On February 9, the IRS issued final regulations on foreign tax credit splitting events. The final regulations did not make many significant changes to the temporary regulations that were issued in 2012. The final regulations are issued primarily under IRC § 909, which prevents taxpayers from claiming a foreign tax credit when they have not yet taken the income to which the foreign tax relates (related income) into account for purposes of U.S. tax. In particular, section 909 defers the creditability of foreign taxes paid in connection with a foreign tax credit splitting event to the taxable year that the related income is taken into account under the Internal Revenue Code.
The final regulations incorporate the approach of the temporary regulations and adopt an exclusive list of foreign tax credit splitting events: reverse hybrid splitter arrangements, loss-sharing splitter arrangements, hybrid instrument splitter arrangements and partnership inter-branch payment splitter arrangements. The final regulations clarify the temporary regulations in some instances. For example, the temporary regulations stated that a splitter event occurs if the “shared loss of a U.S. combined income group could have been used to offset income of that group (usable shared loss) but is used instead to offset income of another U.S. combined income group.” The temporary regulations did not specify whether a usable shared loss includes losses that could be used in a carryover arrangement by members of the same combined group but in different tax years. In the final regulations, Treasury made clear that a usable shared loss does not include a loss that is usable in the current tax year and in carryforward years, but it does include losses usable in the current year and carryback years.
The final regulations are generally effective for foreign income taxes paid or accrued in taxable years ending after February 9, 2015.
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