ABA, Other Trades Call for Withdrawal of Foreign Tax Credit Regulations

Ms. Lily Batchelder
Assistant Secretary for Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW, Room 3058
Washington, DC 20220

Mr. Kevin Nichols
International Tax Counsel
Office of International Tax Counsel
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW, Room 3058
Washington, DC 20220

Mr. Jose E. Murillo
Deputy Assistant Secretary for International Tax Affairs
Office of Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW, Room 3058
Washington, DC 20220

Dear Assistant Secretary Batchelder, Deputy Assistant Secretary Murillo, and Mr. Nichols:

On behalf of the undersigned organizations, representing globally engaged U.S. employers across all sectors of the U.S. economy, we write to express our strong objection to the final foreign tax credit regulations {T.D. 9959, 87 Fed. Reg. 276 (Jan. 4, 2022)}, released by the U.S. Treasury Department and the Internal Revenue Service and published in the Federal Register on January 4, 2022 (the “Final FTC Regulations”).

Executive Summary

Specifically, we respectfully request that Treasury immediately withdraw and repropose the portions of the Final FTC Regulations relating to:

1. The source-based attribution rules for royalties and services;
2. The requirement that allocations of income between related parties must be determined under arm’s length principles to determine the tax base for foreign taxes imposed on residents of foreign countries;
3. The inclusion of a per se list of “significant costs and expenses” under the cost recovery requirement; and
4. The rules for allocating and apportioning foreign income taxes with respect to certain disregarded transactions.

Additionally, we respectfully request that Treasury delay the effective date of the net gain rule to provide taxpayers sufficient time to assess and reflect the impact of such requirements on their business operations and financial statements as well as assess the need to adjust their operations accordingly.

The Final FTC Regulations appear to deny foreign tax credits for run-of-the mill foreign taxes that have been creditable for decades. Particularly with respect to withholding taxes on royalties, the Final FTC Regulations mark a surprising and dramatic change from the November 2020 proposed regulations (the “Proposed Regulations”) without providing taxpayers sufficient notice or an opportunity to comment, as required under the Administrative Procedure Act. These final regulations generally took effect immediately upon being published in the Federal Register on January 4, 2022, three days after the calendar and fiscal year had already begun for many taxpayers. This left many taxpayers scrambling to assess the disparate, and in most cases unclear, royalty and other sourcing rules of many foreign countries. Publicly traded companies are also forced to quantify the cost of possibly denied foreign tax credits for financial statement purposes as soon as March 2022. The rules for allocating and apportioning foreign income taxes with respect to certain disregarded transactions generally had retroactive effect to taxable years that begin after December 31, 2019, and end on or after November 2, 2020, which has exacerbated the adverse impact of the regulations with respect to certain foreign taxes incurred while the regulations remained in proposed form for over a year.

Download the comment letter to read the full text.