Guidance Related to the Foreign Tax Credit; Clarification of Foreign-Derived Intangible Income

Federal RegisterJan 4, 2022

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9959]

RIN 1545-BP70

Guidance Related to the Foreign Tax Credit; Clarification of Foreign-Derived Intangible Income

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations.

SUMMARY:

This document contains final regulations relating to the foreign tax credit, including the disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a dividends-received deduction; the allocation and apportionment of interest expense, foreign income tax expense, and certain deductions of life insurance companies; the definition of a foreign income tax and a tax in lieu of an income tax; the definition of foreign branch category income; and the time at which foreign taxes accrue and can be claimed as a credit. This document also contains final regulations clarifying rules relating to foreign-derived intangible income (FDII). The final regulations affect taxpayers that claim credits or deductions for foreign income taxes, or that claim a deduction for FDII.

DATES:

Effective date:

These regulations are effective on March 7, 2022.

Applicability dates:

For dates of applicability, see §§ 1.164-2(i), 1.245A(d)-1(f), 1.336-5, 1.338-9(d)(4), 1.367(b)-7(h), 1.367(b)-10(e), 1.861-3(e), 1.861-9(k), 1.861-10(h), 1.861-14(k), 1.861-20(i), 1.901-1(j), 1.901-2(h), 1.903-1(e), 1.904-6(g), 1.905-1(h), 1.905-3(d), 1.951A-7, and 1.960-7.

FOR FURTHER INFORMATION CONTACT:

Concerning §§ 1.245A(d)-1, 1.336-2, 1.338-9, 1.861-3, 1.861-20, 1.904-6, 1.960-1, and 1.960-2, Suzanne M. Walsh, (202) 317-4908; concerning §§ 1.250(b)-1, 1.861-8, 1.861-9, and 1.861-14, Jeffrey P. Cowan, (202) 317-4924; concerning § 1.250(b)-5, Brad McCormack, (202) 317-6911; concerning §§ 1.164-2, 1.901-1, 1.901-2, 1.903-1, 1.905-1, and 1.905-3, Tianlin (Laura) Shi, (202) 317-6987; concerning §§ 1.367(b)-3, 1.367(b)-4, and 1.367(b)-10, Logan Kincheloe, (202) 317-6075; concerning §§ 1.367(b)-7, 1.861-10, and 1.904-4, Jeffrey L. Parry, (202) 317-4916; concerning §§ 1.951A-2 and 1.951A-7, Jorge M. Oben and Larry Pounders, (202) 317-6934 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

On December 7, 2018, the Treasury Department and the IRS published proposed regulations (REG-105600-18) relating to foreign tax credits in the

Federal Register

(83 FR 63200) (the “2018 FTC proposed regulations”). Those regulations addressed several significant changes that the Tax Cuts and Jobs Act (Pub. L. 115-97, 131 Stat. 2054 (2017)) (the “TCJA”) made with respect to the foreign tax credit rules and related rules for allocating and apportioning deductions in determining the foreign tax credit limitation. Certain portions of the 2018 FTC proposed regulations were finalized as part of TD 9866, published in the

Federal Register

(84 FR 29288) on June 21, 2019. The remaining portions of the 2018 FTC proposed regulations were finalized in TD 9882, published in the

Federal Register

on December 17, 2019 (84 FR 69022) (the “2019 FTC final regulations”). On the same date, new proposed regulations (REG-105495-19) addressing changes made by the TCJA as well as other related foreign tax credit rules were published in the

Federal Register

(84 FR 69124) (the “2019 FTC proposed regulations”). Correcting amendments to the 2019 FTC final regulations and the 2019 FTC proposed regulations were published in the

Federal Register

on May 15, 2020. See 85 FR 29323 (2019 FTC final regulations) and 85 FR 29368 (2019 FTC proposed regulations). 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 (REG-101657-20) 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. See 86 FR 54367. A public hearing on the 2020 FTC proposed regulations was held on April 7, 2021.

On July 15, 2020, the Treasury Department and the IRS finalized regulations under section 250 (the “section 250 regulations”) in TD 9901, published in the

Federal Register

(85 FR 43042). The 2020 FTC proposed regulations also included revisions to the section 250 regulations.

