Bulletin No. 2022–49

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2022–49

December 5, 2022

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE

Rev. Proc. 2022-39, page 507.

The revenue procedure obsoletes and replaces existing

Revenue Procedure 94-69, 1994-2 C.B. 804. The revenue procedure prescribes special procedures for certain eligible LB&I taxpayers who are subject to nearly

annual examinations to file a qualified amended return

shortly after the opening of an audit. Eligible taxpayers

may submit a form to report additional tax due or make

an adequate disclosure with respect to an item or position to avoid the accuracy-related penalty described in

sections 6662(b)(1) and 6662(b)(2).

EMPLOYEE PLANS

Notice 2022-60, page 502.

This notice sets forth updates on the corporate bond

monthly yield curve, the corresponding spot segment

rates for November 2022 used under § 417(e)(3)(D),

the 24-month average segment rates applicable for

November 2022, and the 30-year Treasury rates, as

reflected by the application of § 430(h)(2)(C)(iv).

Notice 2022-62, page 506.

This notice sets forth the 2022 Required Amendments

List (2022 RA List). The 2022 RA List applies to both

Finding Lists begin on page ii.

individually designed plans qualified under section

401(a) of the Internal Revenue Code (qualified individually designed plans) and individually designed plans

that satisfy the requirements of section 403(b) (section

403(b) individually designed plans).

INCOME TAX

REG-112096-22, page 511.

This document contains proposed regulations that clarify and revise certain foreign tax credit regulations that

were published on January 4, 2022. Specifically, these

proposed regulations amend the definition of a reattribution asset for purposes of allocating and apportioning foreign income taxes; revise the cost recovery

rule under the requirements for a tax to be a creditable

foreign income tax; and provide a limited exception to

the source-based attribution requirement for withholding taxes imposed on royalty payments to be creditable

foreign income taxes.

Rev. Rul. 2022-22, page 500.

Federal rates; adjusted federal rates; adjusted federal

long-term rate, and the long-term tax exempt rate. For

purposes of sections 382, 1274, 1288, 7872 and

other sections of the Code, tables set forth the rates

for December 2022.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

December 5, 2022 

Bulletin No. 2022–49

Part I

Section 1274.—

Determination of Issue

Price in the Case of Certain

Debt Instruments Issued for

Property

(Also Sections 42, 280G, 382, 467, 468, 482, 483,

1288, 7520, 7872.)

Rev. Rul. 2022-22

This revenue ruling provides various prescribed rates for federal income

AFR

110% AFR

120% AFR

130% AFR

AFR

110% AFR

120% AFR

130% AFR

150% AFR

175% AFR

AFR

110% AFR

120% AFR

130% AFR

Short-term adjusted AFR

Mid-term adjusted AFR

Long-term adjusted AFR

December 5, 2022

tax purposes for December 2022 (the

current month). Table 1 contains the

short-term, mid-term, and long-term

applicable federal rates (AFR) for the

current month for purposes of section

1274(d) of the Internal Revenue Code.

Table 2 contains the short-term, midterm, and long-term adjusted applicable federal rates (adjusted AFR) for the

current month for purposes of section

1288(b). Table 3 sets forth the adjusted

federal long-term rate and the long-term

tax-exempt rate described in section

382(f). Table 4 contains the appropriate

percentages for determining the low-income housing credit described in section 42(b)(1) for buildings placed in

service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service

after July 30, 2008, shall not be less

than 9%. Finally, Table 5 contains the

federal rate for determining the present

value of an annuity, an interest for life

or for a term of years, or a remainder or

a reversionary interest for purposes of

section 7520.

REV. RUL. 2022-22 TABLE 1

Applicable Federal Rates (AFR) for December 2022

Period for Compounding

Annual

Semiannual

Quarterly

Short-term

4.55%

4.50%

4.47%

5.01%

4.95%

4.92%

5.47%

5.40%

5.36%

5.94%

5.85%

5.81%

Mid-term

4.27%

4.23%

4.21%

4.70%

4.65%

4.62%

5.14%

5.08%

5.05%

5.58%

5.50%

5.46%

6.45%

6.35%

6.30%

7.54%

7.40%

7.33%

Long-term

4.34%

4.29%

4.27%

4.78%

4.72%

4.69%

5.22%

5.15%

5.12%

5.66%

5.58%

5.54%

REV. RUL. 2022-22 TABLE 2

Adjusted AFR for December 2022

Period for Compounding

Annual

Semiannual

3.45%

3.42%

3.24%

3.21%

3.29%

3.26%

500

Monthly

4.46%

4.90%

5.34%

5.78%

4.19%

4.61%

5.03%

5.44%

6.27%

7.29%

4.25%

4.67%

5.10%

5.52%

Quarterly

3.41%

3.20%

3.25%

Monthly

3.40%

3.19%

3.24%

Bulletin No. 2022–49

REV. RUL. 2022-22 TABLE 3

Rates Under Section 382 for December 2022

Adjusted federal long-term rate for the current month

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal

long-term rates for the current month and the prior two months.)

3.29%

3.29%

REV. RUL. 2022-22 TABLE 4

Appropriate Percentages Under Section 42(b)(1) for December 2022

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July

30, 2008, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit

8.00%

Appropriate percentage for the 30% present value low-income housing credit

3.43%

REV. RUL. 2022-22 TABLE 5

Rate Under Section 7520 for December 2022

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a

remainder or reversionary interest

Section 42.—Low-Income

Housing Credit

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

December 2022. See Rev. Rul. 2022-22, page 500.

Section 280G.—Golden

Parachute Payments

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

December 2022. See Rev. Rul. 2022-22, page 500.

Section 382.—Limitation

on Net Operating Loss

Carryforwards and

Certain Built-In Losses

Following Ownership

Change

The adjusted applicable federal long-term rate

is set forth for the month of December 2022. See

Rev. Rul. 2022-22, page 500.

Section 467.—Certain

Payments for the Use of

Property or Services

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

December 2022. See Rev. Rul. 2022-22, page 500.

Section 468.—Special

Rules for Mining and Solid

Waste Reclamation and

Closing Costs

The applicable federal short-term rates are set

forth for the month of December 2022. See Rev.

Rul. 2022-22, page 500.

Section 482.—Allocation

of Income and Deductions

Among Taxpayers

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

December 2022. See Rev. Rul. 2022-22, page 500.

5.20%

Section 483.—Interest on

Certain Deferred Payments

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

December 2022. See Rev. Rul. 2022-22, page 500.

Section 1288.—Treatment

of Original Issue Discount

on Tax-Exempt Obligations

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for the

month of December 2022. See Rev. Rul. 2022-22,

page 500.

Section 7520.—Valuation

Tables

The applicable federal mid-term rates are set

forth for the month of December 2022. See Rev.

Rul. 2022-22, page 500.

Section 7872.—Treatment

of Loans With BelowMarket Interest Rates

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

December 2022. See Rev. Rul. 2022-22, page 500.

Bulletin No. 2022–49

501

December 5, 2022

Part III

Administrative,

Miscellaneous, and

Procedural

Update for Weighted Average

Interest Rates, Yield Curves,

and Segment Rates

Notice 2022-60

This notice provides guidance on the

corporate bond monthly yield curve, the

corresponding spot segment rates used

under § 417(e)(3), and the 24-month average segment rates under § 430(h)(2) of the

Internal Revenue Code. In addition, this

notice provides guidance as to the interest rate on 30-year Treasury securities

under § 417(e)(3)(A)(ii)(II) as in effect for

plan years beginning before 2008 and the

30-year Treasury weighted average rate

under § 431(c)(6)(E)(ii)(I).

YIELD CURVE AND SEGMENT

RATES

Section 430 specifies the minimum

funding requirements that apply to

Applicable Month

November 2022

single-employer plans (except for CSEC

plans under § 414(y)) pursuant to § 412.

Section 430(h)(2) specifies the interest rates that must be used to determine

a plan’s target normal cost and funding

target. Under this provision, present

value is generally determined using three

24-month average interest rates (“segment rates”), each of which applies to

cash flows during specified periods. To

the extent provided under § 430(h)(2)(C)

(iv), these segment rates are adjusted by

the applicable percentage of the 25-year

average segment rates for the period ending September 30 of the year preceding

the calendar year in which the plan year

begins.1 However, an election may be

made under § 430(h)(2)(D)(ii) to use the

monthly yield curve in place of the segment rates.

Notice 2007-81, 2007-44 I.R.B. 899,

provides guidelines for determining the

monthly corporate bond yield curve, and

the 24-month average corporate bond

segment rates used to compute the target

normal cost and the funding target. Consistent with the methodology specified in

Notice 2007-81, the monthly corporate

bond yield curve derived from October

2022 data is in Table 2022-10 at the end

of this notice. The spot first, second, and

third segment rates for the month of October 2022 are, respectively, 5.10, 5.83, and

5.68.

The 24-month average segment rates

determined under § 430(h)(2)(C)(i)

through (iii) must be adjusted pursuant to

§ 430(h)(2)(C)(iv) to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates. The 25-year average

segment rates for plan years beginning

in 2021, 2022 and 2023 were published

in Notice 2020-72, 2020-40 I.R.B. 789,

Notice 2021-54, 2021-41 I.R.B. 457,

and Notice 2022-40, 2022-40 I.R.B. 266,

respectively.

24-MONTH AVERAGE CORPORATE

BOND SEGMENT RATES

The three 24-month average corporate bond segment rates applicable for

November 2022 without adjustment for

the 25-year average segment rate limits

are as follows:

24-Month Average Segment Rates Without 25-Year Average Adjustment

First Segment

Second Segment

Third Segment

1.76

3.36

3.76

Section 9706(a) of the American Rescue Plan Act of 2021, Pub. L. 117-2 (the

ARP), which was enacted on March 11,

2021, changed the 25-year average segment rates and the applicable minimum

and maximum percentages used under

§ 430(h)(2)(C)(iv) of the Code to adjust

the 24-month average segment rates.2

Prior to this change, the applicable minimum and maximum percentages were

85% and 115% for a plan year beginning

in 2021, and 80% and 120% for a plan

year beginning in 2022, respectively.

After this change, the applicable minimum and maximum percentages are 95%

and 105% for a plan year beginning in

2021 or 2022. In addition, pursuant to

this change, any 25-year average segment rate that is less than 5% is deemed

to be 5%.3

Pursuant to § 9706(c)(1) of the ARP,

these changes apply with respect to plan

years beginning on or after January 1,

2020. However, § 9706(c)(2) of the ARP

provides that a plan sponsor may elect not

to have these changes apply to any plan

year beginning before January 1, 2022.4

The adjusted 24-month average segment rates set forth in the chart below

reflect § 430(h)(2)(C)(iv) of the Code as

Pursuant to § 433(h)(3)(A), the third segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount

of the full funding limitation under § 433(c)(7)(C)).

2

Section 80602 of the Infrastructure Investment and Jobs Act, Pub. L. 117-58, makes further changes to the time periods for which specified applicable minimum and maximum percentages

apply.

3

Pursuant to this change, the 25-year averages of the first segment rate for 2021 and 2022 are increased to 5.00% because those 25-year averages as originally published are below 5.00%.

4

This election may be made either for all purposes for which the amendments under § 9706 of the ARP apply or solely for purposes of determining the adjusted funding target attainment

percentage under § 436 of the Code for the plan year.

1

December 5, 2022

502

Bulletin No. 2022–49

amended by § 9706(a) of the ARP. These

adjusted 24-month average segment rates

apply only for plan years for which an

election under § 9706(c)(2) of the ARP is

not in effect. For a plan year for which such

an election does not apply, the 24-month

averages applicable for November 2022,

adjusted to be within the applicable

minimum and maximum percentages of

the corresponding 25-year average segment rates in accordance with § 430(h)(2)

(C)(iv) of the Code, are as follows:

Adjusted 24-Month Average Segment Rates

For Plan Years

Beginning In

Applicable Month

First Segment

Second Segment

Third Segment

2021

November 2022

4.75

5.36

6.11

2022

November 2022

4.75

5.18

5.92

2023

November 2022

4.75

5.00

5.74

The adjusted 24-month average segment rates set forth in the chart below do

not reflect the changes to § 430(h)(2)(C)

(iv) of the Code made by § 9706(a) of the

ARP. These adjusted 24-month average

segment rates apply only for plan years for

which an election under § 9706(c)(2) of the

ARP is in effect. For a plan year for which

such an election applies, the 24‑month

averages applicable for November 2022,

adjusted to be within the applicable minimum and maximum percentages of the

corresponding 25-year average segment

rates in accordance with § 430(h)(2)(C)

(iv) of the Code, are as follows:

Pre-ARP Adjusted 24-Month Average Segment Rates

For Plan Years

Beginning In

Applicable Month

First Segment

Second Segment

Third Segment

2021

November 2022

3.32

4.79

5.47

30-YEAR TREASURY SECURITIES

INTEREST RATES

Section 431 specifies the minimum

funding requirements that apply to multiemployer plans pursuant to § 412. Section 431(c)(6)(B) specifies a minimum

amount for the full-funding limitation

described in § 431(c)(6)(A), based on the

plan’s current liability. Section 431(c)

(6)(E)(ii)(I) provides that the interest

rate used to calculate current liability for

this purpose must be no more than 5 percent above and no more than 10 percent

below the weighted average of the rates

of interest on 30-year Treasury securities during the four-year period ending

on the last day before the beginning

of the plan year. Notice 88-73, 1988-2

C.B. 383, provides guidelines for determining the weighted average interest

rate. The rate of interest on 30-year

Treasury securities for October 2022 is

4.02 percent. The Service determined

this rate as the average of the daily

determinations of yield on the 30-year

Treasury bond maturing in August 2052.

For plan years beginning in November

2022, the weighted average of the rates

of interest on 30‑year Treasury securities and the permissible range of rate

used to calculate current liability are as

follows:

For Plan Years Beginning In

Treasury Weighted Average Rates

30-Year Treasury Weighted Average

Permissible Range 90% to 105%

November 2022

2.33

2.09 to 2.44

under § 417(e)(3)(D) are segment rates

computed without regard to a 24-month

average. Notice 2007-81 provides guidelines for determining the minimum

present value segment rates. Pursuant to

that notice, the minimum present value

segment rates determined for October

2022 are as follows:

MINIMUM PRESENT VALUE

SEGMENT RATES

In general, the applicable interest rates

Month

October 2022

Bulletin No. 2022–49

Minimum Present Value Segment Rates

First Segment

Second Segment

5.10

5.83

Third Segment

5.68

503

December 5, 2022

DRAFTING INFORMATION

The principal author of this notice is

Tom Morgan of the Office of Associate

December 5, 2022

Chief Counsel (Employee Benefits,

Exempt Organizations, and Employment

Taxes). However, other personnel from

the IRS participated in the development

504

of this guidance. For further information

regarding this notice, contact Mr. Morgan

at 202-317-6700 or Tony Montanaro at

626-927‑1475 (not toll-free calls).

