Where there is a US gross income item corresponding to a foreign gross income item, the item of foreign gross income is categorized based on the categorization of the corresponding item of US gross income. Foreign gross income items are items of income recognized for foreign law purposes, which may or may not correspond to items of income for US federal income tax purposes. The most substantive and detailed rules for allocating and apportioning foreign taxes relate to the first step of assigning foreign gross income items to statutory and residual groupings. In general, taxpayers are required to allocate and apportion foreign income taxes to or among the statutory and residual groupings ( e.g., section 904 categories or a CFC’s income groups within a section 904 category) under the following steps: (i) first, assign foreign gross income items to statutory and residual groupings (ii) second, allocate and apportion foreign law tax deductions to the foreign gross income in such statutory and residual groupings and (iii) third, allocate and apportion the foreign income tax among such statutory and residual groupings. § 1.904-6(a)(1)(iv) (2019 Final Regulations).)Īs a result, the 2020 Proposed Regulations may provide for significantly different availability of foreign tax credits than under the 2019 Final Regulations or the 2019 Proposed Regulations.
The 2020 Proposed Regulations represent a significant departure from the approach taken in the prior proposed regulations published in the Federal Register on Decem(REG-105495-19) (the “2019 Proposed Regulations”), as well as from 2019 final regulations (TD 9882) (the “2019 Final Regulations”) that generally apply a “timing difference” rule (described below) to determine how taxes on certain types of disregarded transactions are categorized.
The income group to which a tax paid by a CFC is assigned determines whether, and to what extent, a US shareholder of the CFC may claim a deemed paid foreign tax credit. They also would apply for purposes of assigning foreign taxes paid by a controlled foreign corporation (CFC) on a payment to or from its disregarded entity to a section 904 category and an income group ( e.g., a tested income group, a Subpart F income group or a residual income group) within the section 904 category. The rules provided in the 2020 Proposed Regulations would apply for purposes of assigning foreign taxes paid on disregarded payments to or from a foreign branch of a domestic corporation to a section 904 category ( i.e., foreign branch category, section 951A category, passive category or general category).
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