Finalization of foreign tax credit rules on skipped payments (with retroactive effect) | McDermott Will & Emery
On January 4, 2022, the United States Department of the Treasury and the Internal Revenue Service (IRS) released their third set of final foreign tax credit rules (the “Final Rules”) since the enactment of the Tax Cuts and Jobs Act. The Final Rules include final rules on the allocation and apportionment of foreign income taxes imposed with respect to Disregarded Payments (the “Disregarded Payments Final Rules”). As described below, the skipped final payment rules apply retroactively to tax years beginning after December 31, 2019 and ending on or after November 2, 2020. So, for calendar year taxpayers, the final skipped payment rules are effective as of the 2020 tax year. This column describes the final skipped payment rules.
Background to the Allocation and Allocation of Foreign Income Taxes
As a backdrop, a foreign income tax is generally assigned and apportioned between the statutory and residual groupings which include the foreign gross income items included in the base on which the tax is imposed according to the following three-step process:
Step 1: Allocate foreign gross income items to statutory and residual groupings,
2nd step: Allocate and distribute deductions permitted under foreign law from foreign gross income in pools, and
Step 3: Allocate and apportion foreign income tax by reference to foreign taxable income in statutory and residual groupings.
Thus, in order to allocate and distribute the foreign income tax to the statutory and residual groups (in step 3), the foreign gross income items must first be allocated to the statutory and residual groupings (in Step 1).
For step 1, each item of foreign gross income is assigned to a statutory or residual grouping. The amount of the item is determined under foreign law. However, federal income tax law applies to characterize the item and the transaction or other realization event giving rise to the item, and to assign it to a pool. If a “matching US item” exists in the same year, the foreign gross income is assigned to the same group as the matching US item. If a corresponding US item is not recognized or is recognized in a different US tax year, the foreign gross income is allocated to the group to which the corresponding US item would be allocated as if the event giving rise to the foreign gross income had resulted in the recognition of the gross income or loss under United States federal income tax law in the United States taxation year in which the foreign tax on income is paid or due. A corresponding US item is the item of US gross income or US loss, if any, that arises from the same transaction or other realization event from which a foreign gross income item also arises. Special rules apply regarding the attribution of the foreign gross income element in special circumstances.
New skipped payment rules
The final rule adds paragraph (d)(3)(v), which applies to the attribution to a statutory or residual pool of an item of foreign gross income that a taxpayer includes because of the receipt of a skipped payment (i.e. the final skipped payment of the rules). The final skipped payment rules generally follow the proposed 2020 rules on the allocation and apportionment of foreign tax on income taxed with respect to skipped payments, but make some adjustments. The Final Skipped Payments Rules provide specific rules for the following skipped payments: (1) “reattribution payments” (which are generally skipped payments that are deductible under foreign law), (2) remittances , (3) contributions and (4) skipped payments. sale or exchange of goods.
Determination of reattribution payment
The amount of a “reattribution amount” received by the beneficiary taxable unit must first be determined by applying attribution rules. In the case of a taxpayer who is an individual or a domestic corporation, the attribution rules of O. Reg. §1.904-4(f)(2) applies to determine the reattribution amount received by a taxable unit. In the case of a taxpayer that is a foreign corporation, the attribution rules in O. Reg. §1.951A-2(c)(7)(iii)(B) applies to determine reattribution amounts received by a taxable unit.
Effect on recipient’s taxable unit
The statutory or residual grouping of a reallocation amount received by a taxable unit is the grouping that includes the U.S. gross income allocated to the taxable unit by reason of its receipt of the reallocation gross amount (regardless of whether, after taking into account account of payments not taken into account by the taxable unit, the taxable unit has an allocation item due to its receipt of the reallocation amount).
Effect on payer’s taxable unit
For the payer of a reattribution payment, the statutory or residual grouping to which an item of foreign gross income of a taxable unit is allocated is determined without regard to the reattribution payments made by the taxable unit (and without regard to the fact that the taxable unit has one or more attribution elements after taking into account these reattribution payments).
