On January 4, 2022, the Treasury published final regulations on foreign tax credits (T.D. 9959). These regulations, among other things, change the rules for determining creditability of a foreign tax under Section 901 and 903 by requiring that foreign tax now meet certain attribution rules to be creditable. The unintended potential consequences of the regulations may, arguably, impact regulated investments companies (RICs) as well as other U.S. companies.
Intent Behind Foreign Tax Credits Regulations
The intent behind the new rules is to address certain taxes, such as digital services tax, by attempting to establish a sufficient connection between the taxpayer’s operations and the foreign country — based on certain factors such as destination, customers and market access — to allow such taxes to be eligible for the foreign tax credit. The final regulations added attribution rules to address some of these concerns. These changes are applicable to tax years beginning after December 28, 2021.
Impact of the Final Regulations
Potentially, the final regulations may impact RICs that may have traditionally been able to pass through a wide range of foreign taxes, such as foreign capital gains taxes. Under the new rules, it is possible that capital gains taxes paid on disposition of foreign securities in foreign countries are no longer creditable if paid to a non-treaty country. If paid to a treaty country, such as India, the taxpayer must file IRS Form 8833 for each applicable transaction to invoke treaty benefits under Section 6114. If such taxes are no longer creditable, RICs can still deduct them at the fund level under Section 164.
This is the third round of foreign tax credit changes since the Tax Cuts and Jobs Act of 2017. Taxpayers outside of the industry may also be impacted by these changes. On June 3, 2022, 28 CFOs of leading U.S. companies sent a letter to the Treasury asking for these new rules to be reconsidered, stating that they are a significant departure from existing tax law. This issue was specifically mentioned, along with a concern about creditability of taxes paid to non-treaty countries such as Brazil. Not only are foreign taxes potentially no longer creditable for non-treaty counties, but the compliance for invoking treaty benefits for treaty counties could be very burdensome.
While the industry is still analyzing and determining the consequences of these rules, RICs in particular should prepare to comply with the new requirement beginning with years ending December 31, 2022, or any short tax year beginning after the December 28, 2021, effective date.
Contact Andreana Shengelya at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.