Proposed U.S. Foreign Tax Credit Rules Provide Relief for Certain Taxpayers and Ideas for Others & More Trending News


December 1, 2022

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The U.S. Treasury Department lately issued proposed rules[1] to handle sure considerations raised by taxpayers and different stakeholders in response to ultimate overseas tax credit score rules printed in January 2022[2].  Although the proposed rules don’t grapple with a number of the extra elementary issues beforehand recognized by commentators, they do supply taxpayers aid in sure slim circumstances.  In basic, the proposed rules are proposed to use to tax years ending on or after November 18, 2022 (i.e., beginning instantly in 2022 for calendar-year taxpayers).  Once the proposed rules are finalized, taxpayers might select to use “some or all of the final regulations to earlier taxable years, subject to certain conditions” described intimately within the discover of proposed rulemaking.  Until the efficient date of ultimate rules, taxpayers might depend on the proposed rules.  If a taxpayer chooses to depend on a portion of the proposed rules, taxpayers should persistently observe all proposed guidelines for that portion of the rules for all years till ultimate rules are efficient.[3]


One of the first areas of concern for taxpayers after the publication of the January 2022 ultimate overseas tax credit score rules was the introduction of a source-based attribution requirement (described in earlier iterations of the rules because the “jurisdictional nexus” requirement) that compares overseas legal guidelines governing the supply of earnings with United States earnings tax legal guidelines to find out if a overseas tax ought to be creditable within the United States.  Under the source-based attribution requirement in Treas. Reg. § 1.901-2(b)(5)(i)(B), a overseas tax imposed on a nonresident’s earnings meets the attribution requirement provided that the overseas tax regulation’s sourcing guidelines are fairly much like the United States sourcing guidelines.

In the case of gross earnings arising from royalties, the overseas tax regulation should impose tax on the royalties in keeping with the style wherein the Internal Revenue Code (the “Code”) sources royalty earnings:  i.e., primarily based on the place of use or the precise to make use of the licensed intangible property.[4]  In this regard, the United States’ place-of-use rule for sourcing royalties is way from consultant of a worldwide consensus.  Other jurisdictions supply royalties in a fashion that doesn’t fall neatly into that class, such because the United Kingdom, the place a multi-factor method is used to supply royalties.  As a consequence, in these nations the place withholding taxes on royalties are imposed on the idea of another method, royalty withholding taxes wouldn’t be creditable in opposition to the recipient’s U.S. tax legal responsibility even when the licensed intangible property is actually used throughout the territory of the taxing jurisdiction.[5]

Complicating this inquiry is the dearth of certainty that always arises when figuring out the placement the place intangible property is used.  Although it might be straightforward to establish the place sure manufacturing-related intangibles are used (e.g., at a multinational enterprise’s manufacturing facility), it’s tougher in different conditions, comparable to the place workers in a single jurisdiction use intangibles to generate gross sales by way of social media to clients residing in one other jurisdiction.

The proposed rules present a restricted exception to the source-based attribution requirement of the January 2022 rules for conditions wherein the taxpayer can present {that a} withholding tax is imposed on royalties acquired in trade for the precise to make use of intangible property pursuant to a single-country license throughout the territory of the taxing jurisdiction.  For this goal, a cost is made pursuant to a single-country license if the phrases of the license settlement underneath which the cost is made characterize the cost as a royalty and restrict the territory of the license to the nation imposing the withholding tax.  Therefore, U.S. taxpayers might have to revise present license agreements to qualify for the single-country license exception.

Cost Recovery Requirement

The proposed rules additionally present additional perception into the web achieve necessities that overseas earnings taxes should meet to offer rise to U.S. overseas tax credit.  The ultimate rules require usually that vital gadgets of expense—together with capital expenditures, curiosity, rents, royalties, wages and analysis and experimentation—have to be recovered in opposition to earnings, however the proposed rules allow a overseas tax to disallow vital prices and bills if the disallowance is in keeping with any precept underlying disallowances required underneath the Code.

For taxpayers figuring out whether or not a disallowance is in keeping with Code-based rules, the proposed rules present useful steering.  Treas. Reg. § 1.901-2(b)(4)(iv)(J), Example 10, makes clear that taxpayers can be permitted to say overseas tax credit in respect of taxes paid to overseas taxing jurisdictions that don’t permit any deductions for inventory primarily based compensation as a result of the Code “contain[s] targeted disallowances or limits on the deductibility of certain items of compensation in particular circumstances based on non-tax public policy reasons, including to influence the amount or use of a certain type of compensation in the labor market,” citing sections 162(m) and 280G.  Without the inclusion of Example 10 within the proposed rules, it could not in any other case have been apparent {that a} full disallowance of deductions for stock-based compensation can be thought of to be in keeping with (or resemble) the restrictions in sections 162(m) and 280G.

For taxpayers analyzing whether or not every other kind of disallowance underneath overseas tax regulation resembles a Code-based disallowance, the instance and its rules ought to present useful authority in figuring out whether or not the web achieve requirement is glad.


