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US Treasury and the IRS released eagerly anticipated proposed foreign tax credit regulations (2022 Foreign Tax Credit (FTC) proposed regulations) on 18 November 2022. The regulations address the cost recovery requirement, the attribution requirement for withholding tax on royalty payments, and the definition of a reattribution asset for purposes of allocating and apportioning foreign taxes. The proposed regulations have varying applicability dates, but in all events, and subject to consistency rules, they provide taxpayers the option to apply the 2022 FTC proposed regulations, once finalized, to all foreign taxes that were subject to the modified provisions of the regulations finalized on January 4, 2022.

The regulations include 29 pages of preamble text and 19 pages of regulatory text including 10 examples. Public comments are due 60 days after the date of publishing in the Federal Register (scheduled for November 22, 2022). 

The takeaway: The 2022 FTC proposed regulations would relax the stringent creditability requirements of the 2021 FTC final regulations, following a more modest relaxation in the correcting amendments that were published this summer. Although Treasury and the IRS have not agreed with calls to withdraw the final regulations or defer their applicability, the proposed changes should insert needed flexibility into the FTC regime to account for the wide variety in countries’ income tax laws.