Bulletin No. 2022–49

Table 2022-10

Monthly Yield Curve for October 2022

Derived from October 2022 Data

Maturity

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

19.5

20.0

Yield

4.53

4.79

5.00

5.14

5.22

5.25

5.26

5.26

5.28

5.30

5.33

5.38

5.43

5.49

5.55

5.62

5.68

5.73

5.79

5.83

5.87

5.91

5.94

5.96

5.98

5.99

6.00

6.01

6.01

6.01

6.00

5.99

5.98

5.97

5.96

5.95

5.94

5.92

5.91

5.90

Maturity

20.5

21.0

21.5

22.0

22.5

23.0

23.5

24.0

24.5

25.0

25.5

26.0

26.5

27.0

27.5

28.0

28.5

29.0

29.5

30.0

30.5

31.0

31.5

32.0

32.5

33.0

33.5

34.0

34.5

35.0

35.5

36.0

36.5

37.0

37.5

38.0

38.5

39.0

39.5

40.0

Bulletin No. 2022–49

Yield

5.89

5.87

5.86

5.85

5.84

5.83

5.82

5.81

5.80

5.79

5.78

5.77

5.76

5.76

5.75

5.75

5.74

5.73

5.73

5.72

5.72

5.72

5.71

5.71

5.70

5.70

5.70

5.69

5.69

5.68

5.68

5.68

5.67

5.67

5.67

5.67

5.66

5.66

5.66

5.65

Maturity

40.5

41.0

41.5

42.0

42.5

43.0

43.5

44.0

44.5

45.0

45.5

46.0

46.5

47.0

47.5

48.0

48.5

49.0

49.5

50.0

50.5

51.0

51.5

52.0

52.5

53.0

53.5

54.0

54.5

55.0

55.5

56.0

56.5

57.0

57.5

58.0

58.5

59.0

59.5

60.0

Yield

5.65

5.65

5.65

5.64

5.64

5.64

5.64

5.64

5.63

5.63

5.63

5.63

5.62

5.62

5.62

5.62

5.62

5.62

5.61

5.61

5.61

5.61

5.61

5.61

5.60

5.60

5.60

5.60

5.60

5.60

5.60

5.59

5.59

5.59

5.59

5.59

5.59

5.59

5.59

5.58

505

Maturity

60.5

61.0

61.5

62.0

62.5

63.0

63.5

64.0

64.5

65.0

65.5

66.0

66.5

67.0

67.5

68.0

68.5

69.0

69.5

70.0

70.5

71.0

71.5

72.0

72.5

73.0

73.5

74.0

74.5

75.0

75.5

76.0

76.5

77.0

77.5

78.0

78.5

79.0

79.5

80.0

Yield

5.58

5.58

5.58

5.58

5.58

5.58

5.58

5.58

5.57

5.57

5.57

5.57

5.57

5.57

5.57

5.57

5.57

5.57

5.56

5.56

5.56

5.56

5.56

5.56

5.56

5.56

5.56

5.56

5.56

5.56

5.56

5.55

5.55

5.55

5.55

5.55

5.55

5.55

5.55

5.55

Maturity

80.5

81.0

81.5

82.0

82.5

83.0

83.5

84.0

84.5

85.0

85.5

86.0

86.5

87.0

87.5

88.0

88.5

89.0

89.5

90.0

90.5

91.0

91.5

92.0

92.5

93.0

93.5

94.0

94.5

95.0

95.5

96.0

96.5

97.0

97.5

98.0

98.5

99.0

99.5

100.0

Yield

5.55

5.55

5.55

5.55

5.55

5.55

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.54

5.53

5.53

5.53

5.53

5.53

5.53

5.53

5.53

5.53

5.53

5.53

5.53

5.53

5.53

5.53

5.53

December 5, 2022

2022 Required

Amendments List

for Individually

Designed Qualified and

Section 403(b) Plans

Notice 2022-62

2022 RA List. Later dates may apply to a

governmental plan within the meaning of

section 414(d) pursuant to section 5.03(2)

(c) of Rev. Proc. 2022-40. References to

qualification requirements and to section 403(b) requirements in Parts III and

IV of this notice are referred to, separately

and collectively, as “requirements.”1

II. BACKGROUND

I. PURPOSE

This notice sets forth the 2022 Required

Amendments List (2022 RA List). The

Required Amendments List (RA List)

applies to both individually designed

plans qualified under section 401(a) of

the Internal Revenue Code (Code) (qualified individually designed plans) and

individually designed plans that satisfy

the requirements of section 403(b) (section 403(b) individually designed plans).

Section 5 of Rev. Proc. 2022-40, 202247 IRB 487, provides generally that,

except as otherwise provided by statute or

in regulations or other guidance published

in the Internal Revenue Bulletin (IRB), in

the case of an individually designed qualified or section 403(b) plan that is not a

governmental plan within the meaning of

section 414(d), the remedial amendment

period for (1) a disqualifying provision or

(2) a form defect first occurring after June

30, 2020, that arises as a result of a change

in qualification requirements or section 403(b) requirements, as applicable,

expires on the last day of the second calendar year that begins after the issuance of

the RA List on which the change in qualification requirements or section 403(b)

requirements appears. Pursuant to section

5.03(1)(c) and section 6.01 of Rev. Proc.

2022‑40, December 31, 2024, generally is

both the last day of the remedial amendment period and the plan amendment

deadline with respect to (1) a disqualifying

provision arising as a result of a change in

qualification requirements that appears on

the 2022 RA List, and (2) a form defect

arising as a result of a change in section

403(b) requirements that appears on the

Section 401(b) of the Code provides a

remedial amendment period during which

a plan may be amended retroactively to

comply with the qualification requirements

under section 401(a). Section 1.401(b)-1

describes the disqualifying provisions that

may be amended retroactively and the

remedial amendment period during which

retroactive amendments may be adopted.

That regulation also grants the Commissioner of Internal Revenue the discretion

to designate in guidance published in the

IRB certain plan provisions as disqualifying provisions and to extend the remedial

amendment period.

Section 21.02 of Rev. Proc. 2013-22,

2013-18 IRB 985,2 establishes an initial

remedial amendment period that permits

an eligible employer to retroactively correct form defects in its written section

403(b) plan.

Rev. Proc. 2017-18, as modified by

Notice 2020-35, 2020-25 IRB 948, provides that the initial remedial amendment

period for a form defect in a section 403(b)

plan ends on June 30, 2020.

Section 5 of Rev. Proc. 2022-40 provides that except as otherwise provided by

statute or in regulations or other guidance

published in the IRB, with respect to plans

that are not governmental plans within the

meaning of section 414(d), the remedial

amendment period for (1) a disqualifying

provision or (2) a form defect first occurring after June 30, 2020, that arises as a

result of a change in qualification requirements or section 403(b) requirements, as

applicable, expires on the last day of the

second calendar year that begins after

the issuance of the RA List on which

the change in qualification requirements

or section 403(b) requirements appears.

Section 5.03(2) provides a special rule

for governmental plans that may further

extend the remedial amendment period in

some cases.

Section 6.01 of Rev. Proc. 2022-40 provides that the plan amendment deadline

with respect to (1) a disqualifying provision in a qualified individually designed

plan, or (2) a form defect first occurring

after June 30, 2020, in a section 403(b)

individually designed plan described in

section 5 of Rev. Proc. 2022-40 is the date

on which the remedial amendment period

expires with respect to that disqualifying

provision or form defect.

Section 7 of Rev. Proc. 2022-40 provides that the Treasury Department and

the IRS publish an annual RA List. In

general, a change in qualification requirements or section 403(b) requirements will

not appear on an RA List until guidance

with respect to that change (including,

in certain cases, model amendments)

has been provided in regulations or in

other guidance published in the IRB.

However, in the discretion of the Treasury Department and the IRS, a change

in qualification requirements or section

403(b) requirements may be included on

an RA List in other circumstances, such

as in cases in which a statutory change is

enacted and the Treasury Department and

the IRS anticipate that no guidance will be

issued.

The remedial amendment period applicable to a disqualifying provision or form

defect arising as a result of a change in

qualification requirements or section

403(b) requirements may be extended

beyond the date that normally would

apply to an item included on an RA List,

if, for example, a statute, regulation, or

other guidance published in the IRB provides for a later deadline.

III. CONTENT AND

ORGANIZATION OF RA LIST

In general, an RA List includes statutory and administrative changes in requirements that are first effective during the

In order to help plan sponsors achieve operational compliance with changes in requirements, the IRS provides the Operational Compliance List, which is a list of changes in both qualification

requirements and section 403(b) requirements that are effective during a calendar year, on the IRS website at https://www.irs.gov/retirement-plans/operational-compliance-list. See section

8 of Rev. Proc. 2022-40.

2

Rev. Proc. 2013-22 was modified by Rev. Proc. 2014-28, 2014-16 I.R.B. 944, and Rev. Proc. 2015-22, 2015-11 I.R.B. 754, and clarified by Rev. Proc. 2017-18, 2017-5 I.R.B. 743.

1

December 5, 2022

506

Bulletin No. 2022–49

plan year in which the list is published.3

However, an RA List does not include:

• Guidance issued or legislation enacted

after the list has been prepared;

• Statutory changes in requirements

for which the Treasury Department

and the IRS expect to issue guidance

that would be included on an RA List

issued in a future year;4

• Changes in requirements that permit

(but do not require) optional plan

provisions, in contrast to changes

in requirements that cause existing

plan provisions (which may include

optional plan provisions previously

adopted) to become disqualifying

provisions or section 403(b) form

defects;5 or

• Changes in the tax laws affecting

qualified

individually

designed

plans or section 403(b) individually

designed plans that do not change the

requirements (such as changes to the

tax treatment of plan distributions, or

changes to the funding requirements

for qualified individually designed

plans).

The RA List is divided into two parts.

Part A covers changes in requirements that

generally would require an amendment to

most plans or to most plans of the type

affected by the change.

Part B includes changes in requirements

that the Treasury Department and the IRS

anticipate will not require amendments to

most plans but might require an amendment because of an unusual plan provision in a particular plan. For example, if

a change affects a particular requirement

that most plans incorporate by reference,

Part B would include that change because

a particular plan might not incorporate the

requirement by reference and, thus, might

include language inconsistent with the

change.

Annual, monthly, or other periodic

changes to (1) the various dollar limits that

are adjusted for cost of living increases as

provided in section 415(d) or other Code

provisions, (2) the spot segment rates used

to determine the applicable interest rate

under section 417(e)(3), and (3) the applicable mortality table under section 417(e)

(3), are treated as included on the RA List

for the year in which such changes are

effective even though they are not directly

referenced on that RA List. The Treasury

Department and the IRS anticipate that

few plans have language that will need to

be amended on account of these changes.

The fact that a change in a requirement

is included on the RA List does not necessarily mean that a plan must be amended

as a result of that change. Each plan sponsor must determine whether a particular change in a requirement requires an

amendment to its plan.

IV. 2022 REQUIRED AMENDMENTS

LIST

There are no entries listing changes in

qualification requirements on the 2022 RA

List.6

V. DRAFTING INFORMATION

The principal author of this notice is

Tom Morgan of the Office of Associate Chief Counsel (Employee Benefits,

Exempt Organizations, and Employment Taxes). For further information

regarding this notice, contact Mr. Morgan

at (202) 317-6700 (not a toll-free number).

26 CFR 601.105: Examination of returns and claims

for refund, credit or abatement; determination of

correct tax liability

(Also: Part I, §§ 6662, 6664; 1.6662-3, 1.6662-4,

1.6664-2.)

Rev. Proc. 2022-39

SECTION 1. PURPOSE

The purpose of this revenue procedure

is to obsolete Rev. Proc. 94-69, 1994-2

C.B. 804, and prescribe special procedures for eligible taxpayers to file a qualified amended return in accordance with

§ 1.6664-2(c)(4)(ii) of the Income Tax

Regulations. This revenue procedure also

sets forth special procedures for eligible

taxpayers to show additional tax due or

make adequate disclosure with respect

to an item or a position on a previously

filed return to avoid imposition of the

accuracy-related penalties described in §§

6662(b)(1) and 6662(b)(2) of the Internal

Revenue Code (Code).

SECTION 2. BACKGROUND

.01 Section 6662(b)(1) and (2) impose

an accuracy-related penalty equal to

20 percent of the portion of any underpayment that is attributable to (1) negligence

or disregard of rules or regulations or (2)

any substantial understatement of income

tax.

.02 Section 1.6662-3(c) provides, generally, that no penalty for disregard of

RA Lists also may include changes in requirements that were first effective in a prior year that were not included on a prior RA List under certain circumstances, such as changes in requirements that were issued or enacted after the prior year’s RA List was prepared.

4

For example, certain provisions of Division O of the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94, 133 Stat. 2534 (2019), known as the Setting Every Community Up for

Retirement Enhancement Act of 2019 (SECURE Act), are already effective, but have not been included on an RA List. As explained in Notice 2022-33, 2022-34 IRB 147 (guidance that, in

part, extends the deadlines for amending a retirement plan to reflect provisions of the SECURE Act), it is anticipated that (1) guidance will be issued with respect to certain SECURE Act

provisions and (2) the guidance and SECURE Act provisions requiring plan amendments will appear on a future RA List.

5

The remedial amendment period and plan amendment deadline for discretionary changes to the terms of an individually designed qualified or section 403(b) plan are governed by sections

5.03(1)(b), 5.03(2)(b), and 6.02 of Rev. Proc. 2022-40. These deadlines for discretionary changes are not affected by the inclusion of a change in requirements on an RA List.

6

The 2021 RA List included entries for section 9704 of the American Rescue Plan Act of 2021 (ARP) and Notice 2021-38, 2021-30 IRB 155, relating to special financial assistance for certain

eligible multiemployer plans. Under these provisions, the sponsor of an eligible multiemployer plan has the discretion, during a period of several years beginning in 2021, to either apply for

or not apply for special financial assistance pursuant to section 9704 of the ARP. If the plan sponsor (1) exercises its discretion to apply for special financial assistance, (2) had previously

suspended plan benefits pursuant to section 432(e)(9) of the Code or section 4245(a) of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 829, as amended, and

(3) received special financial assistance, then the sponsor is required to amend the plan to provide for reinstatement of the suspended benefits and for make-up payments, in accordance with

Notice 2021-38. Beginning in 2022, an amendment made pursuant to section 9704 of the ARP will be treated as a discretionary amendment, and the plan amendment deadlines applicable

to discretionary amendments as set forth in Rev. Proc. 2022-40 will apply. Accordingly, for a sponsor of an eligible multiemployer plan that commences payment of previously suspended

benefits and make-up payments on account of being granted special financial assistance after 2021, the deadline for adopting the amendment to provide for these payments is the later of (1)

the amendment deadline specified in the 2021 RA List that applies to plans eligible for special financial assistance (that is, December 31, 2023), or (2) the amendment deadline that would

apply if the amendment were a discretionary amendment (that is, the end of the plan year in which the plan amendment is operationally put into effect, through the commencement of these

payments by the plan).

3

Bulletin No. 2022–49

507

December 5, 2022

rules or regulations will be imposed on

any underpayment attributable to an item

or position that is adequately disclosed,

has a reasonable basis and, for penalties

attributable to disregard of a regulation,

represents a good faith challenge to the

validity of the regulation.

.03 Section 6662(d)(1) generally

defines “substantial understatement” of

income tax to be an understatement for the

taxable year that exceeds the greater of 10

percent of the tax required to be shown on

the return or $5,000 (or, in the case of a

corporation other than an S corporation or

a personal holding company, exceeds the

lesser of (1) 10 percent of the tax required

to be shown on the return (or, if greater,

$10,000) or (2) $10 million).

.04 In the case of a taxpayer who

claims any deduction allowed under §

199A of the Code for the taxable year, an

understatement is substantial if it exceeds

the greater of 5 percent of the tax required

to be shown on the return or $5,000.

.05 Under §§ 6662(d)(2)(B)(ii) and

1.6662-4(e), the tax treatment of an item

(other than a tax shelter item or an item

attributable to a multiple-party financing

transaction if such treatment does not

clearly reflect the income of the corporation) for which the taxpayer had a reasonable basis, that is properly substantiated

and adequately disclosed, and for which

the taxpayer kept adequate books and

records is not taken into account in computing the amount of an understatement of

income tax for purposes of the substantial

understatement penalty.

.06 Section 1.6662-7 provides that the

accuracy-related penalty for disregarding

rules or regulations or for a substantial

understatement of income tax may be

avoided by disclosure of a return position

only if the position has at least a reasonable basis.

.07 Sections 1.6662-3(c) and 1.66624(f) provide the methods for making adequate disclosures for purposes of (1) the

penalty for disregard of rules or regulations, and (2) the substantial understatement penalty, respectively. These methods

include attaching a properly completed

Form 8275, Disclosure Statement, to an

original return or to a qualified amended

return in the case of an item or position

other than one that is contrary to a regulation. In the case of a position contrary

December 5, 2022

to a regulation, disclosure must be made

on Form 8275-R, Regulation Disclosure

Statement.

.08 Section 1.6664-2(c)(3) generally

provides, among other deadlines, that

for purposes of the accuracy-related penalty, a “qualified amended return” is an

amended return, or request for an administrative adjustment under § 6227, that is

filed after the due date of the return for

the taxable year (including extensions)

and before the earliest of (1) the date

on which the Internal Revenue Service

(IRS) first contacts the taxpayer concerning an examination of the return or

(2) for certain pass-through items, the

date on which the IRS first contacts the

pass-through entity in connection with

an examination of the return to which the

pass-through item relates. In addition,

§ 1.6664-2(c)(4)(ii) provides that the

Commissioner may prescribe by revenue

procedure the manner in which the rules

governing qualified amended returns

apply to particular classes of taxpayers.

.09 Qualified amended returns are

intended to encourage voluntary compliance by permitting taxpayers to avoid

accuracy-related penalties by filing an

amended return before the IRS begins

an examination of the taxpayer or the

promoter of a transaction in which the

taxpayer participated. See T.D. 9186,

2005-13 I.R.B. 790 (March 2, 2005) (providing additional circumstances that end

the period within which a taxpayer may

file an amended return that constitutes a

qualified amended return).

.10 To discourage taxpayers from forgoing or delaying the filing of amended

returns unless or until the IRS has taken

steps to identify taxpayers who filed

returns with underpayments, § 1.66642(c)(3) sets out events that operate as

deadlines after which a taxpayer may not

avoid accuracy-related penalties by filing

an amended return. See T.D. 9186.

.11 Revenue Procedure 94-69 set forth

special procedures for taxpayers that

were subject to audit each year under the

now-discontinued Coordinated Examination Program (CEP). After elimination of

the CEP in 2000, Rev. Proc. 94-69 was

applied to taxpayers subject to audit under

the Coordinated Industry Case Program

(CIC). Taxpayers in the CEP and CIC programs were unique in that, unlike most

508

taxpayers, they were generally subject to

a continuous examination covering each

year’s return; and as such, amendments

to filed returns were best addressed as the

examination of a particular year started

through a disclosure to the examination

team in lieu of filing a regular qualified

amended return.

