Proposed Foreign Tax Credit Regulations: Expense Allocation Rules Provide Limited GILTI Relief but Otherwise Make Limited Changes—Indirect Credit Rules Are Complex and Differ Significantly from the Former “Pooling” Regime

Sullivan & Cromwell LLP - February 11, 2019

The IRS and Treasury Department have issued proposed regulations intended to implement the new foreign tax credit provisions of the 2017 tax reform legislation. The proposed regulations require allocation of certain shareholder-level expenses to the foreign tax credit basket for “global intangible low taxed income” (“GILTI”), but provide limited relief by treating GILTI assets as partially exempt, resulting in partial allocation of expenses to other baskets. In addition, the proposed regulations replace the former “pooling” regime for indirect tax credits with a complex new system under which the timing of income and deductions for U.S. and foreign purposes will be of heightened importance.