This document contains final regulations (the “final regulations”) addressing the following: (1) The determination of foreign income taxes subject to the credit and deduction disallowance provisions of section 245A(d); (2) the determination of oil and gas extraction income from domestic and foreign sources and of electronically supplied services under the section 250 regulations; (3) the impact of the repeal of section 902 on certain regulations issued under section 367(b); (4) the sourcing of inclusions under sections 951, 951A, and 1293; (5) the allocation and apportionment of interest deductions of certain regulated utilities; (6) a revision to the controlled foreign corporation (“CFC”) netting rule; (7) the allocation and apportionment of section 818(f)(1) items of life insurance companies that are members of consolidated groups; (8) the allocation and apportionment of foreign income taxes, including taxes imposed with respect to disregarded payments; (9) the definitions of a foreign income tax and a tax in lieu of an income tax, including changes to the net gain requirement, the replacement of the jurisdictional nexus rule with an attribution rule contained in the net gain requirement, the treatment of certain tax credits, the treatment of foreign tax law elections for purposes of the noncompulsory payment rules, and the substitution requirement under section 903; (10) the allocation of the liability for foreign income taxes in connection with certain mid-year transfers or reorganizations; (11) the foreign branch category rules in § 1.904-4(f); and (12) the time at which credits for foreign income taxes can be claimed pursuant to sections 901(a) and 905(a).

This rulemaking finalizes, without substantive change, certain provisions in the 2020 FTC proposed regulations with respect to which the Treasury Department and IRS did not receive any comments. See §§ 1.164-2(d), 1.250(b)-1(c), 1.250(b)-5, 1.336-2(g)(3), 1.338-9(d), 1.367(b)-2, 1.367(b)-3, 1.367(b)-4, 1.367(b)-7, 1.367(b)-10, 1.461-1, 1.861-3(d), 1.861-8(e)(4), 1.861-8(e)(8)(v), 1.861-9(g)(3), 1.861-10(e)(8)(v), 1.861-10(f), 1.901-1, 1.901-2(e)(4), 1.901-2(f), 1.904-4(b), 1.904-4(c), 1.904-6, 1.905-3, 1.954-1, 1.960-1, and 1.960-2. These provisions are generally not discussed in this preamble.

No comments were received with respect to the transition rules contained in the 2020 FTC proposed regulations to account for the effect on loss accounts of net operating loss carrybacks to pre-2018 taxable years that are allowed under the Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136, 134 Stat. 281 (2020). Section 1.904(f)-12(j) was finalized without

change in TD 9956, published in the

Federal Register

(86 FR 52971) on September 24, 2021.

Comments that do not pertain to the 2020 FTC proposed regulations, or that are otherwise outside the scope of this rulemaking, are generally not addressed in this preamble but may be considered in connection with future guidance projects.

The rules contained in proposed § 1.861-9(k) (election to capitalize certain expenses in determining tax book value of assets), § 1.861-10(g) (requiring the direct allocation of interest expense in the case of certain foreign banking branches), and §§ 1.904-4(e)(1)(ii) and 1.904-5(b)(2) (relating to the definition of financial services income) are not finalized in this document. The Treasury Department and the IRS are continuing to study the comments received in connection with those provisions.

