Treasury Mulling a New Foreign Tax Credit Rule Framework

The Treasury Department is still mulling how to tweak final foreign tax credit regulations that are currently on hold following companies’ and tax practitioners’ concerns about compliance, a Treasury official said Monday.

The department was “still considering how to address” the foreign tax credit rules, said Isaac Wood, attorney-advisor in Treasury’s Office of Tax Policy, speaking at a Tax Executives Institute Midyear Conference. He added the government was debating between “sticking with the framework” of the regulations it issued in early 2022 “and addressing the issues that have arisen,” or “coming up with a new framework.”

However, he said, “no decisions have been made.”

• Last July, Treasury suspended the regulations in the wake of complaints fromcorporate taxpayers that they were too strict over issues like the treatment of royalty withholding taxes.
• The ability to temporarily go back to following the previously, more corporate-friendly rules is helping multinational companies whose business is based on intellectual property like patents, practitioners have said, such as pharmaceutical companies and technology companies. Royalties and royalty withholding taxes stemming from IP licensing are among the areas in which the new rules tightened things up the most, rendering some taxes ineligible for the foreign tax credit.
• In December, Treasury extended the suspension until changes to the regulations are proposed.
• In the interim, taxpayers are allowed to mostly apply older foreign tax credit rules that were previously in place.

— With assistance from Michael Rapoport.