The IRS has issued guidance (Notice 2022-42) that would provide relief from the final foreign tax credit regulations under Section 901 for certain U.S. taxpayers amending Puerto Rican tax decrees.
The FTC regulations generally provide that amounts remitted to a foreign country exceeding the taxpayer’s liability for foreign income tax are not considered compulsory and are thus not a creditable foreign tax (see Tax Flash 2022-01 for more background on the final FTC regulations). This has created a potential problem for U.S. taxpayers who are able renegotiate tax decrees under the new Puerto Rican Act 52-2022, enacted on June 30, 2022.
Many U.S. taxpayers have in the past negotiated tax decrees with Puerto Rico for more favorable tax treatment. Under existing decrees, certain types of taxes, such as excise tax and modified effectively connected income (ECI) tax, may still apply. The Puerto Rican Act 52-2022 allows taxpayers to amend existing decrees. Taxpayers that elect to amend will no longer be subject to the excise tax and modified ECI tax, but the decree may result in a greater total amount of tax. This could result in the excess tax being considered noncompulsory under the FTC regulations, and therefore not creditable.
Notice 2022-42 provides that the IRS intends to issue proposed regulations under Section 901 to treat the amount of foreign income tax paid or accrued pursuant to an amended Puerto Rico tax decree as a compulsory payment under Treas. Reg. Sec. 1.901-2(e)(5) if the existing tax degree is amended pursuant to Act 52-2022 on or before Dec. 31, 2022, and the taxpayer’s Puerto Rico income tax liability under the tax decree is less than under the generally applicable Puerto Rico tax laws (in absence of any decree). In addition, the Notice revokes Notice 2011-29, which treated the excise tax as a tax paid in lieu of an income tax under Section 903. The revocation is effective for the excise tax paid or accrued in taxable years beginning on or after Jan. 1, 2023.
Taxpayers with existing Puerto Rico tax decrees should immediately evaluate the notice to determine how their foreign tax credit determinations may be impacted by the changes. Treasury has indicated that proposed FTC regulations may be forthcoming later this year or early next year so taxpayers should continue to monitor developments to ensure compliance.
Contact:
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.