.12 The special procedures set forth in

Rev. Proc. 94-69 allowed taxpayers subject to the CEP and CIC to show additional tax due or to make adequate disclosures with respect to an item or a position

and thereby avoid the imposition of accuracy-related penalties under §§ 6662(b)(1)

and 6662(b)(2) of the Code. In general, the

special procedures allowed these taxpayers to avoid or reduce the accuracy-related

penalties to the extent that items resulting in additional tax were reported, or a

position contrary to a rule was adequately

disclosed, in a written statement furnished

to the IRS within a 15-day window beginning with the IRS’s written request for

such statement.

.13 In 2019, the IRS replaced the CIC

Program with the Large Corporate Compliance Program (LCC) effective for

audits for taxable years 2017 and later. See

IRS News Release: IR-2019-95 (May 16,

2019), LB&I Announces Large Corporate

Compliance Program. Under the LCC,

large corporate taxpayers are selected for

examination based on their risk profiles

and data analytics. Large corporate taxpayers are no longer subject to planned

continuous examinations.

.14 The IRS also implemented the

Large Partnership Compliance Program

(LPC) to address the IRS’s compliance

approach to large partnerships. See Interim

Guidance Memo: LB&I-04-1021-0017

(October 21, 2021), Interim Guidance on

Implementation of the Large Partnership

Compliance Pilot Program.

.15 On May 21, 2019, the IRS

announced that, as a transition, Rev. Proc.

94-69 would continue to apply to any taxpayer that was both in the CIC (with an

open CIC examination as of May 2019

for taxable year 2016 and earlier taxable

years) and the LCC (for taxable year 2017

and later taxable years). See Interim Guidance Memo: LB&I-04-0419-004 (May 21,

2019), Interim Guidance on Implementation of the Large Corporate Compliance

(LCC) Program.

Bulletin No. 2022–49

.16 On August 19, 2020, the IRS

requested comments concerning obsoleting Rev. Proc. 94-69. See IRS Statements

and Announcements, IRS Seeks Comments

on Revenue Procedure 94-69 (Aug. 19,

2020), at https://www.irs.gov/newsroom/

irs-seeks-comments-on-revenue-procedure-94-69. The comments received contended that both large corporate taxpayers

and the IRS have benefited from using

Rev. Proc. 94-69 to allow those taxpayers to disclose errors on their returns at

the start of an audit. The IRS has determined that for a subset of large corporate

taxpayers and large partnerships whose

tax posture is likely to result in near-annual examinations, special procedures are

appropriate for disclosure of errors on a

return or items that may result in an underpayment but have a reasonable basis.

.17 The procedures set forth in this

revenue procedure allow eligible taxpayers to avoid the accuracy-related penalty

described in §§ 6662(b)(1) and 6662(b)(2)

to the extent that the taxpayer reports errors

resulting in additional tax or adequately

discloses the tax treatment of an item that

has a reasonable basis as provided in section 4 of this revenue procedure.

.18 The special procedures set forth in

this revenue procedure are intended for

the disclosure of errors and omissions

that were not known at the time of filing

a return.

SECTION 3. SCOPE

.01 Eligible taxpayers. The special procedures set forth in this revenue procedure

are available to eligible taxpayers. An

“eligible taxpayer” means any taxpayer

selected for examination under the LCC

(or successor program) if, on the date on

which the IRS first contacts the taxpayer

concerning an examination of an income

tax return, at least four of the taxpayer’s

income tax returns for the five taxable

years preceding the taxable year at issue

are (or were) under examination under the

LCC, the CIC, or a successor program. An

eligible taxpayer also means any partnership selected for examination under the

LPC (or successor program) if, on the date

on which the IRS first contacts the partnership concerning an examination of a

return of partnership income, at least four

of the partnership’s returns for the five

Bulletin No. 2022–49

taxable years preceding the taxable year

at issue are (or were) under examination

under the LPC (or successor program).

Taxpayers selected for examination under

the LCC or the LPC will be notified by the

IRS if they are eligible taxpayers under

this revenue procedure.

.02 Procedures for ineligible taxpayers. Taxpayers not eligible for, or making

disclosures beyond the scope of, the special procedures set forth in this revenue

procedure have the opportunity to utilize

existing methods to avoid the imposition

of penalties, including by filing a qualified

amended return as described in and satisfying the requirements of § 1.6664-2(c)

(3), or by adequately disclosing the position on a properly completed Form 8275,

Form 8275-R, or Schedule UTP, Uncertain Tax Position Statement, filed with a

return and satisfying the requirements of

§1.6662-3(c).

SECTION 4. QUALIFIED AMENDED

RETURN ON FORM 15307

.01 For purposes of avoiding the imposition of the penalty under § 6662(b)(1)

for negligence or disregard of rules or regulations, and the substantial understatement penalty under § 6662(b)(2), a properly completed Form 15307, Post-Filing

Disclosure for Specified Large Business

Taxpayers (or successor form), is treated

as a qualified amended return with respect

to a particular taxable year of an eligible taxpayer if an eligible taxpayer furnished it to the IRS personnel conducting

the examination after the tax return with

respect to the particular taxable year has

been filed but no later than 30 days (or a

later date agreed to in writing by the IRS

with respect to a particular taxable year)

from the date of a written request to the

taxpayer that Form 15307 be furnished

with respect to that taxable year.

.02 The taxpayer must include a

description of all items that would result

in one or more adjustments with respect

to a particular taxable year if the taxpayer

filed a properly completed amended return

with respect to that taxable year, or request

for an administrative adjustment under §

6227. The description of an item is adequate if it consists of information that reasonably may be expected to apprise the

IRS of the identity of the item, its amount,

509

and the nature of the controversy or potential controversy. Each disclosed adjustment with respect to the particular taxable

year must be stated separately.

.03 The taxpayer need not include a

recomputation of total tax liability with

respect to the particular taxable year with

Form 15307. Similarly, if an item automatically affects another item with respect

to that taxable year, the Form 15307 need

not include a recomputation of the affected

item. The taxpayer is required to include a

computation of the increase (or decrease)

in taxable income, or the increase (or

decrease) to tax credits if the disclosure

relates to tax credits, with respect to each

item disclosed on the Form 15307.

.04 The taxpayer may also disclose

information for purposes of establishing

the reasonable basis of a position even

though the taxpayer does not report any

items that would result in adjustments

with respect to the particular taxable year.

.05 Any additional tax liability with

respect to the particular taxable year

resulting from the adjustments identified

in a written statement described in sections

4.01 through 4.03 of this revenue procedure that is agreed at the conclusion of the

examination will be treated as an additional amount of tax shown on a qualified

amended return for purposes of determining whether there is an underpayment of

tax with respect to that taxable year subject to penalty under §§ 6662(b)(1) and

6662(b)(2). Any additional tax liability

resulting from adjustments identified in

the written statement with respect to a particular taxable year that is unagreed at the

conclusion of the examination (1) will be

subject to the deficiency procedures prescribed by §§ 6212 and 6213, or the partnership audit procedures prescribed by

§§ 6221 through 6241, as applicable; (2)

will not reduce the underpayment subject

to penalty under § 6662(b)(1) for negligence; and (3) will not reduce the penalty

for substantial understatement of income

tax unless there was a reasonable basis for

the taxpayer’s tax treatment of the item

identified in the written statement.

.06 Failure to Provide Adequate

Disclosure.

(1) A disclosure based on incomplete

information, unreasonable assumptions,

or otherwise not in conformity with the

requirements of this revenue procedure

December 5, 2022

and the Form 15307 furnished to the

IRS with respect to a particular taxable

year will be considered an inadequate

disclosure.

(2) A taxpayer deemed to have made

an inadequate disclosure will not receive

penalty protection under this process with

respect to the item or items inadequately

disclosed with respect to the particular

taxable year. The IRS will inform the taxpayer of any determination that a disclosure is inadequate.

SECTION 5. EFFECT ON OTHER

DOCUMENTS

Rev. Proc. 94-69 is obsoleted. “Rev.

Proc. 2022-39” should be substituted for

“Rev. Proc. 94-69” in any other revenue

procedure that refers to Rev. Proc. 94-69.

December 5, 2022

SECTION 6. EFFECTIVE DATE

.01 This revenue procedure is effective

for examinations of eligible taxpayers that

begin after November 16, 2022, the date

this revenue procedure was released to the

public.

.02 The transition relief described in

section 2.15 of this revenue procedure continues to apply to the taxpayers eligible for

such relief with respect to examinations of

taxable year 2020 and earlier years. The

transition relief described in section 2.15

of this revenue procedure does not apply

with respect to the examination of taxable

year 2021 and later years. For examinations of taxable year 2021 and later years,

taxpayers who were eligible for the transition relief described in section 2.15 of

this revenue procedure can only utilize the

510

special procedures set forth in this revenue procedure if the taxpayer meets the

eligibility requirements described in section 3 of this revenue procedure.

SECTION 7. DRAFTING

INFORMATION

The principal author of this revenue

procedure is Jessica Chase of the Office

of the Associate Chief Counsel (Procedure

and Administration). For further information regarding this revenue procedure,

contact Ms. Chase at (202) 317-6845 (not

a toll-free number).

Bulletin No. 2022–49

Part IV

Notice of Proposed

Rulemaking

FOR FURTHER INFORMATION

CONTACT: Concerning §§1.901-2 and

1.903-1, Teisha Ruggiero, (646) 2598116; concerning §1.861-20, Suzanne

Walsh, (202) 317-4908; concerning submissions of comments and requests for

a public hearing, Regina Johnson, (202)

317-6901 (not toll-free numbers) or by

sending an email to publichearings@irs.

gov (preferred).

This document contains proposed

regulations (the “proposed regulations”)

addressing the following issues: (1) the

definition of a reattribution asset for purposes of allocating and apportioning foreign income taxes; (2) the application of

the cost recovery requirement; and (3) the

application of the source-based attribution

requirement to withholding taxes on certain royalty payments.

AGENCY: Internal Revenue Service

(IRS), Treasury.

SUPPLEMENTARY INFORMATION:

Explanation of Provisions

ACTION: Notice of proposed rulemaking.

Background

SUMMARY: This document contains

proposed regulations relating to the foreign tax credit, including guidance with

respect to the reattribution asset rule for

purposes of allocating and apportioning

foreign taxes, the cost recovery requirement, and the attribution rule for withholding tax on royalty payments.

On December 17, 2019, the Treasury

Department and the IRS published proposed regulations (REG-105495-19)

addressing changes made by the Tax Cuts

and Jobs Act (Pub. L. 115-97, 131 Stat.

2054 (2017)) (the “TCJA”) and other

related foreign tax credit rules in the Federal Register (84 FR 69124) (the “2019

Foreign Tax Credit (“FTC”) proposed

regulations”). Correcting amendments

to the 2019 FTC proposed regulations

were published in the Federal Register

on May 15, 2020 (85 FR 29368). The

2019 FTC proposed regulations were

finalized as part of TD 9922, published

in the Federal Register (85 FR 71998)

on November 12, 2020 (the “2020 FTC

final regulations”). On the same date,

the Treasury Department and the IRS

published proposed regulations (REG101657-20) in the Federal Register (85

FR 72078) (the “2020 FTC proposed regulations”). The 2020 FTC proposed regulations addressed changes made by the

TCJA and other foreign tax credit issues.

Correcting amendments to the 2020 FTC

final regulations were published in the

Federal Register on October 1, 2021 (86

FR 54367). A public hearing on the 2020

FTC proposed regulations was held on

April 7, 2021. The 2020 FTC proposed

regulations were finalized in TD 9959,

published in the Federal Register (87

FR 276) on January 4, 2022 (the “2022

FTC final regulations”). Correcting

amendments to the 2022 FTC final regulations were published in the Federal

Register on July 27, 2022 (87 FR 45018

and 87 FR 45021).

I. Allocation and Apportionment of

Foreign Income Taxes

Guidance Related to the

Foreign Tax Credit

REG-112096-22

DATES: Written or electronic comments

and requests for a public hearing must be

received by January 23, 2023.

ADDRESSES: Commenters are strongly

encouraged to submit public comments

electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS

and REG-112096-22) by following the

online instructions for submitting comments. Once submitted to the Federal

eRulemaking Portal, comments cannot

be edited or withdrawn. The Department

of the Treasury (the “Treasury Department”) and the Internal Revenue Service (the “IRS”) will publish for public

availability any comment submitted

electronically, and on paper, to its public docket. Send hard copy submissions

to: CC:PA:LPD:PR (REG-112096-22),

Room 5203, Internal Revenue Service,

PO Box 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered Monday through

Friday between the hours of 8 a.m. and

4 p.m. to CC:PA:LPD:PR (REG-11209622), Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue, NW,

Washington, DC 20224.

Bulletin No. 2022–49

511

A. In general

Section 1.861-20 provides rules for

allocating and apportioning foreign

income taxes to the statutory and residual groupings, including the categories

described in section 904 that apply for

purposes of calculating a taxpayer’s foreign tax credit limitation. In general,

§1.861-20 operates by first assigning the

foreign gross income on which the foreign

income tax is imposed to statutory and

residual groupings based upon the character of the item of U.S. gross income that

corresponds to the foreign gross income

(the “corresponding U.S. item”). §1.86120(c) and (d). Foreign income tax expense

is allocated to the grouping to which the

foreign gross income is assigned, and if

foreign gross income is assigned to more

than one grouping, deductions computed

under foreign law are allocated and apportioned to the groupings and foreign tax

expense is apportioned among the groupings based upon foreign taxable income in

the groupings. §1.861-20(e) and (f).

The 2022 FTC final regulations provide

rules for allocating and apportioning foreign income tax arising from a disregarded

payment. Foreign gross income included

by reason of the receipt of a disregarded

payment has no corresponding U.S. item

because Federal income tax law does not

give effect to the payment as a receipt of

gross income. Section 1.861-20(d)(3)(v)

therefore characterizes the disregarded

payment under Federal income tax law

for purposes of assigning this foreign

December 5, 2022

gross income to the statutory and residual

groupings. These rules treat the portion of

a disregarded payment, if any, that causes

U.S. gross income of the payor taxable

unit to be reattributed under either §1.9044(f)(2) (in the case of a taxpayer that is

an individual or domestic corporation)

or §1.951A-2(c)(7)(ii)(B) (in the case of

a taxpayer that is a foreign corporation)

to the recipient taxable unit as a “reattribution payment.” §1.861-20(d)(3)(v)(E)

(7); see also part I.B of this Explanation

of Provisions for a description of the reattribution payment rules. The excess of a

disregarded payment over the portion that

is a reattribution payment is treated either

as a contribution from one taxable unit

to another taxable unit owned by the first

taxable unit, or as a remittance of a taxable

unit’s current and accumulated earnings.

§1.861-20(d)(3)(v)(E)(2) and (8). Section

1.861-20(d)(3)(v)(D) provides a special

rule for characterizing disregarded payments that are made in exchange for property and are not reattribution payments.

B. Reattribution payments, remittances,

and the reattribution of assets

Section 1.861-20(d)(3)(v)(B) assigns

foreign gross income from a disregarded

payment that is a reattribution payment

to the same statutory and residual grouping as the U.S. gross income that is reattributed to the recipient taxable unit. This

assignment occurs before taking into

account any reattribution payments made

by the recipient taxable unit.

Foreign gross income included by reason of a remittance is assigned to the statutory and residual groupings by reference

to the proportion of the tax book value of

the assets of the remitting taxable unit in

the groupings as assigned for purposes

of apportioning interest expense. §1.86120(d)(3)(v)(C)(1)(i). In other words, the

character of the assets of the remitting

taxable unit is a proxy for the character of

the current and accumulated earnings out

of which the remittance is made. To more

accurately reflect the character of the

remitting taxable unit’s earnings, the reattribution asset rule in §1.861-20(d)(3)(v)

(C)(1)(ii) requires that a reattribution of

income from one taxable unit (payor taxable unit) to another taxable unit (recipient taxable unit) result in a concomitant

December 5, 2022

reattribution of the tax book value of the

assets of the payor taxable unit that generated the reattributed income (“reattribution assets”) from the payor taxable unit to

the recipient taxable unit.

After further study, the Treasury

Department and the IRS have concluded

that the reattribution asset rule is not

needed for allocating and apportioning

foreign tax on a remittance in the case of

disregarded property sales, and particularly with respect to disregarded sales of

inventory property. For example, consider

a domestic corporation that directly owns

two taxable units that are disregarded for

U.S. Federal income tax purposes: DE1,

which manufactures inventory property, and DE2, which distributes inventory property to unrelated customers.

DE1 sells the manufactured inventory to

DE2 in exchange for a disregarded payment. The disregarded payment that DE1

receives for the sale of inventory property

to DE2 becomes a reattribution payment

when DE2 on-sells the inventory property

and generates gain in a transaction that is

regarded for U.S. tax purposes. Accordingly, gain from the sale of the inventory is

reattributed from the distributing taxable

unit to the manufacturing taxable unit, and

a portion of the distributing taxable unit’s

assets is reattributed to the manufacturing taxable unit. Although the assets of

the manufacturing taxable unit contributed to the production of the income of

both taxable units, the tax book value of

the manufacturing taxable unit’s assets is

not reattributed to the distributing taxable

unit. As a result, the reattribution asset

rule, by reattributing assets only from the

distributor taxable unit to the manufacturing taxable unit, does not more accurately

balance among the taxable units all of the

assets that produced the gain from the

inventory sale. The reattribution of assets

instead changes the ratios of the assets

considered held by the taxable units such

that a greater percentage of the distributor taxable unit’s assets consist of non-inventory assets (for example, cash), and a

greater percentage of the manufacturing

taxable unit’s assets consist of inventory.

