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Eagerly awaited guidance appears on US foreign tax credit reforms

Thursday, 29 November, 2018

The US Treasury Department has issued proposed regulations governing one of the most significant measures introduced by the Tax Cuts and Jobs Act 2017 (TCJA): the calculation of foreign tax credits for 2018 and future years.

The TCJA, passed in December 2017, envisages that the US' international taxation system will shift to a territorial basis. This requires a major reinterpretation of the foreign tax credits rules, which allow US companies to offset their US tax liabilities by the amount of foreign income taxes they have paid or accrued.

Changes covered in the new draft guidance include the repeal of rules for computing deemed-paid foreign tax credits on dividends on the basis of foreign subsidiaries' cumulative pools of earnings and foreign taxes.

Also, two separate limitations on foreign tax credits are being introduced, one for foreign branch income and the other concerning the new global intangible low-taxed income (GILTI) provisions. Under GILTI, certain foreign earnings of US companies that would have been eligible for deferred taxation under previous law are now immediately liable to US corporate tax.

The TCJA also modifies how taxable income is calculated for the foreign tax credit limitation, by disregarding certain expenses related to income eligible for the dividends-received deduction and repealing the use of the fair market value method for allocating interest expense.

A further point covered by the draft guidance is an elective transition rule for carryover of foreign tax credits that the Treasury describes as 'taxpayer favourable'.

The new foreign tax credit rules apply to 2018 and future years. The proposed regulations will be open for public comment for the 60 days following publication in the Federal Register.