While the lately launched proposed rules don’t deal with many substantive points raised by taxpayers and different stakeholders in response to the January 2022 rules, they do characterize an effort to reply narrower issues recognized by taxpayers, and they’re designed in a approach that permits taxpayers the chance to make broad arguments in different areas by analogy to those slim guidelines.  Given the aid offered in response to excessive profile feedback from the know-how and different sectors on royalty withholding points specifically, events with different particular points ought to think about speaking these points to the Treasury Department and the IRS with proposals for aid or clarification.

Please contact any Gibson Dunn tax lawyer for updates on this challenge.


[1] 87 Fed. Reg. 71,271, 71,275 (Nov. 22, 2022).

[2] T.D. 9959, 87 Fed. Reg. 276 (Jan. 4, 2022).

[3] Until the efficient date of ultimate rules, taxpayers might depend on the proposed rules. If a taxpayer chooses to depend on a portion of the proposed rules, taxpayers should persistently observe all proposed guidelines for that portion of the rules for all years till ultimate rules are efficient.  87 Fed. Reg. 71,271, 71,277 (Nov. 22, 2022).

[4] Sections 861(a)(4) and 862(a)(4) of the Code.

[5] Foreign tax on royalties can typically be eradicated altogether underneath United States earnings tax treaties that remove royalty withholding tax, wherein case there isn’t a want to say a overseas tax credit score.  But overseas taxes on royalties are a major focus of many U.S. taxpayers, as different U.S. treaties solely scale back the royalty withholding tax, and many substantial U.S. buying and selling companions, together with Brazil, Singapore, and Hong Kong, don’t take pleasure in tax treaties with the United States.  We additionally notice that in figuring out the provision of a deemed paid credit score to a U.S. shareholder of a CFC, the IRS and Treasury have taken the place within the January 2022 rules {that a} U.S. taxpayer might not depend on a U.S. treaty provision {that a} nation’s royalty withholding tax is creditable in a context the place withholding taxes are imposed on royalties paid by one CFC to a different CFC.

This alert was ready by Jeffrey M. Trinklein, Anne Devereaux, John F. Craig III, Michael A. Benison, Eric Sloan, Sandy Bhogal, Jérôme Delaurière, and Hans Martin Schmid.

Gibson Dunn attorneys can be found to help in addressing any questions you will have relating to these developments. Please contact the Gibson Dunn lawyer with whom you normally work, the authors, or any of the next leaders and members of the agency’s Tax and Global Tax Controversy and Litigation observe teams:

Tax Group:
Dora Arash – Los Angeles (+1 213-229-7134, [email protected])
Sandy Bhogal – Co-Chair, London (+44 (0) 20 7071 4266, [email protected])
Michael Q. Cannon – Dallas (+1 214-698-3232, [email protected])
Jérôme Delaurière – Paris (+33 (0) 1 56 43 13 00, [email protected])
Michael J. Desmond – Los Angeles/Washington, D.C. (+1 213-229-7531, [email protected])
Anne Devereaux* – Los Angeles (+1 213-229-7616, [email protected])
Matt Donnelly – Washington, D.C. (+1 202-887-3567, [email protected])
Pamela Lawrence Endreny – New York (+1 212-351-2474, [email protected])
Benjamin Fryer – London (+44 (0) 20 7071 4232, [email protected])
Brian R. Hamano – Los Angeles (+1 310-551-8805, [email protected])
Kathryn A. Kelly – New York (+1 212-351-3876, [email protected])
Brian W. Kniesly – New York (+1 212-351-2379, [email protected])
Loren Lembo – New York (+1 212-351-3986, [email protected])
Jennifer Sabin – New York (+1 212-351-5208, [email protected])
Hans Martin Schmid – Munich (+49 89 189 33 110, [email protected])
Eric B. Sloan – Co-Chair, New York (+1 212-351-2340, [email protected])
Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224 /+1 212-351-2344), [email protected])
John-Paul Vojtisek – New York (+1 212-351-2320, [email protected])
Edward S. Wei – New York (+1 212-351-3925, [email protected])
Lorna Wilson – Los Angeles (+1 213-229-7547, [email protected])
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, [email protected])

Global Tax Controversy and Litigation Group:
Michael J. Desmond – Co-Chair, Los Angeles/Washington, D.C. (+1 213-229-7531, [email protected])
Saul Mezei – Washington, D.C. (+1 202-955-8693, [email protected])
Sanford W. Stark – Co-Chair, Washington, D.C. (+1 202-887-3650, [email protected])
C. Terrell Ussing – Washington, D.C. (+1 202-887-3612, [email protected])

*Anne Devereaux is an of counsel working within the agency’s Los Angeles workplace who’s admitted solely in Washington, D.C.

© 2022 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed supplies have been ready for basic informational functions solely and aren’t meant as authorized recommendation.

Proposed U.S. Foreign Tax Credit Rules Provide Relief for Certain Taxpayers and Ideas for Others

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Proposed U.S. Foreign Tax Credit Rules Provide Relief for Certain Taxpayers and Ideas for Others

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