On 12 November 2020, the Internal Revenue Service and Treasury published in the Federal Register providing guidance related to the allocation and apportionment of deductions and foreign taxes, foreign tax re-determinations, foreign tax credit dis-allowance under section 965(g), consolidated groups, hybrid arrangements and certain payments under section 951A.

Rules Relating to Foreign Tax Credits

The final regulations contain the following issues:

  • The allocation and apportionment of deductions under sections 861 through 865, including rules on the allocation and apportionment of expenditures for research and experimentation (“R&E”), stewardship, legal damages, and certain deductions of life insurance companies;
  • The allocation and apportionment of foreign income taxes;
  • The interaction of the branch loss and dual consolidated loss recapture rules with section 904(f) and (g);
  • The effect of foreign tax redeterminations of foreign corporations, including for purposes of the application of the high-tax exception described in section 954(b)(4) (and for purposes of determining tested income under section 951A(c)(2)(A)(i)(III)), and required notifications under section 905(c) to the IRS of foreign tax redeterminations and related penalty provisions;
  • The definition of foreign personal holding company income under section 954;
  • The application of the foreign tax credit disallowance under section 965(g); and
  • The application of the foreign tax credit limitation to consolidated groups.

Rules Relating to Hybrid Deduction Accounts

  • The reduction to a hybrid deduction account under section 245A(e) by reason of an amount included in the gross income of a domestic corporation under section 951(a) or 951A(a) with respect to a controlled foreign corporation (“CFC”);
  • The treatment of a hybrid instrument as a financing transaction for purposes of the conduit financing rules under section 881; and
  • The treatment under section 951A of certain prepayments made to a related CFC after December 31, 2017, and before the CFC’s first taxable year beginning after December 31, 2017.

The final regulations are effective on 11 January 2021.