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Proposed regulations for foreign tax credits

foreign tax credits, TCJA, tax reform, international taxThe Tax Cuts and Jobs Act (TCJA) changed many facets in the tax world, including the international tax arena. With the changes to how foreign activities are taxed through the onset of global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII), claiming the foreign tax credit became more complex. Taxpayers trying to navigate through these new tax laws can be left with more questions than answers. The IRS has recognized the need for more clarity and has release proposed regulations on foreign tax credits, which may be found here. These foreign tax credit rules are effective for 2018 and future years.

The foreign tax credit, which is a credit for certain taxes paid to foreign countries, is intended to prevent taxpayers from double taxation. Due to the changes in the way foreign activities are taxed, the foreign tax credit rules also had to change. One way the foreign tax credit rules have changed is the repeal of deemed-paid foreign tax credits on dividends from foreign entities’ cumulative pools of earnings and foreign taxes. Now that these foreign earnings are no longer deferred under GILTI, the foreign tax credits are computed differently. These foreign tax credits from GILTI must be also tracked in a separate category from other foreign tax credits.

The TCJA introduced a new dividends-received deduction for certain dividends from foreign corporations. The proposed regulations provide guidance on how the foreign tax credits are computed with this deduction.

Please be sure to contact a qualified tax professional to help you navigate through these new rules. This information is general in nature and should not be relied upon.

Jill A. Helm, CPA