TEI Comments on Proposed Foreign Tax Credit Regulations.

PositionTax Executives Institute

On February 5, 2019, TEI submitted responsive comments and recommendations to the Internal Revenue Service concerning the new proposed regulations under sections 861 and 904 of the Code (REG-105600-18). TEI's comments, which are reprinted below, were developed by a cross-industry working group of Tax Reform Task Force and U.S. International Tax Committee members under the stewardship of TEI lawyers Watson M. McLeish and Benjamin R. Shreck.

Tax Executives Institute Inc. ("TEI") welcomes this opportunity to comment on the newly proposed regulations (REG-105600-18) under sections 861 and 904 of the Internal Revenue Code (the "Code"), (1) which were published in the Federal Register on December 7, 2018. (2) The proposed regulations would provide guidance relating to the determination of the foreign tax credit under the Code and reflect changes made by Public Law 115-97, colloquially known as the Tax Cuts and Jobs Act (the "Act"). (3)

About TEI

TEI is the preeminent association of in-house tax professionals worldwide. Our more than 7,000 members represent 2,800 of the leading companies in North and South America, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to the development of sound tax policy, uniform and equitable enforcement of tax laws, and minimization of administration and compliance costs to the benefit of both government and taxpayers. As a professional association, TEI is committed to fostering a tax system that works--one that is administrable and with which taxpayers can comply in a cost-efficient manner.

TEI members are responsible for administering the tax affairs of their companies and must contend daily with provisions of the tax law relating to the operation of business enterprises, including the rules governing the determination of the foreign tax credit. We believe that the diversity and professional experience of our members enables TEI to bring a balanced and practical perspective to the issues raised by the proposed regulations, and we are eager to assist the Department of the Treasury ("Treasury") and the Internal Revenue Service (the "Service") in their important, collective efforts to implement the Act.


  1. Allocation and Apportionment of Deductions and the Calculation of Taxable Income for Purposes of Section


    Section 904 of the Code requires the calculation of taxable income from foreign sources in various categories (or "baskets") to determine the maximum allowable foreign tax credit against U.S. federal income tax otherwise imposed on such foreign-source income. To that end, the source-of-income rules of sections 861 through 865 determine the sources of gross income for U.S. federal tax purposes, and the source rules for deductions under sections 861(b), 862(b), and 863(a) identify which deductions may be taken against foreign- versus U.S.-source gross income to determine foreign- and U.S.-source taxable income. The proposed regulations would amend Treasury regulations sections 1.861-8 through 1.861-13 and 1.861-17 to clarify how deductions are allocated and apportioned in general, and provide new rules to account for the specific changes made to sections 864(e) and 904 by the Act. Two of those changes are the subjects of TEI's comments below.

    a. Repeal of Fair Market Value Method and Transition Relief

    Section 14502 of the Act repealed the fair market value method of asset valuation for purposes of apportioning interest expense under section 864(e)(2) of the Code for taxable years beginning after December 31, 2017. Thus, taxpayers using the fair market value...

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