Summary of Comments and Explanation of Revisions

I. Disallowance of Foreign Tax Credit or Deduction for Foreign Income Taxes Under Section 245A(d)

Proposed § 1.245A(d)-1(a) generally provided that neither a credit under section 901 nor a deduction is allowed for foreign income taxes (as defined in § 1.901-2(a)) paid or accrued by a domestic or foreign corporation that are attributable to a specified distribution or specified earnings and profits of a foreign corporation. The proposed rule defined a specified distribution—in the case of a distribution to a domestic corporation—as the portion of a dividend for which a deduction under section 245A(a) is allowed, a hybrid dividend, or a distribution of certain previously taxed earnings (“PTEP”) related to section 245A(d) (“section 245A(d) PTEP”). In the case of a distribution to another foreign corporation, a specified distribution included the portion of the distribution attributable to section 245A(d) PTEP, or a tiered hybrid dividend that gives rise to a U.S. shareholder inclusion by reason of section 245A(e)(2) and § 1.245A(e)-1(c)(1). Specified earnings and profits included the portion of the earnings and profits of a foreign corporation that would give rise to a specified distribution if an amount equal to the entire earnings and profits of the foreign corporation were distributed. Specified earnings and profits also included an amount equal to the portion of a U.S. return of capital amount, as that term is defined in § 1.861-20(b), that is treated as arising in a section 245A subgroup, after the application of the asset method in § 1.861-9. Proposed § 1.245A(d)-1(a) relied upon the rules in § 1.861-20 to associate gross income included in the foreign tax base (“foreign gross income”) with these amounts and to allocate foreign income taxes to the foreign gross income. The proposed regulations also included an anti-avoidance rule to, for example, prevent taxpayers from using successive foreign law distributions to inappropriately associate withholding tax on the distributions with PTEP arising from inclusions under sections 951(a) and 951A(a). See proposed § 1.245A(d)-1(b)(2). The Treasury Department and the IRS requested comments on possible revisions to § 1.861-20 to address these concerns, including rules to require the maintenance of separate accounts that would reflect the effect of foreign law transactions on the earnings and profits of a foreign corporation. 85 FR at 72079.

A comment noted that proposed § 1.245A(d)-1(a) explicitly treated as specified earnings and profits the portion of a U.S. return of capital amount that is deemed to arise pursuant to § 1.861-20(d)(3)(i) in a section 245A subgroup under the asset method of § 1.861-9, yet did not explicitly treat any amount as specified earnings and profits when the asset method of § 1.861-9 applies under proposed § 1.861-20(d)(3)(v) to characterize a disregarded payment that is a remittance as made from a section 245A subgroup. The comment also expressed concerns that proposed § 1.245A(d)-1 did not adequately clarify the treatment of foreign tax imposed on a distribution received by a domestic or foreign corporation with respect to its interest in a partnership, or on the proceeds of a disposition of such an interest.

The comment also noted the uncertainty in proposed § 1.245A(d)-1(a) over the use of the asset method of § 1.861-9 to characterize foreign taxable income of a CFC and apply the disallowance rules of section 245A(d), including when a CFC receives a distribution that is a U.S. return of capital amount. The comment stated that, if the U.S. return of capital amount is treated as made from earnings in a section 245A subgroup of the distributing CFC, the disallowance under section 245A(d) of foreign taxes associated with the portion of the specified earnings and profits attributable to tested income of the recipient CFC not included by a United States shareholder has the inappropriate effect of double-counting the inclusion percentage of section 960(d).

With respect to the anti-avoidance rule of proposed § 1.245A(d)-1(b)(2), the comment acknowledged the need to address successive foreign law distributions and discussed three alternative approaches. One approach would revise § 1.861-20(d)(2)(ii)(A) to treat a foreign law distribution as made ratably out of all of a foreign corporation's earnings and profits, including PTEP, if the amount of its earnings and profits exceeds the foreign gross income arising from the foreign law distribution. The second approach would maintain separate E&P accounts to track the effect of foreign law distributions; the comment viewed this option as overly complex and burdensome. The third approach would maintain the anti-avoidance rule of proposed § 1.245A(d)-1(b)(2) and make no substantive changes to the operative rules. The comment indicated that a flexible, well-articulated anti-avoidance rule could be more effective at policing attempts to avoid section 245A(d) than a series of potentially manipulable mechanical rules.

The Treasury Department and the IRS agree that proposed § 1.245A(d)-1 did not clearly describe the income under Federal income tax law to which foreign gross income should be treated as corresponding for purposes of allocating and apportioning foreign income taxes under § 1.860-20. This lack of clarity resulted in uncertainty in determining the extent to which foreign income taxes on a U.S. return of capital amount, which can arise in a variety of transactions involving both stock and partnership interests, should be treated as attributable to income of a foreign corporation that would give rise to a deduction under section 245A(a) when distributed.

In response to these comments, § 1.245A(d)-1(a) is revised to eliminate references to specified distributions and specified earnings and profits. Instead, § 1.245A(d)-1(a) of the final regulations provides that no credit or deduction is allowed for foreign income taxes attributable to (1) “section 245A(d) income” of a domestic corporation, a successor of a domestic corporation, or a foreign corporation (see § 1.245A(d)-1(a)(1)(i)-(ii) and (a)(2)), or (2) “non-inclusion income” of a foreign corporation (see § 1.245A(d)-1(a)(1)(iii)).

