TEI Files Comments Regarding Proposed Regulations Addressing the Foreign Tax Credit.

On February 18, TEI submitted comments to the IRS and U.S. Treasury Department regarding proposed regulations related to the U.S. foreign tax credit. TEI's comments primarily addressed the administrative burden the proposed regulations would impose on claiming a foreign tax credit due to a foreign tax redetermination under Section 905(c) as well as issues related to "stewardship" expenses. TEI's comments were prepared under the aegis of its U.S. International Tax Committee, whose chair is Sarah Winters. Benjamin R. Shreck, TEI tax counsel, assisted in preparation of the Institute's comments.

The Internal Revenue Service (the Service) and the United States Department of the Treasury (together, the Government) published proposed regulations regarding issues related to the U.S. foreign tax credit on December 17, 2019 (the Proposed Regulations). (1) The Government requested comments from interested stakeholders no later than February 18, 2020.1 am pleased to respond to the Governments request for comments on behalf of Tax Executives Institute, Inc. (TEI).

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organization has 57 chapters in North and South America, Europe and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting sound tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 individual members represent over 2,800 of the leading companies in the world. (2) We believe the diversity and professional experience of our members--who work across all industries--enable TEI to bring a balanced and practical perspective to the issues raised by the Proposed Regulations.

TEI Comments

TEI commends the Government for its work in issuing the Proposed Regulations, as well as finalizing related foreign tax credit regulations published in the Federal Register on the same date. (3) These regulations continue the Government's exemplary effort to provide guidance under Pub. L. 115-97, colloquially known as the "Tax Cuts and Jobs Act" (TCJA). The TCJA, however, has made it more difficult for taxpayers to claim a foreign tax credit for adjusted foreign taxes, both substantively and administratively. This is particularly the case for foreign tax redeterminations under section 905(c). The Proposed Regulations should be modified to ease the compliance burden on taxpayers who have such redeterminations, as set forth below. We also recommend changes to the Proposed Regulations treatment of payments to foreign disregarded entities and "stewardship expenses."

Administrative Issues Under Section 905(c)

The process for obtaining a foreign tax credit for foreign taxes subject to adjustment by non-U.S. tax authorities has never been easy or straightforward. The Proposed Regulations, regrettably, include additional unnecessary administrative hurdles taxpayers must overcome to obtain a foreign tax credit for adjusted foreign taxes, which were not required by the prior regulations under section 905(c). The change from the pre-TCJA system of foreign tax credit pools to the post-TCJA system, along with the TCJA's global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII) regimes, present additional complexities. Historically, for example, a foreign tax redetermination typically only impacted a single foreign entity. Under the new GILTI and FDII regimes, however, a foreign tax redetermination may affect the amounts calculated under such regimes, potentially requiring taxpayers to file amended returns for all their foreign entities. Such a redetermination, for example, will affect a taxpayer's current year taxes, which are apportioned across all U.S. shareholders, and thus impact all the Form 5471s filed by the taxpayer.

Obtaining tax credits for foreign tax redeterminations is particularly difficult due to their retrospective nature, apart from the new issues presented by the TCJA. The tax filings of a multinational enterprise's non-U.S. operations are, of course, subject to audit in non-U.S. jurisdictions. These audits, just as in the United States, often drag on for years before a final adjustment is issued or a settlement is reached. Taxpayers may also decide to litigate a foreign adjustment or elevate it to the mutual agreement procedure under the relevant bilateral income tax treaty after a completed audit, which further delays the final tax determination. (4) Further, non-U.S. advanced pricing agreements obtained by taxpayers often include rollback periods, which may require adjustments to the amount of foreign tax in a particular year and thus the amount of a taxpayer's foreign tax credit for such year. In addition, a taxpayer may deposit amounts with foreign tax authorities during a contested tax assessment to prevent the accrual of interest and penalties while continuing to contest the underlying issues on the merits. Finally, in many instances non-U.S. tax returns are not filed until after the due date of a taxpayer's U.S. federal income tax return.

For all these reasons, the tax reported on a final, non-U.S. return may differ from the tax reported and claimed as a credit on the U.S. return (i.e., because the U.S. return is due before the non-U.S. return and therefore the U.S. return includes an estimate of the non-U.S. tax due). Thus, as acknowledged in the Code and regulations, the determination of the amount of foreign taxes which may be claimed as a credit is often not final until many years after a U.S. taxpayer has filed its return for the year at issue, the U.S...

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