Multinational Businesses Brace for Changes to Apportioning Foreign Income and Foreign Tax Credits

The U.S. Treasury and the Internal Revenue Service (IRS) published proposed regulations relating to changes that impact calculations of the Foreign Income Tax Credit (FITC) and Foreign Earned Income Exclusion (FEIE).

On 12 November 2020, the U.S. Treasury and the Internal Revenue Service (IRS) published proposed regulations (REG-101657-20) relating to changes that impact calculations of the Foreign Income Tax Credit (FITC) and Foreign Earned Income Exclusion (FEIE).

These regulations contain a rather complex and comprehensive set of rules that address many components as to the allocation and apportionments of foreign income related taxes. Several foreign tax issues arose due to passage of the Tax Cuts and Jobs Act (TCJA) at the end of 2017, including foreign tax redeterminations; allocation and apportionment of expenses such as research and experimentation expenses, and stewardship expenses; the addition of a jurisdictional nexus requirement and changes to the net gain requirement of prior law.

Not only did the TCJA precipitate the need to adjust existing regulation, but so too did the maelstrom of digital services and the purchase and use of services not limited by country borders. Foreign taxes imposed on business profits of nonresident businesses affect the attribution and apportionment of a business’ income. Likewise, creative taxing schemes or levies, have added additional complexity in determining whether levies meet the established criteria of a “creditable foreign income tax” assessed against income, and not something like (for example) assets, consumption, or turnover.

Much of the final regulations gets deep into definition of, and allocation and apportionment of various types of expenses, definitions of creditable taxes and nexus, and tracing of payments; a much more mechanical framework than had been under prior law.

Worldwide ERC® supports the efforts of the U.S. Chamber of Commerce in providing detailed feedback on the proposed rulemaking REG -101657-20. We will track the proposed rule and keep members up-to-date.

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How this Impacts Mobility

The proposed rulemaking, once made final after the review of public comment, will impact any employer involved in cross-border enterprises. Despite the favorable results the Treasury’s tracing might yield, the regulation overall creates greater complexity and expansive recordkeeping requirements that will add to employers’ administrative compliance. Staying well informed on the progress of this proposed rulemaking, advance planning, and reliance on competent employer counsels will be more important than ever. Should any member have questions, please reach out to our Vice President of Member Engagement and Public Policy Rebecca Peters, rpeters@worldwideerc.org.

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