# Bulletin No. 2022–49

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A48c073e93264586f

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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

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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),
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Washington, DC 20044. Submissions
may be hand delivered Monday through
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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

512

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

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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 re

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A48c073e93264586f. Public record. Not legal advice.