Figure 1 illustrates the reattribution rule with a controlled foreign corporation (CFC) taxpayer.
The term rebate means the excess of an unrecognized payment, other than an amount that is treated as a contribution, made by one taxable unit to a second taxable unit (including a second taxable unit that shares the same owner as the paying taxable unit) on the part of the ignored payment, if any, that is a reattribution payment. Thus, the term remittance generally means skipped distributions. To the extent that an up, down or side payment is a reattribution payment, the payment is a reattribution
Payment. Also, the term rebate is a catch-all, so if the payment is not a contribution or reallocation payment, the payment is a rebate.
An element of foreign gross income that a taxpayer includes due to the receipt of a remittance by a taxable unit is allocated to the statutory or residual groupings of the beneficiary taxable unit which correspond to the groupings from which the paying taxable unit has made the discount. . A payment made by a taxable unit is considered to be made on a pro rata basis of all the accumulated after-tax income of the taxable unit. The cumulative after-tax income of the taxable unit paying the rebate is deemed to have appeared in the statutory and residual groups in the same proportions as the proportions in which the tax book value of the assets of the taxable unit is (or would be if the owner of the taxable unit was a US person) assigned for interest expense allocation purposes under the asset method of Reg. §1.861-9 in the tax year in which the payment is made. If the payer’s taxable unit is determined to have no assets, the foreign gross income that is included due to the receipt of the remittance is assigned to the residual group. The assets of a taxable unit are determined in accordance with Reg. §1.987-6(b), except that for the purposes of applying Reg. §1.987-6(b)(2), a taxable unit is deemed to be a Code Sec. 987 QBU (within the meaning of Reg. §1.987-1(b)(2)). The assets of the taxable unit include the shares held by the taxable unit, the portion of the tax book value of a reattribution asset that is allocated to the taxable unit, and the taxable unit’s proportionate share of the assets of the taxable unit. another taxable unit.
Thus, an element of foreign gross income upon remittance by a taxable unit is allocated to the statutory or residual groupings according to the tax book value of the assets of the remitting taxable unit, and for this purpose, the assets of the remitting taxable unit include the shares and assets of other taxable units belonging to the remitting taxable unit. Note that the assets of other taxable units that reside in the same foreign country, as well as the assets of other taxable units held by this taxable unit of the same country, can be taken into account. Additionally, since the groupings are based on the tax book value of the assets, there could be situations where the assets have a disproportionate basis to the income produced by the assets, such as low-based intangibles or deposits. in interest-bearing cash.
A contribution is the excess of a skipped payment made by one taxable unit to another taxable unit that the first taxable unit owns over the part of the skipped payment, if any, that is a reallocation payment. An item of foreign gross income that a taxpayer includes due to the receipt of a contribution by a taxable unit is allocated to the residual group. Thus, where the taxpayer is a CFC, the taxes on a contribution would not be chargeable under the section of the Code. 960 and these taxes are permanently lost. However, taxes on certain “Foreign Branch Group Contributions” are assigned to the Foreign Branch category for purposes of Code Sec. 904 as a device.
Generally, an item of foreign gross income attributable to a gain recognized under a foreign law due to an unrecorded payment received in exchange for property is characterized and allocated under the rules of Reg. §1.861-20(d)(2) (which generally attributes income as if the event giving rise to the foreign gross income had occurred from a federal income tax perspective in the year d U.S. taxation in which foreign income tax is paid or accrued).
As noted above, the final skipped payment rules apply retroactively to tax years beginning after December 31, 2019 and ending on or after November 2, 2020. So for calendar year taxpayers, the final skipped payment rules are effective as of the 2020 tax year. Taxpayers who have already filed the 2020 tax return may not be required to amend the returns. of revenue generated. However, interactions with the IRS must be accurate (for example, if the 2020 return was changed for another reason).
Taxpayers should consider the impact of the skipped final payment rules on their foreign tax credit calculations, including the fact that the rules are retroactive.