IRS Final Regulations on Foreign Tax Credits: New Compliance Headaches

April 1, 2021

At a Glance:

  • IRS Final Regulations Update: The IRS has released the long-awaited final regulations for foreign tax adjustments, which the Tax Cuts and Jobs Act (TCJA) significantly reformed in 2017.
  • Impact on Your Business: The new rules expand the definition of a foreign tax redetermination and introduce additional compliance obligations for U.S. taxpayers.
  • Next Steps: Failing to prepare for the increased compliance burden could cause you to lose your foreign tax credits or potentially incur penalties. You can avoid these headaches by proactively implementing new processes for tracking foreign tax redeterminations and filing amended returns.

Not sure how to properly track and report your foreign tax redeterminations under these new rules? Aprio can help you develop a comprehensive foreign tax compliance strategy.

The full story:

Before the TCJA passed, a foreign tax redetermination generally only included certain events impacting a taxpayer’s foreign tax credit. Taxpayers could generally avoid the cumbersome process of recalculating and amending prior-year tax returns through what’s known as a “pooling adjustment,” or a mechanism to make adjustments cumulatively on a go-forward basis.

What has changed:

Tax reform eliminated pooling adjustments (i.e., requires accounting for a redetermination in the year to which it relates) and expanded the definition of a foreign tax redetermination to include any change in foreign tax liability that impacts U.S. tax liability – not just the foreign tax credit. For example, foreign redeterminations might affect your U.S. tax liability in the following ways:

  • Changing the amount of a distribution or inclusion under subpart F, GILTI, and Section 1293
  • The application of the subpart F and GILTI high-tax exceptions
  • The amount of deemed paid credits for affected and subsequent years

Now, U.S. taxpayers will need to notify the IRS of adjustments to a foreign corporation’s taxable income, earnings and profits, and current year taxes by filing an amended return and statement. This requirement significantly increases the compliance burden, and taxpayers with foreign corporations risk losing their foreign tax credits or incurring penalties if they don’t implement new tracking and reporting processes immediately.

The bottom line:

The new final regulations for foreign tax redeterminations are not welcome news for U.S. taxpayers with business overseas. You should generally expect to file an amended return for each foreign tax redetermination from now on, which could create a compliance nightmare without the right processes in place. In addition to carefully tracking your foreign tax redeterminations and regularly filing your amended returns, you also need to heed the appropriate filing deadlines and any special notification rules, such as those for taxpayers under the jurisdiction of the IRS’ Large Business and International Division.

These changes could easily overwhelm any corporation, but failing to satisfy the new compliance requirements could be costly. With the stakes this high, don’t let anything fall through the cracks. Aprio’s international tax professionals are experienced in these compliance needs and can help you create the necessary processes and strategies to stay ahead of the new requirements.

Related Resources:

If you’re concerned about how these new compliance and reporting requirements could impact your U.S. multinational company, contact our team today.

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About the Author

Yelena Epova

Yelena is the partner-in-charge of Aprio’s International Services practice. She specializes in advising domestic and international companies on international tax issues and tax planning strategies regarding inbound and outbound operations. She also assists clients with domestic tax issues by providing tax planning and compliance services.

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