Section 245A(d) income means, in the case of a domestic corporation, dividends or inclusions for which a deduction under section 245A(a) is allowed, a distribution of section 245A(d) PTEP, and hybrid dividends and inclusions related to tiered hybrid dividends under section 245A(e). In the case of a successor of a domestic corporation, section 245A(d) income

means a distribution of section 245A(d) PTEP. In the case of a foreign corporation, section 245A(d) income means an item of subpart F income that gives rise to an inclusion for which a deduction under section 245A(a) is allowed, a tiered hybrid dividend, and a distribution of section 245A(d) PTEP. Under § 1.245A(d)-1(b)(1), foreign income taxes are attributable to section 245A(d) income if the taxes are allocated and apportioned under § 1.861-20 to the statutory grouping within each section 904 category (the “section 245A(d) income group”) to which section 245A(d) income is assigned.

Accordingly, the disallowance under § 1.245A(d)-1(a) applies not only to foreign income taxes that are paid or accrued with respect to certain distributions and inclusions, but also to taxes paid or accrued by reason of the receipt of a foreign law distribution with respect to stock, a foreign law disposition, ownership of a reverse hybrid, a foreign law inclusion regime, or the receipt of a disregarded payment described in § 1.861-20(d)(3)(v)(B), to the extent the foreign income taxes are attributable to section 245A(d) income. The disallowance also applies where a foreign corporation pays or accrues foreign income taxes that are attributable to section 245A(d) income of the foreign corporation, in which case such taxes are not eligible to be deemed paid under section 960 in any taxable year. For example, the disallowance applies to foreign income taxes paid or accrued by reason of the receipt by the foreign corporation of a tiered hybrid dividend.

These revised rules ensure that § 1.861-20, including the rules of § 1.861-20(d)(2) for allocating and apportioning foreign income tax to a statutory or residual grouping in a year in which there is no income for Federal income tax purposes in the grouping, apply consistently to allocate and apportion foreign income taxes to the section 245A(d) income group. The rules of § 1.861-20(d)(3) apply to determine the circumstances under which foreign gross income included by reason of a dividend or other distribution with respect to stock, a partnership distribution, a sale or exchange of stock, or a sale or exchange of a partnership interest is assigned to the section 245A(d) income group.

Non-inclusion income is defined as income other than subpart F income, tested income, or income described in section 245(a)(5), without regard to section 245(a)(12), (items of income constituting post-1986 undistributed U.S. earnings) of a foreign corporation. Section 1.245A(d)-1(b)(2)(ii) attributes foreign income taxes to non-inclusion income of a foreign corporation to the extent the foreign income taxes are allocated and apportioned to the domestic corporation's section 245A subgroup category of stock when applying § 1.861-20 for purposes of section 904 as the operative section. The final rules also attribute foreign income taxes to the non-inclusion income of a reverse hybrid or foreign law CFC to the extent that they are allocated and apportioned to the non-inclusion income group under § 1.861-20. See § 1.245A(d)-1(b)(2)(iii).

The disallowance under § 1.245A(d)-1(a)(1)(iii) therefore applies to foreign income taxes paid or accrued by a domestic corporation that are attributable to non-inclusion income of a foreign corporation in which the domestic corporation is a United States shareholder. For example, paragraph (a)(1)(iii) applies to foreign income taxes that a domestic corporation that is a United States shareholder of a foreign corporation pays or accrues by reason of its receipt from the foreign corporation of a distribution that is a U.S. return of capital amount to the extent the foreign income taxes are attributable to non-inclusion income of the foreign corporation. The final regulations at § 1.245A(d)-1(b)(2)(ii) clarify that this rule extends to foreign income taxes the domestic corporation pays or accrues by reason of a remittance, a distribution that is a U.S. return of partnership basis amount, or a disposition that gives rise to a U.S. return of capital amount or a U.S. return of partnership basis amount. The disallowance under paragraph (a)(1)(iii) also applies to foreign income taxes that a domestic corporation that is a United States shareholder pays or accrues by reason of its ownership of a reverse hybrid or foreign law CFC, to the extent the foreign income taxes are attributable to non-inclusion income of the reverse hybrid or foreign law CFC and not otherwise disallowed under paragraph (a)(1)(i) or (ii).

