Final regs offer safe harbor for CTFE allocations

Tax Hot Topics newsletter The IRS released final regulations (TD 9871) on July 24 regarding the allocation of a partnership’s creditable foreign tax expenditures (CFTEs). The rules generally adopt temporary regulations that were issued in February 2016 with minor changes and are effective immediately.

CFTEs are foreign taxes paid or accrued by a partnership that are eligible for a credit under Section 901(a) or an applicable U.S. income tax treaty. A CFTE must be allocated in accordance with the partners’ interest in the partnership. Generally, a partnership meets the safe harbor provided in the final regulations by allocating CFTEs to each partner in proportion to the partner’s share of net income in each so-called CFTE category.

The final regulations provide rules for the determination of CFTE categories and the amount of net income in each CFTE category. Additionally, the regulations address the effect that items including Section 743(b) basis adjustments, allocations made pursuant to Section 704(c), treatment of certain allocations and guaranteed payments in a foreign jurisdiction and disregarded payments between partnership foreign branches have with respect to the identification of CFTE categories and the determination of net income among those categories.

Grace Kim
Principal, Partnerships
Washington National Tax Office
T +1 202 521 1590

Jose Carrasco
Senior Manager, Partnerships
Washington National Tax Office
T +1 202 521 1552

Whit Cocanower
Senior Associate
Washington National Tax Office
T +1 202 521 1541

Ryan Nodal
Washington National Tax Office
T +1 803 231 3020

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