Accordingly, proposed §1.861-20(d)

(3)(v)(E)(6) retains the general definition

of reattribution asset but excludes any

portion of the tax book value of property

transferred in a disregarded sale from

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being attributed back to the selling taxable unit. Comments are requested on

whether similar revisions should be made

to the reattribution asset rule in situations

other than disregarded property sales.

Comments are further requested on other

issues related to the allocation and apportionment of foreign income taxes to disregarded payments, which may be considered in future guidance projects.

II. Creditability of Foreign Taxes Under

Sections 901 and 903

A. In general

Section 901 allows a credit for foreign

income, war profits, and excess profits

taxes, and section 903 provides that such

taxes include a tax in lieu of a generally-imposed foreign income, war profits,

or excess profits tax (collectively, “foreign

income taxes”). Before its amendment by

the 2022 FTC final regulations, §1.9012(a)(1) provided that a foreign levy was

an income tax if and only if (1) it was a

tax, and (2) the predominant character of

that tax was that of an income tax in the

U.S. sense. Under former §1.901-2(a)(3),

the predominant character of a foreign tax

was that of an income tax in the U.S. sense

if the tax (1) was likely to reach net gain

in the normal circumstances in which it

applied (the “net gain requirement”), and

(2) was not a “soak-up” tax. To satisfy the

net gain requirement, a foreign tax needed

to meet the realization, gross receipts,

and net income requirements. See former

§1.901-2(b).

The 2022 FTC final regulations revised

the net gain requirement to better align

the regulatory tests with principles in

the Internal Revenue Code (“Code”) for

determining the base of a U.S. income tax,

as well as to simplify and clarify the application of these tests. The revisions made

by the 2022 FTC final regulations ensure

that a foreign tax is a creditable net income

tax only if the determination of the foreign

tax base conforms in essential respects to

the determination of taxable income under

the Code. In particular, the 2022 FTC final

regulations limit the role of the predominant character analysis generally required

under the prior regulations, which often

required empirical analysis, in determining whether a foreign tax meets each of

Bulletin No. 2022–49

the net gain requirements. Under the 2022

FTC final regulations, a foreign tax satisfies the net gain requirement only if the tax

satisfies the realization requirement, the

gross receipts requirement, the cost recovery requirement (formerly the net income

requirement), and the attribution requirement. In addition, the 2022 FTC final regulations provide that the determination of

whether a foreign tax satisfies each component of the net gain requirement is generally based on the terms of the foreign tax

law governing the computation of the tax

base and not based on empirical analysis.

§1.901-2(b)(1). The 2022 FTC final regulations also maintained the long-standing

all-or-nothing rule; that is, a foreign tax

either is or is not a foreign income tax, in

its entirety, for all persons subject to the

foreign tax. §1.901-2(a)(1)(i).

B. Cost recovery requirement

1. Application under 2022 FTC final

regulations

Consistent with the net income requirement in former §1.901-2(b)(4), the 2022

FTC final regulations require, under the

cost recovery requirement, that the base of

a foreign tax permits the recovery of significant costs and expenses attributable,

under reasonable principles, to the gross

receipts included in the tax base. §1.9012(b)(4)(i)(A). However, to ensure that a

foreign tax is a foreign income tax only if

the foreign tax allows for the recovery of

costs and expenses in a manner that conforms in essential respects to the determination of taxable income under the Code,

and to limit the empirical analysis that

would otherwise be required, the 2022

FTC final regulations modified the cost

recovery requirement in several respects.

For example, the 2022 FTC final regulations provide a list of costs and expenses

that are always treated as significant (costs

and expenses related to capital expenditures, interest, rents, royalties, wages or

other payments for services, and research

and experimentation). §1.901-2(b)(4)(i)

(C)(1). Whether other costs and expenses

are significant continues to be determined

under an empirical analysis; that is, based

on whether, for all taxpayers in the aggregate to which the foreign tax applies,

the item of cost or expense constitutes a

Bulletin No. 2022–49

significant portion of the taxpayers’ total

costs and expenses. Id.

However, the 2022 FTC final regulations also recognized that, similar to the

United States, foreign countries limit the

recovery of certain significant costs and

expenses. As a result, §1.901-2(b)(4)

(i)(C)(1) provides that foreign tax law

is considered to permit the recovery of

significant costs and expenses, even if

recovery of certain significant costs and

expenses is disallowed in whole or in part,

if such disallowance is consistent with

any principle underlying the disallowances required under the Code (“principles-based exception”).

2. Response to the 2022 FTC final

regulations

Following the publication of the

2022 FTC final regulations, the Treasury

Department and the IRS have received a

number of questions regarding the application of the cost recovery requirement as

well as requests to modify the requirement.

In particular, taxpayers and other stakeholders identified a number of foreign tax

laws that impose disallowances or other

limitations on the recovery of costs and

expenses that are not clearly matched to

a principle underlying a similar disallowance under the Code, even though, in the

view of these stakeholders, the foreign tax

as a whole is consistent with a net income

tax in the U.S. sense. Moreover, taxpayers

noted that, in some instances, it was difficult to determine the principle underlying

the foreign disallowance because of a lack

of information from the foreign country.

The Treasury Department and the IRS

agree that, in certain instances, the cost

recovery requirement should be satisfied even if the foreign tax law contains

a disallowance or other limitation on the

recovery of a particular cost or expense

that may not reflect a specific principle

underlying a particular disallowance in

the Code. The income tax provisions of

the Code contain a number of disallowances and other limitations on the deductibility of certain costs and expenses. In

some instances, the principle or principles behind the limitation is clear, either

because the motivation is articulated in

legislative history or because it is possible

to determine the principle from the terms

513

of the limitation itself. However, the principles underlying other limitations may be

less apparent, making it difficult to determine whether a foreign limitation on the

deductibility of certain costs and expenses

is consistent with any principle underlying

the disallowances under the Code.

As explained in the preamble to the

2022 FTC final regulations, section 901

allows credits for foreign taxes that are

income taxes in the U.S. sense, and this

standard is met if there is substantial conformity in the principles used to calculate

the foreign tax base and the U.S. tax base.

Complete conformity between the rules

for determining the foreign tax base and

the U.S. tax base is not required. Accordingly, the proposed regulations provide

additional guidance for evaluating disallowances under foreign tax law that may

not mirror the expense disallowance rules

in the Code, but that nonetheless do not

prevent the foreign tax from being a tax

imposed on net income.

Proposed §1.901-2(b)(4)(i) retains the

general cost recovery requirement under

the 2022 FTC final regulations, but provides that the relevant foreign tax law need

only permit recovery of substantially all

of each item of significant cost or expense.

Consistent with the general approach of

the 2022 FTC final regulations, whether

a foreign tax permits recovery of substantially all of each item of significant cost

or expense is determined based solely on

the terms of the foreign tax law. Proposed

§1.901-2(b)(4)(i)(C)(1).

Proposed §1.901-2(b)(4)(i)(C)(2) provides a safe harbor for purposes of applying this requirement. Under the safe harbor, a disallowance of a stated portion of

an item (or multiple items) of significant

cost or expense does not prevent a foreign tax from satisfying the cost recovery

requirement if the portion of the item (or

items) that is disallowed does not exceed

25 percent. This safe harbor also permits

the foreign tax law to cap deductions of a

single item of significant cost or expense

or multiple items that relate to a single

category of per se significant costs and

expenses described in proposed §1.9012(b)(4)(i)(B)(2) so long as the cap, based

solely on the terms of the foreign tax

law, is not less than 15 percent of gross

receipts, gross income, or a similar measure, or in the case of a cap based on a

December 5, 2022

percentage of taxable income, or a similar measure, the cap is not less than 30

percent. A foreign law limitation that caps

deductions of multiple items that relate to

different categories of per se significant

costs and expenses at a stated percentage

(for example, a cap on the deduction of all

interest and royalties, combined, at 15 percent of gross receipts), or that caps deductions of multiple items of significant costs

or expense that are significant under proposed §1.901-2(b)(4)(i)(B)(1) at a stated

percentage, would not meet the safe harbor. The safe harbor is intended to provide

additional certainty where a foreign tax

law disallowance is in the form of a stated

portion or cap. Taxpayers will not need to

identify a corresponding principle underlying the disallowances required under the

Code for foreign tax law disallowances

that meet the safe harbor. If the foreign

tax law contains a disallowance that is not

within the safe harbor, and that otherwise

prevents the recovery of substantially all

of an item of significant cost or expense,

then the limitation would be examined

under the principles-based exception from

the 2022 FTC final regulations, retained in

proposed §1.901-2(b)(4)(i)(F)(1), which

permits more substantial disallowances

(including complete disallowances) of an

item of significant cost or expense that

are consistent with any principle underlying the disallowances required under

the Code. The proposed regulations make

additional clarifications to this rule, to provide that the principle must be reflected

in a disallowance within the income tax

provisions of the Code, and if the disallowance addresses a non-tax public policy

concern, then such concern must be similar to the non-tax public policy concerns

reflected in the Code. In addition, the proposed regulations remove the example of

a limit on recovery of interest based upon

a measure of taxable income from this

principles-based exception because such

a limitation would generally be covered

by the safe harbor. See proposed §1.9012(b)(4)(iv)(H) (Example 8). If the foreign

law disallowance does not meet the safe

harbor or otherwise permit recovery of

substantially all of each item of significant cost or expense, the principles-based

exception would be relevant for determining whether the foreign tax could satisfy

the cost recovery requirement.

December 5, 2022

Additionally, proposed §1.901-2(b)(4)

(iv)(F) through (J) provide new examples illustrating the application of the cost

recovery requirement. The proposed regulations also reorganize the provisions of

the cost recovery requirement to accommodate the addition of these new provisions, as well as to better reflect the structure of the requirement.

C. Attribution requirement for royalty

payments

1. Application under 2022 FTC final

regulations

The 2022 FTC final regulations added

an attribution requirement in §1.901-2(b)

(5) as an element of the net gain requirement to require that a foreign tax conform to the concepts of taxing jurisdiction

reflected in the Code that define an income

tax in the U.S. sense. The purpose of the

attribution requirement is to allow a credit

for a foreign tax only if the country imposing the tax has sufficient nexus to the taxpayer’s activities or investment of capital

that generates the income included in the

tax base. This result is consistent with

the statutory purpose of the foreign tax

credit to relieve double taxation of income

through the United States ceding its own

taxing rights only where the foreign country has the primary right to tax the income.

With respect to a foreign levy imposed

on nonresident taxpayers, the attribution

requirement limits the scope of gross

receipts and costs included in the base

of a foreign tax to those that satisfy the

activities-based attribution, source-based

attribution, or property-based attribution

tests. §1.901-2(b)(5)(i). These tests are

consistent with U.S. income tax principles

reflected in the Code’s provisions that only

tax foreign persons’ income that is effectively connected with a U.S. trade or business or attributable to U.S. real property,

or that is fixed or determinable annual or

periodical (FDAP) income sourced in the

United States.

Under the source-based attribution

requirement in §1.901-2(b)(5)(i)(B), a

foreign tax imposed on the nonresident’s

income on the basis of source meets the

attribution requirement only if the foreign

tax law’s sourcing rules are reasonably

similar to the sourcing rules that apply

514

for Federal income tax purposes. In the

case of gross income arising from royalties, §1.901-2(b)(5)(i)(B)(2) provides that

the foreign tax law must source royalties

based on the place of use of, or the right

to use, the intangible property, consistent with how the Code sources royalty

income.

For foreign taxes imposed in lieu of an

income tax, the 2022 FTC final regulations

also modified the substitution requirement

in §1.903-1, including by adding an attribution requirement. Under §1.903-1(c)

(2)(iii), a foreign withholding tax must

meet the source-based attribution requirement in §1.901-2(b)(5)(i)(B) to qualify as

a “covered withholding tax” that may be

creditable as a tax in lieu of an income tax.

Thus, a withholding tax on a royalty payment is creditable only if the foreign tax

law sources royalties based upon the place

of use of, or the right to use, the intangible property, consistent with how the

Code sources royalty income. The 2022

FTC final regulations also maintained

the all-or-nothing rule for the substitution

requirement; that is, a foreign tax either is

or is not a tax in lieu of an income tax,

in its entirety, for all persons subject to

the foreign tax. §1.903-1(b)(1). Accordingly, a withholding tax on royalties that

is imposed on the basis of the residence of

the payor of the royalty is not creditable,

whether or not the relevant intangible

property is in fact used within the territory

of the taxing jurisdiction. §1.903-1(d)(3)

and (4) (Examples 3 and 4).

The determination of whether a foreign levy meets the requirements under

§§1.901-2 and 1.903-1 is made on a levyby-levy basis. Section 1.901-2(d) provides

rules for determining whether one foreign

levy is separate from another foreign

levy. In general, §1.901-2(d)(1)(ii) provides that separate levies are imposed on

particular classes of taxpayers if the tax

base is different for those taxpayers. The

2022 FTC final regulations added a special rule for withholding taxes imposed on

nonresidents that treats each such tax as

a separate levy with respect to each class

of gross income (as listed in section 61)

to which the tax applies. §1.901-2(d)(1)

(iii). This rule allows withholding taxes

that are imposed on classes of income that

are subject to different sourcing rules of

the taxing jurisdiction to be analyzed as

Bulletin No. 2022–49

separate levies under the covered withholding tax requirement in §1.903-1(c)

(2). The 2022 FTC final regulations also

provided that if a foreign country imposes

a withholding tax on two or more subsets

of a separate class of income and a different source rule applies to each subset

of income, then separate levies are considered imposed on each subset of that

separate class of income. §1.901-2(d)(1)

(iii). These special rules reflect the general

principle in §1.901-2(d)(1) that the separate levy determination is based upon U.S.

principles and not whether foreign tax law

imposes the levy or levies pursuant to a

single or separate statutes. The rules also

enable testing the creditability of a withholding tax on a more granular basis. This

approach better reflects the purpose of the

attribution requirement to allow a foreign

tax credit only where, in the U.S. view, the

taxing jurisdiction has the primary right to

tax the income.

2. Response to the 2022 FTC final

regulations

Following the publication of the

2022 FTC final regulations, the Treasury

Department and the IRS received questions regarding the application of the

source-based attribution requirement to

certain royalty withholding taxes. In addition, the Treasury Department and the IRS

received requests (including a petition for

rulemaking) to change the requirement, by

allowing a credit even if a foreign country

sources royalties based on the residence

of the payor or by applying a different

standard.1

As an initial matter, some taxpayers

questioned whether the sourcing rule for

royalties was applied differently than that

for services because §1.901-2(b)(5)(i)(B)

(1) includes a reference to the use of “reasonable principles” for purposes of applying the source-based attribution requirement to a payment for services, while the

equivalent rule in §1.901-2(b)(5)(i)(B)

(2) for royalties does not. Since the introductory text in §1.901-2(b)(5)(i)(B) states

that, in all instances, sourcing rules must

be reasonably similar to the sourcing rules

under the Code, the same standard applies

regardless of whether the relevant payment is for services or for royalties. However, to avoid further confusion, the proposed regulations conform the language

of §1.901-2(b)(5)(i)(B)(1) and (2).

Additionally, the Treasury Department

and the IRS are aware that, in some cases,

a taxpayer may license intangible property

for use solely within the foreign country

in which the licensee is resident, but the

foreign country sources royalties based on

the residence of the payor. In these cases,

notwithstanding the actual use of the

licensed property in the taxing jurisdiction, a credit would not be allowed for the

royalty withholding tax under the sourcebased attribution requirement for royalties in §1.901-2(b)(5)(i)(B). However, in

these cases, the foreign country imposing

tax on the royalty income should, from a

U.S. perspective, have the primary taxing right over the royalty income because

the intangible property giving rise to the

royalty is in fact being used solely in that

foreign country. That is, notwithstanding

the difference in sourcing rules for royalty income, there is complete overlap

between the jurisdiction with the primary

right to tax based on U.S. tax principles

and the taxing rights exercised by the taxing jurisdiction.

The Treasury Department and the

IRS have concluded that it is appropriate to provide a limited exception to the

source-based attribution requirement of

the 2022 FTC final regulations where the

taxpayer can substantiate that a withholding tax is imposed on royalties received

in exchange for the right to use intangible

property solely within the territory of the

taxing jurisdiction. The Treasury Department and the IRS have concluded that it

would be unduly burdensome for both

the taxpayer and the IRS to determine the

place of use of all intangible property on

a country-by-country basis based on each

taxpayer’s facts and circumstances. While

taxpayers may need to determine the place

of use of certain intangible property to

determine whether the royalty income is

U.S. or foreign source, or for other purposes, those determinations generally do

not require taxpayers or the IRS to separately determine the use in a specific foreign country. For this reason, this limited

exception applies only if the taxpayer has

a written license agreement that provides

for the payment of the royalty and that

limits the use of the intangible property

giving rise to the royalty payment to the

territory of the foreign country imposing

the tax.

