Proposed foreign tax credit regulations: Key insights

In brief

Treasury and the IRS released proposed foreign tax credit regulations (2022 Foreign Tax Credit (FTC) proposed regulations) on November 18, which were published in the Federal Register at 87 FR 71,271 (Nov. 22, 2022). The regulations address the cost recovery requirement, the attribution requirement for withholding tax on royalty payments, and the definition of a reattribution asset for purposes of allocating and apportioning foreign taxes. Subject to consistency rules, taxpayers may rely on the provisions contained in the regulations in assessing the treatment of all foreign taxes that were subject to the modified provisions of the regulations finalized on January 4, 2022 (the 2021 FTC final regulations), both in proposed form, and once they are finalized.

The takeaway: The 2022 FTC proposed regulations would amend the 2021 FTC final regulations to further relax some of the stringent creditability requirements that were only modestly relaxed in the correcting amendments published this summer. The proposed changes should insert needed flexibility into the FTC regime to account for the wide variety in countries’ income tax laws. The 2022 FTC proposed regulations are the last expected FTC guidance for the current year, and potentially the last major change to the creditability regulations for some time. Therefore, taxpayers should reassess their positions on creditability of foreign taxes for both financial statement and tax return filing purposes and consider providing comments on the proposed rules to raise issues where there is continued uncertainty that warrants further guidance. Comments are due by January 23, 2023.