession. Congress first introduced this rule in the Revenue Act of 1918, and the quoted language has remained the same for over 100 years.

From time to time, Congress has enacted exceptions to the general rule that foreign income taxes are creditable. For example, Section 901(i) of the Code denies a credit in certain cases for income taxes that are used by the foreign country to provide a subsidy. More recently, Congress enacted Section 901(m) of the Code, denying a credit for certain foreign income taxes in connection with a “covered asset acquisition.”

Treasury regulations issued under Section 901 of the Code have generally provided technical guidance (e.g., addressing the boundary between income taxes and other taxes, and when a tax should be treated as paid) or elaborated on specific legislation (e.g., regulations issued pursuant to §§ 901(m) and 909).

Absent a statutory exception, however, taxes that are plainly foreign income taxes paid by the taxpayer are creditable under the plain, simple, and longstanding language of Section 901 of the Code.

Sincerely,

David Forst, Adam Halpern, Larissa Neumann, and Julia Ushakova‐Stein
FENWICK & WEST LLP
Mountain View, CA