3. The single-country exception

Reflecting this new limited exception,

proposed §1.903-1(c)(2)(iii) provides that

a tested foreign tax satisfies the sourcebased attribution requirement if the tax

meets either the source-based attribution

requirement in §1.901-2(b)(5)(i)(B) or the

exception in proposed §1.903-1(c)(2)(iii)

(B) (the “single-country exception”).

In general, the single-country exception applies where (1) the income subject

to the tested foreign tax is characterized as

gross royalty income, and (2) the payment

giving rise to such income is made pursuant to a single-country license. Proposed

§1.903-1(c)(2)(iii)(B). Consistent with

§1.901-2(b)(5)(i)(B), proposed §1.9031(c)(2)(iii)(B) provides that foreign tax

law generally applies for purposes of

determining whether the gross income

or gross receipts arising from a transaction are characterized as a royalty, except

in the case of a transaction that is considered the sale of a copyrighted article

under §1.861-18, which is not treated as a

license of intangible property but as a sale

of tangible property.

A payment is made pursuant to a single-country license if the terms of the

written license agreement under which the

payment is made characterize the payment

as a royalty and limit the territory of the

license to the foreign country imposing

the tested foreign tax. Proposed §1.9031(c)(2)(iv)(A). However, a payment (or

The Treasury Department and the IRS received a petition for rulemaking with respect to the attribution requirement as applied to a tax on a resident but declined to engage in rulemaking

on that subject. The Treasury Department and the IRS have determined that the attribution requirement as contained in the 2022 FTC final regulations, including as applied to residents,

is appropriate to ensure that a foreign tax is consistent with the general principles of income taxation reflected in the Code. These principles include not only those related to determining

realization, gross receipts, and cost recovery, but also principles for determining the scope of the items of gross receipts and costs that may be properly taken into account in computing the

tax base on which the foreign tax is imposed.

1

Bulletin No. 2022–49

515

December 5, 2022

portion of a payment) may be treated as

made pursuant to a single-country license

even if the written agreement does not

limit the territory of the license to the foreign country imposing the tax or provides

for payments in addition to those for the

use of intangible property (for example,

for related services), if the agreement separately states the portion (whether as a

specified amount or as a formula) of the

payment subject to the tested foreign tax

that is characterized as a royalty and that

is with respect to the part of the territory of

the license that is solely within the foreign

country imposing the tax. See proposed

§§1.903-1(c)(2)(iv)(B) and (d)(9) (Example 9).

The Treasury Department and the

IRS are aware that, to qualify for the single-country exception, taxpayers may

need to revise existing license agreements.

Additionally, because certain withholding

taxes may remain non-creditable, taxpayers may be incentivized to maximize the

portion of a payment that is made pursuant

to a single-country license. For example,

a taxpayer that receives royalty payments

pursuant to a related-party license agreement that grants the licensee rights to

several different types of intangible property—some of which will be exploited

solely within the taxing jurisdiction and

some outside of the taxing jurisdiction—

may be incentivized to amend the related-party license agreement to separately

state a royalty amount that purports to

qualify for the single-country exception

but that may exceed an amount that, under

the arm’s length principles of section

482 and sourcing principles of section

861, is attributable to the exploitation of

the intangible property within the taxing

jurisdiction. Additionally, taxpayers may

be disincentivized from revising existing

agreements to reflect changes in facts and

circumstances if doing so would decrease

the amount of the royalty that is eligible

for the single-country exception.

To address these concerns, proposed

§1.903-1(c)(2)(iv)(C) provides that a

payment is treated as not made pursuant

to a single-country license if the taxpayer

knows, or has reason to know, that the

required agreement misstates the territory

in which the intangible property is used

or overstates the amount of the royalty

with respect to the part of the territory of

December 5, 2022

the license that is solely within the foreign country imposing the tax. Thus, the

required agreement must reflect the relevant facts and circumstances, as known by

the taxpayer or as would be known by a

reasonably prudent person in the position

of the taxpayer, regarding both the amount

of the relevant royalty and the territory in

which the intellectual property is actually

used.

In general, a taxpayer cannot qualify for the single-country exception

without satisfying the documentation

requirement in proposed §1.903-1(c)

(2)(iv)(D). Under proposed §1.903-1(c)

(2)(iv)(D), the required agreement pursuant to which the qualifying royalty is

paid must be executed no later than the

date on which the royalty is paid. However, recognizing that the single-country

exception is proposed to be applicable

to periods preceding the release of this

notice of proposed rulemaking, a special

transition documentation rule is provided

for royalties paid on or before May 17,

2023. In that case, to satisfy the documentation requirement, the required

agreement must be executed no later than

May 17, 2023 and the agreement must

state (whether in the terms of the agreement or in recitals) that royalties paid on

or before the execution of the agreement

are considered paid pursuant to the terms

of the agreement.

The required agreement must be maintained by the taxpayer and provided to

the IRS within 30 days of a request by

the Commissioner or another period as

agreed between the Commissioner and

the taxpayer. Id. For purposes of the rule,

the term taxpayer includes a partnership

upon which foreign law imposes a tax.

See §1.901-2(f)(4) and (g)(7). Therefore,

if the royalty withholding tax is imposed

at the partnership level, the documentation

required by the proposed regulations must

be maintained by the partnership, even

though the party that claims the credit is

the partner and not the partnership. The

Treasury Department and the IRS request

comments as to whether special rules may

be necessary to address the documentation

requirement in the case of partnerships.

Finally, proposed §1.903-1(d)(3) and

(8) through (11) provide new examples

illustrating the application of the sourcebased attribution rule and single-country

516

exception for covered withholding taxes

on royalties.

4. Separate levy

The proposed regulations also modify the separate levy rule in §1.901-2(d)

(1)(iii) for withholding taxes imposed on

nonresidents. Specifically, §1.901-2(d)

(1)(iii)(B)(3) provides that a withholding

tax that is imposed on a royalty payment

made to a nonresident pursuant to a single-country license is treated as a separate levy from a withholding tax that is

imposed on other royalty payments made

to such nonresident and from any other

withholding taxes imposed on other nonresidents. As with the special separate

levy rule for withholding taxes on different classes of income or different subsets

of income within a class of income, this

rule may result in a foreign withholding

tax being considered a separate levy in

cases where the foreign tax law considers

only a single levy to be imposed. In contrast to a net income tax, this separate levy

rule can be applied to withholding taxes

because withholding taxes on royalties are

imposed on gross income and on a payment-by-payment basis. In addition, as

with the other special levy rules, this separate levy rule better aligns the outcomes

of the test with the purposes of the foreign

tax credit rules, including that of the attribution requirement. The proposed regulations also reorder and reorganize the

paragraphs of proposed §1.901-2(d)(1)

(iii) to accommodate the addition of this

new provision, and to reflect the structure

of the rules more logically.

III. Applicability Dates

In general, except for proposed §1.86120(d)(3)(v)(E)(6), the proposed regulations are proposed to apply to taxable

years ending on or after November 18,

2022. However, once the proposed regulations are finalized, taxpayers may choose

to apply some or all of the final regulations to earlier taxable years, subject to

certain conditions.

Proposed §1.861-20(d)(3)(v)(E)(6) is

proposed to apply to taxable years ending

on or after the date final regulations adopting these rules are filed with the Federal

Register. Taxpayers may choose to apply

Bulletin No. 2022–49

the rules of §1.861-20(d)(3)(v)(E)(6),

once finalized, to taxable years that begin

after December 31, 2019, and end before

the date final regulations adopting these

rules are filed with the Federal Register

provided they apply §1.861-20(d)(3)(v)

(E)(6) consistently to their first taxable

year beginning after December 31, 2019,

and any subsequent taxable year ending

before the date final regulations adopting these rules are filed with the Federal

Register.

Proposed §1.901-2(b)(4)(i) and (iv),

(b)(5)(i)(B)(2), and (d)(1)(iii) and proposed §1.903-1(c)(2) and (d)(3), (4), and

(8) through (11) are proposed to apply

to foreign taxes paid in taxable years

ending on or after November 18, 2022.

Taxpayers may choose to apply the rules

of §1.901-2(b)(4)(i) and (iv), once finalized, for foreign taxes paid in taxable

years beginning on or after December

28, 2021, and ending before November

18, 2022, provided that they consistently

apply those rules to such taxable years.

Taxpayers may also choose to apply the

rules of §§1.901-2(b)(5)(i)(B)(2) and (d)

(1)(iii) and 1.903-1(c)(2) and (d)(3), (4),

and (8) through (11), once finalized, for

foreign taxes paid in taxable years beginning on or after December 28, 2021, and

ending before November 18, 2022, provided that they consistently apply those

rules for such taxable years.

Finally, until the effective date of final

regulations, a taxpayer may rely on all or

part of the proposed regulations, subject

to certain conditions. Specifically, a taxpayer may choose to rely on the provisions addressing the reattribution asset

rule (proposed §1.861-20(d)(3)(v)(E)(6))

for taxable years that begin after December 31, 2019, and end before the effective

date of final regulations adopting these

rules. A taxpayer may also choose to

rely on the provisions addressing the cost

recovery requirement (proposed §1.9012(b)(4)(i) and (iv)) for foreign taxes paid

in taxable years beginning on or after

December 28, 2021, and ending before

the effective date of final regulations

adopting these rules. Finally, a taxpayer

may choose to rely on the provisions

addressing the attribution requirement

for royalty payments (proposed §1.9012(b)(5)(i)(B)(2) and (d)(1)(iii) and proposed §1.903-1(c)(2) and (d)(3), (4), and

Bulletin No. 2022–49

(8) through (11)) for foreign taxes paid

in taxable years beginning on or after

December 28, 2021, and ending before

the effective date of final regulations

adopting these rules.

If a taxpayer chooses to rely on any of

the three portions of the proposed regulations described in the preceding paragraph,

the taxpayer and its related parties, within

the meaning of sections 267(b) (determined without regard to section 267(c)

(3)) and 707(b)(1), must consistently follow all proposed regulations with respect

to that portion for all relevant years until

the effective date of the final regulations

adopting the rules.

Conforming Amendments to Other

Regulations and Guidance

The Treasury Department and the IRS

intend to make conforming amendments

to other regulations, including the cost

recovery rules that are not being revised in

these proposed regulations and the examples in §§1.901-2(b)(4)(iv) and 1.9031(d), upon finalization of the proposed

regulations.

Special Analyses

I. Regulatory Planning and Review

The Administrator of the Office of

Information and Regulatory Affairs

(“OIRA”), Office of Management and

Budget, has determined that this proposed rule is not a significant regulatory

action, as that term is defined in section

3(f) of Executive Order 12866. Therefore, OIRA has not reviewed this proposed rule pursuant to section 6(a)(3)(A)

of Executive Order 12866 and the April

11, 2018, Memorandum of Agreement

between the Treasury Department and

the Office of Management and Budget

(“OMB”).

II. Paperwork Reduction Act

The Paperwork Reduction Act of 1995

(44 U.S.C. 3501-3520) (“PRA”) requires

that a federal agency obtain the approval

of the OMB before collecting information

from the public, whether such collection

of information is mandatory, voluntary, or

required to obtain or retain a benefit.

517

A. Overview

The collection of information in

these proposed regulations is in proposed §1.903-1(c)(2)(iv)(D). As discussed in part II.C.3 of the Explanation

of Provisions, proposed §1.903-1(c)(2)

(iii)(B) provides an exception (the “single-country exception”) to the sourcebased attribution requirement if a taxpayer can substantiate that the payment

on which the royalty withholding tax is

imposed was made pursuant to an agreement that limits the right to use intangible property to the jurisdiction imposing

the tested foreign tax. Proposed §1.9031(c)(2)(iv)(A). The exception applies

only where the taxpayer has a written

license agreement that provides for the

payment of the royalty and that limits

the use of the intangible property giving rise to the royalty payment to the

territory of the foreign country imposing the tax. A payment may also qualify

for the single-country exception if the

agreement separately states the portion

(whether as a specified amount or as a

formula) of the payment subject to the

tested foreign tax that is characterized

as a royalty and that is with respect to

the portion of the territory of the license

that is solely within the foreign country

imposing the tax. Proposed §1.903-1(c)

(2)(iv)(B).

Proposed §1.903-1(c)(2)(iv)(D)

requires taxpayers who claim eligibility

for the exception to provide an agreement

described in proposed §1.903-1(c)(2)(iv)

(A) or (B), as applicable, (the “required

agreement”) within 30 days of a request

by the Commissioner or another period

as agreed between the Commissioner

and the taxpayer. Proposed §1.903-1(c)

(2)(iv)(D) also provides a transition rule

in the case of a royalty paid on or before

May 17, 2023 that requires the required

agreement to be executed no later than

May 17, 2023.

B. Collection of information — Proposed

§1.903-1(c)(2)(iv)(D)

The Treasury Department and the IRS

intend that the information collection

requirement in proposed §1.903-1(c)(2)

(iv)(D) will be set forth in the forms and

instructions identified in Table 1.

December 5, 2022

Table 1. Tax Forms Impacted

Collection of Information

Proposed §1.903-1(c)(2)(iv)(D)

Number of respondents (estimated)

42,0302

Forms to which the information may be attached

Form 1116 and Form 1118

Source: IRS’s Compliance Data Warehouse

The estimate for the number of

impacted filers with respect to the collection of information in proposed §1.9031(c)(2)(iv)(D) is based on the number of

U.S. corporations that filed a return that

had a Form 1118 that reported an amount

of withholding tax on rents, royalties, and

license fees on Schedule B, Part I, column

e; U.S. corporations that filed a return that

had a Form 1118 that reported an amount

of deemed paid taxes and a Form 5471

that reported an amount of gross royalties

and license fees on Schedule C (and thus

may have incurred a withholding tax on

those royalties); and U.S. individuals that

filed a return and had a Form 1116 that

reported an amount of withholding tax on

rents and royalties on Part II, column n.3

This represents an upper bound of potentially affected taxpayers: not all taxpayers

that have reported an amount of royalty

withholding tax paid to a foreign country or that have royalty income on which

they may have paid a withholding tax are

expected to claim a credit for such tax, and

not all taxpayers who claim such a credit

are expected to rely on the single country

exception in proposed §1.903-1(c)(2)(iii)

(B).

The Treasury Department and the IRS

expect that taxpayers subject to the collection of information in proposed §1.9031(c)(2)(iv)(D) will not have a significant

increase in burden (if any) because some

taxpayers may already have existing

license agreements that qualify for the

single-country exception in place for a

variety of tax and non-tax law reasons,

and other taxpayers may not elect to take

advantage of the single-country exception. The reporting burden associated

with this collection of information will

be reflected in future PRA submissions

associated with Form 1118 (OMB control

number 1545-0123), Form 1065 (OMB

control number 1545-0123), and Form

1116 (OMB control numbers 1545-0074

for individuals, and 1545-0121 for estates

and trusts). The collection of information

in proposed §1.903-1(c)(2)(iv)(D) will be

reflected in future Paperwork Reduction

Act submissions that the Treasury Department and the IRS will submit to OMB

for these forms. The current status of the

Paperwork Reduction Act submissions

related to these forms is summarized in

Table 2.

Because the proposed regulations,

including the collection of information

in proposed §1.903-1(c)(2)(iv)(D), are

proposed to apply to taxes paid in taxable

years ending on or after the date the proposed regulations are filed with the Federal Register, the Treasury Department

and the IRS have submitted the collection

of information in proposed §1.903-1(c)(2)

(iv)(D) to the OMB for review in accordance with the Paperwork Reduction Act

and requested a new OMB control number

(the “temporary OMB control number”).

After the rulemaking is finalized, the

information collection contained within

the regulations will be incorporated into

the OMB control numbers described in

Table 2.

Table 2. Status of Current Paperwork Reduction Submissions.

Form

Type of Filer

Form 1116

Trusts & estates

Individual

Business

Form 1118

Commenters are strongly encouraged

to submit public comments electronically.

Comments and recommendations for the

proposed information collection should

be sent to https://www.reginfo.gov/public/do/PRAMain, with electronic copies

emailed to the IRS at pra.comments@

irs.gov (indicate REG-112096-22 on the

Temporary OMB

Control Number

1545-NEW

1545-NEW

1545-NEW

Incorporated into OMB Control

Number(s) after Final Rulemaking

1545-0121

1545-0074

1545-0123

subject line). This particular information collection can be found by selecting

“Currently under Review - Open for Public Comments” then by using the search

function. Comments can also be mailed to

OMB, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington,

DC 20503, with copies mailed to the IRS,

Attn: IRS Reports Clearance Officer,

SE:W:CAR:MP:T:T:SP, Washington, DC

20224. Comments on the collections of

information should be received by January 23, 2023.

The likely respondents associated with

the temporary OMB control number are

The estimated number of respondents in this Table 1 is based on the number of respondents from the 2020 tax year.

