For many years, the courts and IRS have concluded that the term “income taxes” in section 901 means a foreign “income tax in the U.S. sense.” Regulations issued in 1983 define a foreign income tax as one based on the excess of gross receipts over relevant costs. These 1983 regulations seek to ensure that the foreign tax base is measured in a manner similar to how the US tax base is measured.
The recent final regulations, issued by Treasury on January 4, add a jurisdictional nexus requirement for determining whether a foreign tax qualifies as a foreign income tax under section 901. As a result, the recent regulations potentially apply to deny a credit for a broad range of foreign taxes. This could include novel taxes (such as those imposed pursuant to Pillar One of the OECD BEPS 2.0 project) but also certain common foreign taxes, the creditability of which had never before been in doubt (including withholding taxes on royalties and service fees).
In a Tax Notes article, our partners Gary B. Wilcox and Lucas Giardelli analyze whether the jurisdictional nexus requirement in the new foreign tax credit regulations will survive a validity challenge in the courts.
This article was originally published by Tax Notes and is reproduced with permission.