Looks Like the IRS Does Listen to Main Street After All – IRS Announces Temporary Relief on Key Foreign Tax Credit Rules

In what seems to be an unprecedented turn of events on July 21, 2023, the IRS released Notice 2023-55, providing temporary relief for taxpayers in determining which foreign taxes are “creditable” taxes for U.S. purposes.

In early 2022, the IRS issued final regulations providing guidance on determining if a foreign tax is creditable for U.S. tax purposes. These rules required a detailed analysis of the foreign tax regime, which assessed the taxes, to determine creditability. This requirement to analyze the foreign tax system is an onerous one and is particularly challenging for small and middle market taxpayers to administer.

Due to these administrative challenges, the IRS received a constant barrage of requests to modify these final foreign tax credit regulations or to provide a white-list of which foreign tax systems were approved for creditability purposes. The IRS and even Treasury Secretary went on record on several occasions stating that a white-list would not be issued and that the regulations would not be modified.

It appears, however, that the taxpayers’ complaints and requests did not fall on deaf ears and the IRS indeed decided to offer significant relief.

This relief provides that for determining where foreign taxes paid are foreign income taxes, the taxpayer may apply Treas. Reg. 1.901-2(a)-(b) but replace language in the regulations in regard to the non-confiscatory gross basis tax rule with the following:

No Foreign tax whose base is gross receipts or gross income satisfies the net income requirement, except in the case of a foreign tax whose base consists solely of investment income that is not derived from a trade or business, or wage income (or both.

In addition, a taxpayer may disregard Treas. Reg. 1.903-1(c)(1)(iv) and 1.903-1(c)(2)(iii) regarding the jurisdiction to tax excluded income rule and the source-based attribution requirement.

It is important to note the language provided by the relief precludes foreign digital service taxes from being creditable.

Author: Calvin Yung  | [email protected] and Chaya Siegfried, CPA, MST, Partner and Lead, International Business Tax  | [email protected]

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