As explained in part II.C.3 of the Explanation of Provisions, the collection of information in proposed §1.903-1(c)(2)(iv)(D) also impacts partnerships and S corporations that pay a withholding tax that is imposed at the partnership or S corporation level under foreign law even though it is the partners or S corporation shareholder that claims the credit for those taxes. The

Treasury Department and the IRS lack sufficient data to identify the number of partnerships and S corporations that pay foreign withholding taxes on royalty income. However, the IRS and

Treasury Department do not expect that this will impact the number of affected taxpayers since the partners and shareholders that claim a credit for the royalty withholding tax would be

captured within the Form 1116 and Form 1118 filers.

2

3

December 5, 2022

518

Bulletin No. 2022–49

U.S. persons who pay or accrue foreign

withholding taxes on royalty income.

Estimated total annual reporting burden: 420,300 hours

Estimated average annual burden per

respondent: 10 hours

Estimated number of respondents:

42,030

Estimated frequency of responses:

Annually.

The Treasury Department and the IRS

expect to add the burden for this temporary OMB control number to OMB control numbers 1545-0123, 1545-0074, and

1545-0121 after the final rulemaking. For

1545-0123 and 1545-0074, the Treasury

Department and the IRS estimate burdens

on a taxpayer-type basis rather than a provision-specific basis.

III. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility

Act (5 U.S.C. chapter 6), it is hereby certified that the proposed regulations will not

have a significant economic impact on a

substantial number of small entities within

the meaning of section 601(6) of the Regulatory Flexibility Act.

The proposed regulations provide guidance affecting individuals and corporations

claiming foreign tax credits. The domestic

small business entities that are subject to the

foreign tax credit rules in the Code and in

the proposed regulations are generally those

that operate in a foreign country or that have

income from sources outside of the United

States and pay foreign taxes. The reattribution asset definition in proposed §1.86120(d)(3)(v)(E)(6) applies only to taxable

units that make or receive disregarded

payments that are considered reattribution

payments which result in the reattribution

of assets from one taxable unit to another.

§1.861-20(d)(3)(v)(C)(1)(ii). In addition,

some provisions of these proposed regulations, such as proposed §1.903-1, apply

only to entities that license intellectual

property for use in a foreign country and

receive royalty payments that are subject

to foreign withholding tax. The Treasury

Department and the IRS do not expect that

the proposed regulations will likely affect

a substantial number of domestic small

business entities because it is infrequent for

domestic small entities to engage in significant foreign operations or in the types of

transactions giving rise to the foreign taxes

addressed by these proposed regulations.

However, the Treasury Department and the

IRS do not have adequate data readily available to assess the number of small entities

potentially affected by the final regulations.

The Treasury Department and the IRS

have determined that the proposed regulations will not have a significant economic

impact on domestic small business entities.

To provide an upper bound estimate of the

impact these final regulations could have on

business entities, the Treasury Department

and the IRS calculated, based on e-file data

for the 2020 tax year, foreign tax credits as

a percentage of four different tax-related

measures of annual receipts (see Table 3 for

variables) by corporations. As demonstrated

by the data in Table 3 below, foreign tax

credits as a percentage of all four measures

of annual receipts are substantially less than

the three to five percent threshold for significant economic impact for corporations with

business receipts less than $250 million.

Table 3. FTCs as Percentage of Annual Receipts

Size (by Business Receipts)

Under

$500k

$500k

to $1M

FTC/Gross Receipts

0.00%

0.00%

FTC/Business Receipts

0.00%

0.00%

FTC/Total Income

0.00%

0.00%

FTC/(Total Income-Total Deductions)

–0.02% 0.03%

Source: RAAS:KDA (Tax Year 2020 CDW E-File Data 9-26-22)

Note: Business Receipts = Total Income + Cost of Goods Sold

The Treasury Department and the

IRS anticipate that only a small fraction

of existing foreign tax credits would be

impacted by these regulations, and thus,

the economic impact of these regulations will be considerably smaller than

the effects shown in Table 3. A portion of

economic impact of these proposed regulations derive from the collection of information requirement in proposed §1.9031(c)(2)(iv)(D). The Treasury Department

and the IRS do not have readily available

data to determine the incremental burden

that this collection of information will

have on small business entities. However, the Treasury Department and the

Bulletin No. 2022–49

$1M to

$5M

0.00%

0.00%

0.00%

0.05%

$5M to

$10M

0.01%

0.00%

0.01%

0.11%

IRS believe this collection of information

will only marginally increase taxpayers’

burdens because some taxpayers may

already have existing license agreements

that qualify for the single-country exception for a variety of tax and non-tax law

reasons, and other taxpayers may not elect

to take advantage of the single-country

exception. Furthermore, as demonstrated

in Table 3 in this Part III of the Special

Analyses, foreign tax credits do not have

a significant economic impact for any

gross-receipts class of business entities. Therefore, proposed §1.903-1(c)(2)

(iv)(D) will not have a significant economic impact on small business entities.

519

$10M to

$50M

0.01%

0.01%

0.02%

0.16%

$50M to

$100M

0.02%

0.02%

0.04%

0.41%

$100M to

$250M

0.03%

0.03%

0.07%

0.72%

$250M

or more

0.05%

0.05%

0.57%

3.33%

Accordingly, it is hereby certified that the

proposed regulations will not have a significant economic impact on a substantial

number of small entities.

IV. Section 7805(f)

Pursuant to section 7805(f), these proposed regulations will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small businesses. The

Treasury Department and the IRS also

request comments from the public on the

certifications in this Part III of the Special

Analyses.

December 5, 2022

V. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates

Reform Act of 1995 (UMRA) requires that

agencies assess anticipated costs and benefits and take certain other actions before

issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or

tribal government, in the aggregate, or by

the private sector, of $100 million in 1995

dollars, updated annually for inflation.

This proposed rule does not include any

Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of

that threshold.

VI. Executive Order 13132: Federalism

Executive Order 13132 (entitled

“Federalism”) prohibits an agency from

publishing any rule that has federalism

implications if the rule either imposes

substantial, direct compliance costs on

State and local governments, and is not

required by statute, or preempts State law,

unless the agency meets the consultation

and funding requirements of section 6 of

the Executive order. This proposed rule

does not have federalism implications and

does not impose substantial direct compliance costs on state and local governments

or preempt State law within the meaning

of the Executive order.

Comments and Request for Public

Hearing

Before these proposed regulations are

adopted as final regulations, consideration

will be given to any comments that are

submitted timely to the IRS as prescribed

in this preamble under the ADDRESSES

heading. The Treasury Department and

the IRS request comments on all aspects

of the proposed rules, and specifically on

the issues identified in Parts I.B and II.C.3

of the Explanation of Provisions. All comments will be available at www.regulations.gov or upon request.

A public hearing will be scheduled

if requested in writing by any person

that timely submits written comments.

Requests for a public hearing are encouraged to be made electronically. If a public hearing is scheduled, notice of the

December 5, 2022

date and time for the public hearing will

be published in the Federal Register.

Announcement 2020-4, 2020-17 IRB 1,

provides that until further notice, public

hearings conducted by the IRS will be

held telephonically. Any telephonic hearing will be made accessible to people with

disabilities.

Drafting Information

The principal authors of the proposed

regulations are Jeffrey L. Parry, Teisha M.

Ruggiero, and Suzanne M. Walsh of the

Office of Associate Chief Counsel (International). However, other personnel from

the Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, the Treasury Department

and IRS propose to amend 26 CFR part 1

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.861-20 is amended by

revising paragraphs (d)(3)(v)(E)(6) and (i)

to read as follows:

§1.861-20 Allocation and

apportionment of foreign income taxes.

*****

(d) * * *

(3) * * *

(v) * * *

(E) * * *

(6) Reattribution asset. The term reattribution asset means an asset that produces one or more items of gross income,

computed under Federal income tax law,

to which a disregarded payment, other

than a disregarded payment received in

exchange for property, is allocated under

the rules of paragraph (d)(3)(v)(B)(2) of

this section.

520

*****

(i) Applicability dates. (1) Except as

provided in paragraphs (i)(2) through (4)

of this section, this section applies to taxable years beginning after December 31,

2019.

(2) Paragraphs (b)(19) and (23) and (d)

(3)(i), (ii), and (v) of this section apply to

taxable years that begin after December

31, 2019, and end on or after November

2, 2020.

(3) Paragraph (d)(3)(v)(E)(6) of this

section applies to taxable years that end

on or after [date the final rule is filed with

the Federal Register]. Taxpayers may

choose to apply the rules in paragraph

(d)(3)(v)(E)(6) of this section to taxable years beginning after December 31,

2019, and ending before [date the final

rule is filed with the Federal Register],

provided they apply paragraph (d)(3)(v)

(E)(6) of this section consistently to their

first taxable year beginning after December 31, 2019, and any subsequent taxable

year beginning before [date the final rule

is filed with the Federal Register]. Otherwise, for taxable years beginning after

December 31, 2019, and ending before

[date the final rule is filed with the Federal Register], see §1.861-20(d)(3)(v)(E)

(6) as contained in 26 CFR part 1 revised

as of July 27, 2022.

(4) Paragraph (h) of this section applies

to taxable years beginning after December

28, 2021.

Par 3. Section 1.901-2 is amended:

1. By revising paragraph (b)(4)(i)(A).

2. By redesignating paragraphs (b)(4)(i)

(B), (b)(4)(i)(C)(3), and (b)(4)(i)(D)

as paragraph (b)(4)(i)(G), (b)(4)(i)

(D), and (b)(4)(i)(E), respectively.

3. By adding new paragraph (b)(4)(i)

(B).

4. By revising paragraph (b)(4)(i)(C).

5. By revising the first sentence of newly

redesignated paragraph (b)(4)(i)(D).

6. By adding paragraph (b)(4)(i)(F).

7. In newly redesignated paragraph (b)

(4)(i)(G)(1), by removing the language “one or more significant costs

and expenses” and adding the language “substantially all of each item

of significant cost or expense” in its

place.

8. In paragraph (b)(4)(iv)(A)(2), by

removing the language “significant

costs and expenses” and adding the

Bulletin No. 2022–49

language “substantially all of each

item of significant cost or expense” in

its place.

9. In paragraph (b)(4)(iv)(B)(2), by

removing the language “(b)(4)(i)(B)

(2)” and adding the language “(b)(4)

(i)(G)(2)” in its place.

10. By removing and reserving paragraph

(b)(4)(iv)(C).

11. In paragraphs (b)(4)(iv)(D)(2) and

(b)(4)(iv)(E)(2), by removing the language “(b)(4)(i)(C)(2)” and adding

the language “(b)(4)(i)(F)(2)” in its

place.

12. By adding paragraphs (b)(4)(iv)(F)

through (J).

13. By revising paragraphs (b)(5)(i)(B)

(2), (d)(1)(iii), and (h).

The revisions and additions read as

follows:

§ 1.901-2 Income, war profits, or excess

profits tax paid or accrued.

*****

(b) * * *

(4) * * *

(i) * * *

(A) In general. A foreign tax satisfies

the cost recovery requirement if the base

of the tax is computed by reducing gross

receipts (as described in paragraph (b)

(3) of this section) to permit recovery of

substantially all of each item of significant

cost or expense (including each item of

cost or expense related to the categories

described in paragraph (b)(4)(i)(B)(2) of

this section) attributable, under reasonable

principles, to such gross receipts. See paragraph (b)(4)(i)(B) of this section for rules

regarding the determination of what is a

significant cost or expense, paragraph (b)

(4)(i)(C) of this section for rules regarding the recovery of substantially all of an

item, paragraph (b)(4)(i)(E) of this section

for rules regarding principles for attributing costs and expenses to gross receipts,

and paragraph (b)(4)(i)(F) of this section

for exceptions to this rule. A foreign tax

need not permit recovery of significant

costs and expenses, such as certain personal expenses, that are not attributable,

under reasonable principles, to gross

receipts included in the foreign tax base.

A foreign tax whose base is gross receipts,

with no reduction for costs and expenses,

satisfies the cost recovery requirement

Bulletin No. 2022–49

only if there are no significant costs and

expenses described in paragraph (b)(4)(i)

(B) of this section attributable to the gross

receipts included in the foreign tax base.

See paragraph (b)(4)(iv)(A) of this section

(Example 1). A foreign tax that provides

an alternative cost allowance satisfies the

cost recovery requirement only as provided in paragraph (b)(4)(i)(G) of this

section.

(B) Significant costs and expenses—

(1) In general. Except as provided in

paragraph (b)(4)(i)(B)(2) of this section,

whether an item of cost or expense is significant for purposes of this paragraph (b)

(4)(i) is determined based on whether, for

all taxpayers in the aggregate to which

the foreign tax applies, the item of cost or

expense constitutes a significant portion

of the taxpayers’ total costs and expenses.

(2) Per se significant costs and

expenses. An item of cost or expense (as

characterized under foreign law) related

to capital expenditures, interest, rents,

royalties, wages or other payments for services, and research and experimentation is

always treated as an item of significant

cost or expense for purposes of this paragraph (b)(4)(i).

(C) Recovery of substantially all of

each item—(1) In general. Whether a

foreign tax permits recovery of substantially all of each item of significant cost or

expense is determined based solely on the

terms of the foreign tax law.

(2) Safe harbor. One or more disallowances of a stated portion of an item

(or multiple items) of significant cost or

expense does not prevent a foreign tax

from being considered to permit recovery

of substantially all of each item of significant cost or expense if the total portion

of the item (or items) that is disallowed

does not exceed 25 percent. A limitation

that caps the recovery of an item of significant cost or expense, or multiple items

of cost or expense that relate to a single

category of significant costs and expenses

described in paragraph (b)(4)(i)(B)(2) of

this section does not prevent a foreign tax

from being considered to permit recovery

of substantially all of each item of significant cost or expense if the limitation is a

qualifying cap. For such purpose, a limitation that caps the recovery at a stated

portion of gross receipts, gross income,

or a similar measure is a qualifying cap if

521

the stated portion of such measure is not

less than 15 percent. A limitation that caps

the recovery at a stated portion of taxable

income (determined without regard to the

item at issue) or a similar measure is a

qualifying cap if the stated portion of such

measure is not less than 30 percent.

(3) Non-recovery of significant costs

and expenses. Significant costs and

expenses (such as interest expense) are

not considered to be recovered by reason

of the time value of money attributable to

the acceleration of a tax benefit or economic benefit attributable to the timing of

the recovery of other costs and expenses

(such as the current expensing of debt-financed capital expenditures).

(D) * * * A foreign tax law permits

recovery of substantially all of each item

of significant cost or expense even if such

item of cost or expense is recovered earlier or later than it is recovered under the

Internal Revenue Code unless the time of

recovery is so much later as effectively to

constitute a denial of such recovery. * * *

*****

(F) Exceptions—(1) Disallowances

consistent with U.S. principles. Notwithstanding paragraph (b)(4)(i)(A) of this

section, a disallowance of all or a portion

of an item of significant cost or expense

does not prevent a foreign tax from satisfying the cost recovery requirement if

such disallowance is consistent with any

principle underlying the disallowances

required under the income tax provisions

of the Internal Revenue Code, including

the principles of limiting base erosion

or profit shifting and addressing non-tax

public policy concerns similar to those

reflected in the Internal Revenue Code.

For example, a foreign tax may satisfy

the cost recovery requirement even if

the foreign tax law disallows deductions

in connection with hybrid transactions,

disallows deductions attributable to

gross receipts that in whole or in part are

excluded, exempt or eliminated from taxable income, or disallows certain deductions consistent with non-tax public policy

considerations similar to those underlying

the disallowances contained in section

162. See paragraphs (b)(4)(iv)(I) and (J)

of this section (Examples 9 and 10).

(2) Amounts that need not be recovered. A foreign tax law may satisfy the

cost recovery requirement even if the

December 5, 2022

foreign tax law does not permit recovery of costs and expenses attributable to

wage income or to investment income

that is not derived from a trade or business. In addition, in determining whether

a foreign tax (the “tested foreign tax”)

meets the cost recovery requirement, it is

immaterial whether the tested foreign tax

allows a deduction for other taxes that

would qualify as foreign income taxes

(determined without regard to whether

such other tax allows a deduction for the

tested foreign tax). See paragraphs (b)(4)

(iv)(D) and (E) of this section (Examples

4 and 5).

*****

(iv) * * *

(F) Example 6: Substantially all; application of

the safe harbor—(1) Facts. Country X imposes a tax

(“Country X tax”) on the income of corporations that

are resident in Country X. Under Country X tax law,

full deductions are allowed for each item of significant cost or expense attributable under reasonable

principles to the gross receipts included in the Country X tax base, except that Country X tax law disallows a deduction for 25 percent of a taxpayer’s costs

and expenses for royalties related to patents.

(2) Analysis. Under paragraph (b)(4)(i)(B)(2)

of this section, an item of cost or expense related

to royalties is always treated as a significant cost

or expense, and therefore, under paragraph (b)(4)

(i)(A) of this section, absent an exception, Country

X tax law must permit recovery of substantially all

of each item of cost or expense related to royalties,

including the item of royalties related to patents. The

stated percentage of costs and expenses from royalties related to patents (25 percent) that is disallowed

under Country X tax law does not exceed 25 percent.