The proposed anti-avoidance rule in § 1.245A(d)-1(b)(2) is finalized without substantive change at § 1.245A(d)-1(b)(3). While revising § 1.861-20(d)(2)(ii)(A) to treat a foreign law distribution as made ratably out of all of a foreign corporation's earnings and profits would be a potentially feasible alternative approach, the Treasury Department and the IRS have determined that on balance the anti-avoidance rule provides an appropriate framework and the necessary flexibility to address section 245A(d) avoidance.

Finally, for the avoidance of doubt, the final regulations clarify that section 245A(d) operates to deny the credit or deduction for foreign taxes paid or accrued with respect to dividends for which a domestic corporation could claim a deduction under section 245A, regardless of whether the corporation claims the deduction on its return. See § 1.245A(d)-1(c)(19) and (21) (defining section 245A(d) income and section 245A(d) PTEP). See also H.R. Rep. No. 115-466, at 600 (2017) (Conf. Rep.) (“No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to any portion of a distribution treated as a dividend that qualifies for the DRD.”);

id.

at 598 (describing section 245A as “an exemption for certain foreign income by means of a 100-percent deduction”).

II. Section 250 Regulations—Definition of Electronically Supplied Service

Section 1.250(b)-5 provides rules for determining whether a service is provided to a person, or with respect to property, located outside the United States and therefore gives rise to foreign-derived deduction eligible income (“FDDEI service”). The rules identify specific enumerated categories, including a category for general services provided to either consumers or business recipients. For purposes of determining whether such a general service constitutes a FDDEI service, the rules require the location of the recipient to be identified.

The regulations contain special rules in § 1.250(b)-5(d)(2) and § 1.250(b)-5(e)(2)(iii) for determining the location at which “electronically supplied services” are provided. Section 1.250(b)-5(c)(5) defines the term “electronically supplied service” to mean a general service (other than an advertising service) that is delivered primarily over the internet or an electronic network, and provides that such services include cloud computing and digital streaming services. Proposed § 1.250(b)-5(c)(5) revised that definition to clarify that, to qualify as an electronically supplied service, the value of the service to the end user must be derived primarily from the service's automation and electronic delivery and would not include, for example, legal, accounting, medical or teaching services “delivered electronically and synchronously.” No comments were received on the proposed revised definition of an electronically supplied service.

By providing the example of professional or teaching services provided in real time (synchronously) as not constituting electronically supplied services, proposed § 1.250(b)-5(c)(5) was intended to illustrate cases where

the primary value of the service was not in its automation and electronic delivery. However, this example may have implied that the temporal aspect of when the service is rendered, relative to when the end user accesses that service, is a determinative factor in constituting an “electronically supplied service.” The Treasury Department and the IRS had intended that services accessed by an end user outside of real time (asynchronously) also will not constitute an “electronically supplied service” if, under all the facts and circumstances, they primarily involve human effort. Therefore, the final regulations remove the reference to “and synchronously” from the fourth sentence of § 1.250(b)-5(c)(5) to clarify that the definition does not depend on whether the services are rendered synchronously or asynchronously but rather depend on whether the services primarily involve human effort.

III. Allocation and Apportionment of Expenses Under Section 861 Regulations

A. Treatment of Section 818(f)(1) Items for Consolidated Groups

Proposed § 1.861-14(h) provided that certain items of life insurance companies described in section 818(f)(1) that are members of a consolidated group are allocated and apportioned on a life subgroup basis but provided a one-time election to allocate and apportion these items on a separate company basis. The one comment received endorsed the approach in the 2020 FTC proposed regulations, which are finalized without change.

B. Allocation and Apportionment of Foreign Income Taxes

1. In General

The 2020 FTC proposed regulations provided more detailed and comprehensive guidance regarding the assignment of foreign gross income, and the allocation and apportionment of the associated foreign income taxes, to the statutory and residual groupings in certain cases. This guidance included rules for dispositions of stock and partnership interests, and rules for transactions that are distributions with respect to a partnership interest, under Federal income tax law. It also included new rules addressing the allocation and apportionment of foreign income taxes imposed by reason of disregarded payments.

