NYSBA Tax Section Examines Proposed FTC Regime

NYSBA Tax Section Examines Proposed FTC Regime

New York State Bar Association Tax Section

The New York State Bar Association Tax Section has submitted a report on proposed foreign tax credit regulations (<a href="/lr/resolve//2d0f7">REG-101657-20</a>), addressing the creditability of foreign income taxes under <a href="/research/federal/usc26/901" resolve="/lr/resolve//cpnl">sections 901</a> and <a href="/research/federal/usc26/903" resolve="/lr/resolve//cnsp">903</a>, the allocation and apportionment of foreign income taxes, the disallowance of FTCs related to <a href="/research/federal/usc26/245A" resolve="/lr/resolve//1xg02">section 245A</a> dividends, the determination of financial services income, and redeterminations of foreign income taxes. The Tax Section recommends that the jurisdictional nexus requirement rules be separated from the remainder of the proposed regs and considered subject to an extended comment period. However, if the jurisdictional nexus requirement is retained in the final regs, section members propose that a foreign levy that assesses a capital gains tax on the stock of a resident corporation should satisfy the property-based nexus standard. If that recommendation is rejected, members ask that the final regs more specifically address the interaction of the jurisdictional nexus requirement with double tax treaties that historically sanctioned the creditability of capital gains taxes. The Tax Section generally supports the approach for basketing foreign income taxes related to a <a href="/research/federal/usc26/301#cqff-0000011" resolve="/lr/resolve//cqff#cqff-0000011">section 301(c)(2)</a> distribution or a disposition of stock based on the tax book value method. To better conform the FTC consequences of distributions with those of dispositions, section members recommend that to the extent of basis in stock attributable to previously taxed earnings and profits under <a href="/research/federal/usc26/961" resolve="/lr/resolve//cq5v">section 961</a>, foreign gross income in excess of the U.S. dividend amount be assigned to the same grouping as the underlying previously taxed E&amp;P. The Tax Section requests clarification that <a href="/research/federal/usc26/245A#1xg02-0000016" resolve="/lr/resolve//1xg02#1xg02-0000016">section 245A(d)</a> may apply to disallow an FTC regarding a foreign income tax that arises by reason of a remittance. Section members also suggest that the final regs include either an antiabuse rule or modify the foreign law distribution rule to address successive foreign law distributions rather than adopting an approach based on maintaining accounts for tracking E&amp;P and basis. The Tax Section is concerned with the proposed rule that would prevent income of a financial services entity that is treated as passive income under a look-through rule from qualifying as financial services income. If the rule becomes final, however, section members ask Treasury and the IRS to clarify the purpose of the rule and whether the exclusion from financial services income of passive category income under a look-through rule applies solely to related-party payments or whether it applies to inclusions as well. The Tax Section suggests that each partner’s distributive share of additional tax paid by an accrual-method partnership as a result of a change in foreign tax liability should be treated as paid or accrued by the partner in the tax year with which or within which the partnership’s relation-back year ends. Section members further recommend that the provisional credit election be available to any partner of an accrual-method partnership regardless of whether the partner is an accrual-method taxpayer or has elected to use the accrual method for purposes of computing FTCs.

The New York State Bar Association Tax Section has submitted a report on proposed foreign tax credit regulations (REG-101657-20), addressing the creditability of foreign income taxes under sections 901 and 903, the allocation and apportionment of foreign income taxes, the disallowance of FTCs related to section 245A dividends, the determination of financial services income, and redeterminations of foreign income taxes.

The New York State Bar Association Tax Section has submitted a report on proposed foreign tax credit regulations (REG-101657-20), addressing the creditability of foreign income taxes under sections 901 and 903, the allocation and apportionment of foreign income taxes, the disallowance of FTCs related to section 245A dividends, the determination of financial services income, and redeterminations of foreign income taxes. The Tax Section recommends that the jurisdictional nexus requirement rules be separated from the remainder of the proposed regs and considered subject to an extended comment period. However, if the jurisdictional nexus requirement is retained in the final regs, section members propose that a foreign levy that assesses a capital gains tax on the stock of a resident corporation should satisfy the property-based nexus standard. If that recommendation is rejected, members ask that the final regs more specifically address the interaction of the jurisdictional nexus requirement with double tax treaties that historically sanctioned the creditability of capital gains taxes. The Tax Section generally supports the approach for basketing foreign income taxes related to a section 301(c)(2) distribution or a disposition of stock based on the tax book value method. To better conform the FTC consequences of distributions with those of dispositions, section members recommend that to the extent of basis in stock attributable to previously taxed earnings and profits under section 961, foreign gross income in excess of the U.S. dividend amount be assigned to the same grouping as the underlying previously taxed E&P. The Tax Section requests clarification that section 245A(d) may apply to disallow an FTC regarding a foreign income tax that arises by reason of a remittance. Section members also suggest that the final regs include either an antiabuse rule or modify the foreign law distribution rule to address successive foreign law distributions rather than adopting an approach based on maintaining accounts for tracking E&P and basis. The Tax Section is concerned with the proposed rule that would prevent income of a financial services entity that is treated as passive income under a look-through rule from qualifying as financial services income. If the rule becomes final, however, section members ask Treasury and the IRS to clarify the purpose of the rule and whether the exclusion from financial services income of passive category income under a look-through rule applies solely to related-party payments or whether it applies to inclusions as well. The Tax Section suggests that each partner’s distributive share of additional tax paid by an accrual-method partnership as a result of a change in foreign tax liability should be treated as paid or accrued by the partner in the tax year with which or within which the partnership’s relation-back year ends. Section members further recommend that the provisional credit election be available to any partner of an accrual-method partnership regardless of whether the partner is an accrual-method taxpayer or has elected to use the accrual method for purposes of computing FTCs.

Sec. 904 Limitation on credit

Sec. 250 Foreign-derived intangible income and global intangible low-taxed income

Sec. 245A Deduction for foreign source-portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations.

Sec. 951 Amounts included in gross income of United States shareholders

Sec. 951A Global intangible low-taxed income included in gross income of United States shareholders

Sec. 1293 Current taxation of income from qualified electing funds

Sec. 901 Taxes of foreign countries and of possessions of United States

United States

Controlled foreign corporations (CFCs)

Foreign tax credit

Global intangible low-taxed income (GILTI)

Tax Cuts and Jobs Act

Gordon Warnke

DOC 2021-5307

2021 TNTI 27-17

Warnke, Gordon

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NYSBA Tax Section Examines Proposed FTC Regime