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News & Analysis
Latest legal news and recent law changes.

New Foreign Tax Credit Regulations

The foreign tax credit (“FTC”) is the primary vehicle for escaping double taxation often due on international income. It provides a credit for the taxes levied by foreign jurisdictions under a myriad of limitations. Several more limitations were added at the beginning of 2022 through regulations imposing a weight somewhat lightened by even more recent proposed regulations.

            The finalized 2022 regulations require a careful study of each foreign tax for its eligibility. In order to be eligible for FTC application, a tax must be on net gain rather than gross receipts. Business deductions of significant costs must be allowed unless the disallowance is for reasonable tax policy principles compatible with the Internal Revenue Code. Under current law, the entire tax may be barred from the FTC through the disallowance of a single cost category, such as interest, without sufficient cause. This is still true for the proposed regulations, yet each significant cost category needs to be only at least 75% recovered.

            An entirely new jurisdiction requirement was also added through the 2022 regulations: income that is taxed by a foreign country must be sufficiently attributable to the foreign country to benefit from the tax credit. This has generated considerable controversy among tax experts, and the IRS conceded there was no explicit statutory authority for this requirement. The commentators’ argument that this is beyond the IRS’s authority to promulgate may be tested in court under multiple theories in the coming months and years. The IRS remained firm in upholding its nexus creation theory to defend its position but also offered a relatively straightforward means for a tax on royalty income to qualify in the proposed regulations.

            Comments on the proposed regulations are welcome at this link. The IRS is not necessarily mandated to respond to every comment. However, it must address significant comments individually or collectively. 

If you have questions or concerns about how these new reports may affect you or your business, please contact the Burton Law Firm at 916-822-8700 or email for a consultation.