Foreign income taxes deemed paid and the PTEP rules.

• Author: Heroux, Mark
• Position: Previously taxed earnings and profits

Practitioners continue to navigate through the complexities of U.S. international tax rules created by the law known as the Tax Cuts and Job Act (TCJA), P.L. 115-97. While further IRS guidance is awaited as of this writing, Treasury and the IRS issued a set of final and temporary regulations in December 2019 that include rules for determining foreign income taxes deemed paid under Sec. 960, which pertains to the "deemed paid" foreign tax credit (TD. 9882).

In a previous article, the authors focused on Notice 2019-1, which concerns the exclusion from gross income of previously taxed earnings and profits (PTEP) (Alajbegu and Brown, "Tax Clinic: Demystifying the New International E&P Rules," 50 The Tax Adviser 690 (October 2019), available at tinyurl. com/y8m5uwxv). There is an overlap between that topic and the present one.

A provision of the new Sec. 960 regulations, Regs. Sec. 1.960-3(c), requires a controlled foreign corporation (CFC) to establish separate annual PTEP accounts for amounts attributable to Subpart F and global intangible low-taxed income (GILTI) inclusions of their U.S. shareholders (as defined in Sec. 951(b)). The Sec. 960 regulations also provide rules for accounting for foreign income taxes deemed paid under Sec. 960(b)(1) (by a domestic corporation with respect to a distribution of Sec. 959(a) PTEP from a CFC) and Sec. 960(b)(2) (by a CFC with respect to a distribution of Sec. 959(b) PTEP from a lower-tier CFC).

Similar to the PTEP accounts in Notice 2019-1, each PTEP account in Regs. Sec. 1.960-3(c) must correspond to the inclusion year of the PTEP and to the Sec. 904 category to which the Subpart F and GILTI inclusions are assigned at the U.S. shareholder level. Both the notice and the foreign tax credit regulations require the amount in each PTEP account to be further assigned to one or more groups of PTEP.

It is clear that Treasury and the IRS are making a concerted effort to coordinate the PTEP rules in Regs. Sec. 1.960-3(c) with those that will be contained in future PTEP guidance described in Notice 2019-1, which announced the IRS's intent to issue PTEP regulations. As such, in what would be welcome relief, it is noted that the preamble to the Sec. 960 regulations provides that certain PTEP groups listed in Notice 2019-1 have been consolidated, reducing the total number of PTEP groups from 16 to 10.

As one would expect, the Sec. 960 regulations also provide rules that CFCs must follow to account for the foreign...