Accordingly, under the safe harbor in paragraph (b)

(4)(i)(C)(2) of this section, the disallowance does

not prevent the Country X tax from being considered

to permit recovery of substantially all of each item

of cost or expense related to royalties, and therefore the Country X tax satisfies the cost recovery

requirement.

(G) Example 7: Substantially all; application of

the safe harbor—(1) Facts. Country X imposes a tax

(“Country X tax”) on the income of corporations that

are resident in Country X. Under Country X tax law,

full deductions are allowed for each item of significant cost or expense attributable under reasonable

principles to the gross receipts included in the Country X tax base, except that Country X tax law disallows a deduction for 15 percent of a taxpayer’s costs

and expenses for rents and 25 percent of a taxpayer’s

costs and expenses for interest.

(2) Analysis. Under paragraph (b)(4)(i)(B)(2)

of this section, an item of cost or expense related to

rents or interest is always treated as a significant cost

or expense, and therefore, under paragraph (b)(4)

(i)(A) of this section, absent an exception, Country

X tax law must permit recovery of substantially all

of each item of cost or expense related to royalties

and interest. The stated percentage of the costs and

December 5, 2022

expenses related to rents (15 percent) that is disallowed under Country X tax law does not exceed 25

percent. Additionally, the stated percentage of the

costs and expenses related to interest (25 percent)

that is disallowed under Country X law does not

exceed 25 percent. Accordingly, under the safe harbor in paragraph (b)(4)(i)(C)(2) of this section, the

disallowances do not prevent the Country X tax from

being considered to permit recovery of substantially

all of each item of cost or expense related to rents

and interest, and therefore the Country X tax satisfies

the cost recovery requirement.

(H) Example 8: Substantially all; application of

the safe harbor—(1) Facts. Country X imposes a tax

(“Country X tax”) on the income of corporations that

are resident in Country X. Under Country X tax law,

full deductions are allowed for each item of significant cost or expense attributable under reasonable

principles to the gross receipts included in the Country X tax base, except that Country X tax law caps

the recovery of the deduction of interest at 30 percent

of the taxpayer’s taxable income determined without

regard to interest expense.

(2) Analysis. Under paragraph (b)(4)(i)(B)(2)

of this section, an item of cost or expense related

to interest is always treated as a significant cost or

expense, and therefore, under paragraph (b)(4)(i)(A)

of this section, absent an exception, Country X tax

law must permit recovery of substantially all of each

item of cost or expense related to interest. The stated

cap on recovery in Country X tax law with respect

to interest (30 percent of taxable income determined

without regard to interest expense) is not less than 30

percent of taxable income determined without regard

to interest expense. Additionally, the cap on recovery relates to a single category of significant costs

and expenses described in paragraph (b)(4)(i)(B)(2)

of this section. Accordingly, under the safe harbor

in paragraph (b)(4)(i)(C)(2) of this section, the disallowance does not prevent the Country X tax from

being considered to permit recovery of substantially

all of each item of cost or expense related to interest, and therefore the Country X tax satisfies the cost

recovery requirement.

(I) Example 9: Permissible disallowance based

on U.S. principles—(1) Facts. Country X imposes

a tax on the income of corporations that are resident in Country X. Under Country X tax law, full

deductions are allowed for each item of significant

cost or expense attributable under reasonable principles to the gross receipts included in the Country X

tax base, except that under Country X’s anti-hybrid

rules, a deduction is disallowed for any payment,

including interest, royalties, rents, or payments for

services, made by a Country X resident to a related

entity located outside of Country X if the payment

is not included in gross income by the payee or the

payee is not subject to tax.

(2) Analysis. Under paragraph (b)(4)(i)(B)(2) of

this section, each item of cost or expense related to

interest, rents, royalties, and payments for services

is always treated as a significant cost or expense,

and therefore, under paragraph (b)(4)(i)(A) of this

section, absent an exception, Country X tax law

must permit recovery of substantially all of each

item of cost or expense related to interest, rents,

royalties, and payments for services. Country X tax

law does not permit recovery of any portion of any

522

item of significant cost or expense that is subject

to the anti-hybrid rules. As a result, the safe harbor

in paragraph (b)(4)(i)(C)(2) of this section does not

apply to such item. Further, because a deduction

is disallowed for any item of cost or expense that

is subject to the Country X anti-hybrid rules, the

Country X tax law completely disallows certain

items of cost and expense related to interest, rents,

royalties, and payments for services and thus does

not permit recovery of substantially all of each item

of significant cost or expense related to interest,

rents, royalties, and payments for services. However, under paragraph (b)(4)(i)(F)(1) of this section,

a disallowance of all or a portion of an item of significant cost or expense does not prevent a foreign

tax from satisfying the cost recovery requirement

if the disallowance is consistent with any principle underlying the disallowances required under

the income tax provisions of the Internal Revenue

Code. The income tax provisions of the Internal

Revenue Code, specifically section 267A, contain

disallowances of deductions based on the principle

of limiting base erosion or profit shifting. Country

X’s disallowance of deductions for any payment,

including interest, royalties, rents, or payments for

services also reflects the principle of limiting base

erosion or profit shifting. Accordingly, because

Country X’s anti-hybrid rules are consistent with

the principle of limiting base erosion or profit shifting, the Country X tax satisfies the cost recovery

requirement.

(J) Example 10: Permissible disallowance based

on U.S. principles—(1) Facts. Country X imposes a

tax on the income of corporations that are resident

in Country X. Under Country X tax law, full deductions are allowed for each item of significant cost or

expense attributable to the gross receipts included in

the Country X tax base, except that no deduction is

permitted for any stock-based payments for services.

(2) Analysis. Under paragraph (b)(4)(i)(B)(2)

of this section, each item of cost or expense related

to wages or other payments for services is always

treated as a significant cost or expense, and therefore, under paragraph (b)(4)(i)(A) of this section,

absent an exception, Country X tax law must permit recovery of substantially all of each item of cost

or expense related to wages or other payments for

services. Country X tax law denies a deduction for

any stock-based payments for services, and therefore the safe harbor in paragraph (b)(4)(i)(C)(2) of

this section is not satisfied. Further, given that no

deduction is allowed for stock-based payments for

services, the Country X tax law completely disallows an item of cost or expense related to wages or

other payments for services and thus does not permit

recovery of substantially all of each item of significant cost or expense related to wages or other payments for services. However, under paragraph (b)

(4)(i)(F)(1) of this section, a disallowance of all or

a portion of an item of significant cost or expense

does not prevent a foreign tax from satisfying the

cost recovery requirement if such disallowance is

consistent with any principle underlying the disallowances required under the income tax provisions

of the Internal Revenue Code. The income tax provisions of the Internal Revenue Code contain targeted

disallowances or limits on the deductibility of certain

items of compensation in particular circumstances

Bulletin No. 2022–49

based on non-tax public policy reasons, including

to influence the amount or use of a certain type of

compensation in the labor market. For example,

section 162(m) imposes limits on deductions for

compensation of certain highly-paid employees,

and section 280G limits the deductibility of certain

“parachute payments” provided to individuals when

an entity undergoes a change of control. Country X’s

targeted disallowance of deductions for the portion

of payments for services attributable to stock-based

compensation also reflects a principle of influencing

the amount or use of a certain type of compensation

(stock-based compensation) in the labor market.

Accordingly, because the Country X tax law’s disallowance is consistent with a principle underlying the

disallowances required under the income tax provisions of the Internal Revenue Code, the Country X

tax satisfies the cost recovery requirement.

(5) * * *

(i) * * *

(B) * * *

(2) Royalties. Under the foreign tax

law, gross income from royalties must be

sourced based on the place of use of, or

the right to use, the intangible property,

as determined under reasonable principles (which do not include determining

the place of use of, or the right to use, the

intangible property based on the location

of the payor).

*****

(d) * * *

(1) * * *

(iii) Tax imposed on nonresidents—(A)

In general. A foreign levy imposed on

nonresidents is always treated as a separate levy from that imposed on residents,

even if the base of the tax as applied to

residents and nonresidents is the same,

and even if the levies are treated as a single levy under foreign tax law.

(B) Withholding tax—(1) In general.

Except as otherwise provided in this paragraph (d)(1)(iii)(B), a withholding tax

(as defined in section 901(k)(1)(B)) that

is imposed on a payment giving rise to

gross income of nonresidents is treated as

a separate levy as to each separate class of

income described in section 61 (for example, interest, dividends, rents, or royalties)

subject to the withholding tax.

(2) Subsets of income. If two or more

subsets of a separate class of income are

subject to a withholding tax based on different income attribution rules (for example, if technical services are subject to tax

based on the residence of the payor and

other services are subject to tax based on

where the services are performed), separate levies are considered to be imposed

Bulletin No. 2022–49

with respect to each subset of that separate

class of income.

(3) Royalty income. A withholding tax

that is imposed on a payment giving rise

to gross royalty income of a nonresident

that is made pursuant to a single-country

license (as determined under §1.903-1(c)

(2)(iv)) is treated as a separate levy from

a withholding tax that is imposed on other

gross royalty income of such nonresident

and is also treated as a separate levy from

any withholding tax imposed on other

nonresidents.

*****

(h) Applicability dates—(1) In general.

Except as provided in paragraphs (h)(2)

and (3) of this section, this section applies

to foreign taxes paid (within the meaning

of paragraph (g) of this section) in taxable

years beginning on or after December 28,

2021. For foreign taxes that relate to (and

if creditable are considered to accrue in)

taxable years beginning before December

28, 2021, and that are remitted in taxable

years beginning on or after December 28,

2021, by a taxpayer that accounts for foreign income taxes on the accrual basis, see

§1.901-2 as contained in 26 CFR part 1

revised as of April 1, 2021.

(2) Certain foreign taxes paid to

Puerto Rico. For foreign taxes paid to

Puerto Rico by reason of section 1035.05

of the Puerto Rico Internal Revenue Code

of 2011, as amended (13 L.P.R.A. 30155)

(treating certain income, gain or loss as

effectively connected with the active conduct of a trade or business with Puerto

Rico), this section applies to foreign taxes

paid (within the meaning of paragraph (g)

of this section) in taxable years beginning

on or after January 1, 2023. For foreign

taxes described in the preceding sentence

that are paid in taxable years beginning

before January 1, 2023, see §1.901-2 as

contained in 26 CFR part 1 revised as of

April 1, 2021.

(3) Modifications to cost recovery and

royalty attribution rules. Paragraphs (b)

(4)(i) and (iv), (b)(5)(i)(B)(2), and (d)

(1)(iii) of this section apply to foreign

taxes paid (within the meaning of paragraph (g) of this section) in taxable years

ending on or after November 18, 2022.

For foreign taxes described in the preceding sentence that are paid in taxable

years ending before November 18, 2022,

see §1.901-2(b)(4)(i) and (iv), (b)(5)(i)

523

(B)(2), and (d)(1)(iii) as contained in 26

CFR part 1 revised as of July 27, 2022.

Taxpayers may choose to apply the rules

in paragraphs (b)(4)(i) and (iv) of this

section to foreign taxes paid in taxable

years beginning on or after December

28, 2021, and ending before November

18, 2022 provided that they consistently

apply those rules to such taxable years.

Additionally, taxpayers may choose to

apply the rules of paragraphs (b)(5)(i)

(B)(2) and (d)(1)(iii) of this section to

foreign taxes paid in taxable years beginning on or after December 28, 2021, and

ending before November 18, 2022, provided that they consistently apply those

rules and the rules of §1.903-1(c)(2) and

(d)(3), (4), and (8) through (11) to such

taxable years.

*****

Par 4. Section 1.903-1 is amended:

1. By revising paragraphs (c)(2) introductory text and (c)(2)(iii).

2. By adding paragraph (c)(2)(iv).

3. By revising paragraph (d)(3).

4. By removing and reserving paragraph

(d)(4).

5. By adding paragraphs (d)(8) through

(11).

6. By revising paragraph (e).

The revisions and additions read as

follows:

§ 1.903-1 Taxes in lieu of income taxes.

*****

(c) * * *

(2) Covered withholding tax. A tested

foreign tax is a covered withholding tax

if, based on the foreign tax law (except

as provided in paragraph (c)(2)(iii)(B) of

this section), the requirements in paragraphs (c)(1)(i) and (c)(2)(i) through (iii)

of this section are met with respect to the

tested foreign tax. See also §1.901-2(d)(1)

(iii) for rules treating withholding taxes as

separate levies with respect to each class

of income subject to the tax, with respect

to each subset of a class of income that

is subject to different income attribution

rules, or with respect to withholding tax

that is imposed on a payment giving rise

to gross royalty income of a nonresident

that is made pursuant to a single-country

license (as determined under paragraph

(c)(2)(iv) of this section).

*****

December 5, 2022

(iii) Source-based attribution requirement. The income subject to the tested foreign tax satisfies the requirements in paragraph (c)(2)(iii)(A) or (B) of this section.

(A) The income subject to the tested

foreign tax satisfies the attribution requirement described in §1.901-2(b)(5)(i)(B).

(B) The income subject to the tested

foreign tax is characterized as royalty

income and the payment giving rise to

such income is made pursuant to a single-country license as determined under

paragraph (c)(2)(iv) of this section. For

purposes of this paragraph (c)(2)(iii)(B)

and paragraph (c)(2)(iv) of this section,

whether the income is characterized as

royalty income is determined under the

foreign tax law, except that income from

the sale of a copyrighted article (as determined under rules similar to §1.861-18)

is not characterized as royalty income

regardless of the characterization of the

income under the foreign tax law.

(iv) Single-country license—(A) In

general. Except as otherwise provided

in this paragraph (c)(2)(iv), for purposes

of paragraph (c)(2)(iii)(B) of this section, a payment is made pursuant to a

single-country license if the terms of the

license agreement pursuant to which the

payment is made characterize the payment

as a royalty and limit the territory of the

license to the foreign country imposing

the tested foreign tax.

(B) Separately stated portions. If a

written agreement that is not described

in paragraph (c)(2)(iv)(A) of this section

separately states a portion (whether as a

specified amount or as a formula) of the

payment subject to the tested foreign tax

and such portion is both characterized as

a royalty under the terms of the agreement

and is attributable to the part of the territory of the license that is solely within

the foreign country imposing the tested

foreign tax, then that portion of the payment is treated as made pursuant to a single-country license.

(C) Validity of agreement. A payment

is considered not made pursuant to a single-country license if the taxpayer knows,

or has reason to know, that the terms of the

agreement pursuant to which the payment

is made misstate the territory in which

the relevant intangible property is used or

overstate the amount of the royalty with

respect to the part of the territory of the

December 5, 2022

license that is solely within the foreign

country imposing the tested foreign tax. A

taxpayer is considered to have reason to

know if its knowledge of relevant of facts

or circumstances is such that a reasonably

prudent person in the position of the taxpayer would question whether the terms

of the agreement misstate the territory in

which the relevant intangible property is

used or overstate the amount of a royalty.

For purposes of this section, the principles

of sections 482 and 861 apply to determine whether the terms of the agreement

misstate the territory in which the relevant

intangible property is used or overstate the

amount of a royalty. See paragraph (d)(11)

of this section (Example 11).

(D) Documentation. A taxpayer must

provide the agreement described in paragraph (c)(2)(iv)(A) or (B) of this section,

as applicable (the “required agreement”),

within 30 days of a request by the Commissioner or another period as agreed

between the Commissioner and the taxpayer. Except as provided in the next

sentence, the required agreement pursuant to which the royalty is paid must be

executed no later than the date of payment

that gives rise to the gross royalty income

that is subject to the tested foreign tax. In

the case of a royalty that is paid before

the date on which the required agreement

is executed, in order to meet the requirement of this paragraph (c)(2)(iv)(D), the

required agreement must be executed no

later than May 17, 2023, and the agreement must state that royalties paid on or

before the date of execution of the agreement are, for purposes of this paragraph

(c)(2)(iv), considered paid pursuant to the

terms of the agreement.

(d) * * *

(3) Example 3: Withholding tax on royalties;

attribution requirement—(i) Facts. YCo, a resident

of Country Y, is a controlled foreign corporation

wholly owned by USP, a domestic corporation. In

Year 1, YCo enters into a written license agreement

(the “Agreement”) with XCo, a resident of Country

X unrelated to YCo or USP, for the right to use YCo’s

intangible property (“IP”) in a territory defined by

the Agreement as the entire world, including Country

X, in exchange for payments that the terms of the

Agreement characterize as royalties. The payments

made by XCo to YCo under the Agreement are also

characterized as royalties under the laws of Country X. Under Country X’s tax law, all gross royalty

payments made by a Country X resident to a nonresident are treated as giving rise to Country X source

income and are subject to a 20 percent withholding

tax, regardless of whether the nonresident payee has

524

a taxable presence in Country X. Country X has a

generally-imposed net income tax within the meaning of paragraph (c)(1)(i) of this section, and nonresidents subject to the withholding tax on royalties

are not also subject to a Country X net income tax

on their royalty income. In Year 1, XCo withholds

20u (units of Country X currency) of tax on a 100u

royalty paid to YCo under the Agreement.

