The IRS recently released two sets of correcting amendments (T.D. 9959 (correction) and T.D. 9959 (correction)), making changes to the final foreign tax credit regulations that were released on Dec. 28, 2021 (T.D. 9959). For more background on the December 2021 final foreign tax credit regulations, please see our prior story, “Final FTC regs address broad range of issues.”
The first set of correcting amendments revises the regulations under Sections 245A, 338, 367, 861, 901, 904, 905, 951A and 960. In addition to routine clarifying and corrective amendments, the revisions also provide several clarifications and revisions to the cost recovery requirement under the regulations. For example, corrected Treas. Reg. Sec. 1.901-2 provides that the cost recovery requirement requires a foreign tax deduction disallowance to be consistent with “any” principle underlying the deduction disallowances required under the U.S. law, including the principles of limiting base erosion or profit shifting and public policy concerns. This is in contrast with the original version which referred to “a” principle underlying the disallowances required under the Code. Several of the corrections underscore the IRS’ prior comments indicating that the cost recovery requirement is intended to be a principle-based approach and arguably removes some ambiguities and inconsistencies contained in the original regulations.
The second set of correcting amendments lists 13 revisions to the preamble of the foreign tax credit regulations.
Taxpayers should immediately evaluate the corrections to determine how their foreign tax credit determinations may be impacted by the changes. Treasury has indicated that additional guidance regarding the creditability and treatment of foreign levies may be forthcoming later this year. Taxpayers should continue to monitor these developments.