(ii) Analysis—(A) Separate levy. Under §1.9012(d)(1)(iii)(B)(1), Country X’s withholding tax

imposed on gross royalty income of nonresidents

is treated as a separate levy. Under §1.901-2(d)(1)

(iii)(B)(3), the 20u of Country X withholding tax

imposed on the 100u of royalties paid by XCo to

YCo is treated as a separate levy from the Country X

withholding tax on royalties if the Agreement pursuant to which the royalties are paid is a single-country

license under paragraph (c)(2)(iv) of this section.

The Agreement does not meet the requirements of

paragraph (c)(2)(iv) of this section because it neither limits the territory of the license to Country

X nor separately states the portion of the payment

that is with respect to the part of the territory of the

license that is solely within Country X. Thus, the

20u of Country X withholding tax paid by YCo is

not treated as a separate levy under §1.901-2(d)(1)

(iii)(B)(3).

(B) Covered withholding tax. Under paragraph

(c)(2) of this section, a tested foreign tax is a covered withholding tax if paragraphs (c)(1)(i) and (c)

(2)(i) through (iii) of this section are met. Country

X’s withholding tax on royalties meets the requirements of paragraphs (c)(1)(i) and (c)(2)(i) and (ii) of

this section because Country X has a generally-imposed net income tax, Country X’s withholding tax

on the royalties paid pursuant to the Agreement is

imposed on the gross royalty income of persons who

are nonresidents of Country X, and nonresidents

subject to the withholding tax on royalties are not

also subject to the Country X generally-imposed net

income tax on their royalty income. However, the

Country X withholding tax on royalties paid pursuant to the Agreement does not meet the requirements

of §1.901-2(b)(5)(i)(B) and paragraph (c)(2)(iii)(A)

of this section because Country X’s sourcing rule

for royalties (based on residence of the payor) is not

based on the place of use of, or the right to use, the

intangible property. Additionally, the payment that is

subject to Country X’s withholding tax is not made

pursuant to a single-country license under paragraph

(c)(2)(iv) of this section for the reasons described

in paragraph (d)(3)(ii)(A) of this section (the separate levy analysis of this paragraph (d)(3) (Example

3)). Therefore, the requirement in paragraph (c)(2)

(iii)(B) of this section is not met. Accordingly, the

Country X withholding tax paid by YCo is not a

covered withholding tax, and none of the 20u Country X withholding tax paid by YCo with respect to

the 100u royalty payment made to XCo is a foreign

income tax.

*****

(8) Example 8: Withholding tax on royalties;

single-country license—(i) Facts. The facts are the

same as in paragraph (d)(3)(i) of this section (the

facts of Example 3) except that in Year 1, YCo enters

into a written license agreement (the “Agreement”)

with XCo for the right to use YCo’s IP in a territory

defined by the Agreement as Country X, in exchange

Bulletin No. 2022–49

for payments that the terms of the Agreement characterize as royalties, and XCo in fact only uses the IP in

Country X. In Year 1, XCo withholds 20u of tax from

100u of royalties paid to YCo under the Agreement.

(ii) Analysis—(A) Separate levy. Under §1.9012(d)(1)(iii)(B)(1), Country X’s withholding tax

imposed on gross royalty income of nonresidents

is treated as a separate levy. Under §1.901-2(d)(1)

(iii)(B)(3), the 20u of Country X withholding tax

imposed on the 100u of royalties paid by XCo to

YCo is treated as a separate levy from the Country X

withholding tax on royalties if the Agreement pursuant to which the royalties are paid is a single-country

license under paragraph (c)(2)(iv) of this section.

The Agreement meets the requirements of paragraph

(c)(2)(iv)(A) of this section because it is a written

license agreement that characterizes the payment as a

royalty and limits the territory of the license to Country X. Thus, the 20u Country X withholding tax paid

by YCo is treated as a separate levy under §1.9012(d)(1)(iii)(B)(3).

(B) Covered withholding tax. Under paragraph

(c)(2) of this section, a tested foreign tax is a covered withholding tax if paragraphs (c)(1)(i) and (c)

(2)(i) through (iii) of this section are met. Country X

has a generally-imposed net income tax, Country X’s

withholding tax on the royalties paid pursuant to the

Agreement is a withholding tax that is imposed on

the gross income of persons who are nonresidents of

Country X, and nonresidents subject to the withholding tax on royalties paid pursuant to the Agreement

are not also subject to a net income tax on their royalty income. Thus, the requirements of paragraphs

(c)(1)(i) and (c)(2)(i) and (ii) of this section are met.

The withholding tax paid by YCo does not meet the

requirements of §1.901-2(b)(5)(i)(B) and paragraph

(c)(2)(iii)(A) of this section because Country X’s

source rule for royalties (based on residence of the

payor) is not based on the place of use of, or the right

to use, the intangible property. However, the payment that is subject to Country X’s withholding tax

is made pursuant to a single-country license under

paragraph (c)(2)(iv) of this section for the reasons

described in paragraph (d)(8)(ii)(A) of this section

(the separate levy analysis of this Example 8). Therefore, the requirement in paragraph (c)(2)(iii)(B) of

this section is met. Accordingly, the Country X withholding tax on the payment made by XCo to YCo

pursuant to the Agreement is a covered withholding

tax and all of the 20u of Country X withholding tax

paid by YCo with respect to the 100u of royalties

under the Agreement is a foreign income tax.

(9) Example 9: Withholding tax on royalties;

separately stated portion—(i) Facts. The facts are

the same as in paragraph (d)(3)(i) of this section

(the facts of Example 3) except that in Year 1, YCo

enters into a written agreement (the “Agreement”)

with XCo for the right to use YCo’s IP in a territory defined by the Agreement as the entire world, as

well as for YCo to provide certain services to XCo

in Country Y, in exchange for a payment equal to 10

percent of XCo’s annual revenue. The Agreement

provides a formula for determining the amount of

the payment that is characterized as a royalty and

that is with respect to the part of the territory that is

within Country X (the “separately stated formula”).

The separately stated formula provides that the first

30u of the payment represents payment for services

Bulletin No. 2022–49

provided by YCo, and that 40 percent of the remainder of the payment represents payment of a royalty

with respect to the part of the territory of the license

that is solely within Country X. The portion of the

payment by XCo to YCo that is characterized as services income under the Agreement is also characterized as services income under the laws of Country X.

Additionally, all payments by a resident of Country

X for services provided by a nonresident are treated

as giving rise to Country X source income, regardless of where the services are performed, and gross

income from services is subject to the same 20 percent withholding tax as gross royalty income. In Year

1, XCo earns gross income of 1,800u and pays YCo

180u under the Agreement. XCo withholds 12u of

tax from the 60u of royalties attributable to the part

of the territory of the license that is solely within

Country X that are paid to YCo under the separately

stated formula in the Agreement. The portion of the

payment by XCo to YCo that is characterized as a

royalty with respect to the part of the territory of the

license that is solely within Country X under the separately stated formula in the Agreement is also characterized as a royalty under the laws of Country X.

XCo withholds 24u of tax from the remaining 120u

payment paid to YCo under the Agreement, consisting of 6u of tax on the 30u payment for services and

18u of tax on 90u of royalties. YCo does not know, or

have reason to know, that the terms of the Agreement

misstate the territory in which YCo’s IP is used or

overstate the amount of the royalty with respect to

the part of the territory of the license that is solely

within Country X.

(ii) Analysis—(A) Separately stated portion.

The analysis is the same as in paragraph (d)(8)(ii)

of this section (the analysis of Example 8), except

that the portion of the payment that is a royalty with

respect to the part of the territory of the license that is

solely within Country X under the separately stated

formula in the Agreement is treated as made pursuant to a single-country license under paragraph (c)

(2)(iv) of this section because the Agreement is a

written agreement that separately states the portion

of the payment that is characterized as a royalty and

that is with respect to the part of the territory of the

license that is solely within Country X. Thus, the

Country X withholding tax on the portion of the payment from XCo to YCo that is a payment of a royalty

with respect to the part of the territory of the license

that is solely within Country X under the separately

stated formula under the Agreement is a separate

levy and a covered withholding tax. Accordingly, the

12u Country X withholding tax paid by YCo from

the 60u of royalties with respect to the part of the

territory of the license that is solely within Country

X is a foreign income tax.

(B) Remaining portion of royalties. The analysis

is the same as paragraph (d)(3)(ii) of this section (the

analysis of Example 3). Specifically, the 18u Country X withholding tax on the 90u royalty payment

that is not with respect to the part of the territory that

is within Country X is neither a separate levy nor

a covered withholding tax. Accordingly, none of the

18u Country X withholding tax paid by YCo with

respect to the remaining 90u royalty payment under

the Agreement is a payment of foreign income tax.

(C) Services portion. Under §1.901-2(d)(1)

(iii)(B)(1), Country X’s withholding tax imposed

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on gross services income of nonresidents is a separate levy. The Country X withholding tax of 6u

on the 30u payment for services made by XCo to

YCo under the Agreement is not a covered withholding tax. The withholding tax paid by YCo does

not meet the requirements of §1.901-2(b)(5)(i)(B)

and paragraph (c)(2)(iii)(A) of this section because

Country X’s sourcing rule for services (based on

residence of the payor) is not reasonably similar

to the sourcing rule that applies under the Internal

Revenue Code (based on where the services are

performed). The special separate levy and covered

withholding tax rules for single-country licenses

under §1.901-2(d)(1)(iii)(B)(3) and paragraph (c)

(2)(iii)(B) of this section do not apply to withholding taxes on payments for services. Accordingly,

none of the 6u of Country X withholding tax paid

by YCo with respect to the 30u payment for services under the Agreement is a payment of foreign

income tax.

(10) Example 10: Characterization of payment—

(i) Facts. The facts are the same as in paragraph (d)

(3)(i) of this section (the facts of Example 3), except

that in Year 1, YCo enters into a written license agreement (the “Agreement”) with XCo for the right to

use YCo’s IP in a territory defined by the Agreement

as Country X, in exchange for a payment that the

terms of the Agreement characterize as a royalty, but

that is characterized as a payment for services under

the laws of Country X, and all payments of services

paid by a resident of Country X to a nonresident are

treated as giving rise to Country X source income,

regardless of where the services are performed, and

are subject to a 20 percent withholding tax.

(ii) Analysis. Under §1.901-2(d)(1)(iii)(B)(1),

Country X’s withholding tax imposed on gross services income of nonresidents is a separate levy. The

Country X withholding tax of 20u on the 100u payment for services made by XCo to YCo under the

Agreement is not a covered withholding tax. The

withholding tax paid by YCo does not meet the

requirements of §1.901-2(b)(5)(i)(B) and paragraph

(c)(2)(iii)(A) of this section because Country X’s

sourcing rule for services (based on residence of the

payor) is not reasonably similar to the sourcing rule

that applies under the Internal Revenue Code (based

on where the services are performed). The special

separate levy and covered withholding tax rules for

single-country licenses under §1.901-2(d)(1)(iii)(B)

(3) and paragraph (c)(2)(iii)(B) of this section do

not apply to withholding taxes on income that is not

characterized as royalty income under the foreign tax

law. Accordingly, none of the 20u Country X withholding tax paid by YCo with respect to the 100u

paid under the Agreement is a payment of foreign

income tax.

(11) Example 11: Withholding tax on royalties,

validity of agreement—(i) Facts. The facts are the

same as in paragraph (d)(3)(i) of this section (the

facts of Example 3), except that XCo is a controlled

foreign corporation wholly owned by USP. Additionally, in Year 2, XCo and YCo cancel the written

license agreement entered into in Year 1 and YCo

enters into two new written license agreements with

XCo, one agreement which grants XCo the right to

use certain YCo IP in a territory defined as Country X (the “Country X Agreement”), and one of

which grants XCo the right to use the same YCo IP

December 5, 2022

in a territory defined as the entire world except for

Country X (the “Rest of World Agreement”). Both

agreements characterize the payments under the

agreements as royalties, and the payments are also

characterized as royalties under the laws of Country

X. In Year 2, XCo withholds a total of 20u of tax

from a total of 100u of royalties paid to YCo under

the Country X Agreement and the Rest of World

Agreement. Based on the terms of each agreement,

18u of tax was withheld from 90u of royalties paid to

YCo under the Country X Agreement, and 2u of tax

from 10u of royalties paid to YCo under the Rest of

World Agreement. YCo knew or had reason to know

that under the principles of sections 482 and 861,

with respect to the 100u of royalties paid by XCo to

YCo, 40u is attributable to XCo’s use of YCo IP in

Country X and 60u is attributable to use of YCo IP

outside Country X.

(ii) Analysis—(A) Rest of World Agreement. The

analysis is the same as paragraph (d)(3)(ii) of this

section (the analysis of Example 3). Specifically, the

2u Country X withholding tax on the 10u royalty

payment under the Rest of World Agreement is neither a separate levy nor a covered withholding tax.

Accordingly, none of the 2u Country X withholding

tax paid by YCo with respect to the 10u royalty payment under the Rest of World Agreement is a payment of foreign income tax.

(B) Country X Agreement. The analysis is the

same as paragraph (d)(3)(ii) of this section (the analysis of Example 3), except that the reason that the

Country X Agreement does not meet the requirements of paragraph (c)(2)(iv) of this section is that

YCo knew or had reason to know that the terms

of the Country X Agreement overstate the amount

of the royalty with respect to Country X. Thus, the

18u Country X withholding tax on the 90u royalty

payment under the Country X Agreement is neither a separate levy nor a covered withholding tax.

December 5, 2022

Accordingly, none of the 18u Country X withholding

tax paid by YCo with respect to the 90u royalty payment under the Country X Agreement is a payment

of foreign income tax.

(e) Applicability dates—(1) In general.

Except as provided in paragraphs (e)(2)

and (3) of this section, this section applies

to foreign taxes paid (within the meaning

of §1.901-2(g)) in taxable years beginning

on or after December 28, 2021. For foreign taxes that relate to (and if creditable

are considered to accrue in) taxable years

beginning before December 28, 2021, and

that are remitted in taxable years beginning on or after December 28, 2021, by a

taxpayer that accounts for foreign income

taxes on the accrual basis, see §1.903-1 as

contained in 26 CFR part 1 revised as of

April 1, 2021.

(2) Certain foreign taxes paid to

Puerto Rico. For foreign taxes paid to

Puerto Rico under section 3070.01 of the

Puerto Rico Internal Revenue Code of

2011, as amended (13 L.P.R.A. 31771)

(imposing an excise tax on a controlled

group member’s acquisition from another

group member of certain personal property manufactured or produced in Puerto

Rico and certain services performed in

Puerto Rico), this section applies to foreign taxes paid (within the meaning of

§1.901-2(g)) in taxable years beginning

on or after January 1, 2023. For foreign

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taxes described in the preceding sentence

that are paid in taxable years beginning

before January 1, 2023, see §1.903-1 as

contained in 26 CFR part 1 revised as of

April 1, 2021.

(3) Modifications to the covered withholding tax rules. Paragraphs (c)(2) and

(d)(3), (4), and (8) through (11) of this section apply to foreign taxes paid (within the

meaning of §1.901-2(g)) in taxable years

ending on or after November 18, 2022.

For foreign taxes that are paid in taxable

years ending before November 18, 2022,

see §1.903-1(c)(2) and (d)(3) and (4) as

contained in 26 CFR part 1 revised as of

July 27, 2022. Taxpayers may choose to

apply the rules in paragraphs (c)(2) and

(d)(3), (4), and (8) through (11) of this

section to foreign taxes paid in taxable

years beginning on or after December

28, 2021, and ending before November

18, 2022, provided that they consistently

apply those rules and the rules of §1.9012(b)(5)(i)(B)(2) and (d)(1)(iii) to such taxable years.

Melanie R. Krause,

Acting Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on

November 18, 2022, 11:15 a.m., and published in the

issue of the Federal Register for November 22, 2022,

87 F.R. 71271)

Bulletin No. 2022–49

Definition of Terms

Revenue rulings and revenue procedures

(hereinafter referred to as “rulings”) that

have an effect on previous rulings use the

following defined terms to describe the

­effect:

Amplified describes a situation where

no change is being made in a prior published position, but the prior position is

being extended to apply to a variation of

the fact situation set forth therein. Thus,

if an earlier ruling held that a principle

applied to A, and the new ruling holds that

the same principle also applies to B, the

earlier ruling is amplified. (Compare with

modified, below).

Clarified is used in those instances

where the language in a prior ruling is

being made clear because the language

has caused, or may cause, some confusion. It is not used where a position in a

prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously published ruling and points out an essential

difference between them.

Modified is used where the substance

of a previously published position is being

changed. Thus, if a prior ruling held that a

principle applied to A but not to B, and the

new ruling holds that it applies to both A

and B, the prior ruling is modified because

it corrects a published position. (Compare

with amplified and clarified, above).

Obsoleted describes a previously published ruling that is not considered det

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