2. Dispositions of Stock

Proposed § 1.861-20(d)(3)(i)(D) provided that the foreign gross income arising from a transaction that is treated as a sale, exchange, or other disposition of stock for Federal income tax purposes is assigned first to the statutory and residual groupings to which any U.S. dividend amount is assigned under Federal income tax law, to the extent thereof. Foreign gross income is next assigned to the grouping to which the U.S. capital gain amount is assigned, to the extent thereof. Any excess of the foreign gross income over the sum of the U.S. dividend amount and the U.S. capital gain amount is assigned to the statutory and residual groupings in the same proportions in which the tax book value of the stock is (or would be if the taxpayer were a United States person) assigned to the groupings under the rules of § 1.861-9(g) in the U.S. taxable year in which the disposition occurs.

A comment recommended that, to the extent of any basis in the stock attributable to a previous increase under section 961, foreign gross income in excess of the U.S. dividend amount be assigned to the same statutory grouping as the PTEP that gave rise to the basis increase. The comment noted that assigning foreign gross income in excess of the U.S. dividend amount to the grouping that produced the underlying PTEP would better conform the tax attribution consequences of a disposition of stock with the tax attribution consequences of a pre-sale distribution with respect to the stock.

Under § 1.861-20(d)(1), Federal income tax law applies to characterize the transaction that gives rise to foreign gross income. The sale of stock may result in a U.S. dividend amount, a U.S. return of capital amount, and a U.S. capital gain amount for U.S. tax purposes. As noted in the preamble to the 2020 FTC proposed regulations, when a controlled foreign corporation has retained PTEP, the usual consequence will be to increase the portion of the amount realized on the sale of the corporation's stock that is treated as a return of capital for U.S. tax purposes, as a result of the basis adjustments under section 961. Accordingly, it is reasonable to conceive of foreign gross income in the amount of the basis attributable to retained PTEP as a timing difference associated with the earnings represented by the PTEP, just as an amount of foreign gross income equal to a section 1248 amount that is included in the U.S. dividend amount is treated as a timing difference associated with those non-previously taxed earnings.

However, the approach suggested in the comment would create an additional compliance burden for taxpayers and administrative burdens for the IRS by requiring the separate tracking of basis in the stock attributable to a previous increase under section 961, which is not otherwise required for U.S. tax purposes. Additional rules would be required to associate PTEP with the particular shares of stock being sold, such as in the case of a taxpayer with PTEP in different statutory groupings who sells one class of stock but retains a different class of stock. The Treasury Department and the IRS have determined that the groupings to which the tax book value of the stock is assigned is an administrable and reasonably accurate surrogate for both the PTEP and the future, unrealized earnings of the corporation with which the foreign gross income is properly associated when foreign tax is imposed on a U.S. return of capital amount. For these reasons, the final regulations retain the rule in proposed § 1.861-20(d)(3)(i)(D).

3. Partnership Transactions

Proposed § 1.861-20(d)(3)(ii)(B) assigned foreign gross income arising from a partnership distribution in excess of the U.S. capital gain amount by reference to the asset apportionment percentages of the tax book value of the partner's distributive share of the partnership's assets (or, in the case of a limited partner with less than a 10 percent interest, the tax book value of the partnership interest), which are a surrogate for the partner's distributive share of earnings of the partnership that are not recognized in the year in which the distribution is made for U.S. tax purposes. This approach is based on principles similar to those underlying the rule in proposed § 1.861-20(d)(3)(i)(D) for allocating and apportioning foreign tax imposed on an amount that is a return of capital with respect to stock for Federal income tax purposes. Similarly, the 2020 FTC proposed regulations associated foreign gross income from the disposition of a partnership interest in excess of the U.S. capital gain amount with a hypothetical distributive share that is determined by reference to the tax book value of the partnership's assets (or, in the case of a limited partner with less than a 10 percent interest, the tax book value of the partnership interest). See proposed § 1.861-20(d)(3)(ii)(C).

A comment recommended that, in the case of either a distribution with respect to a partnership or a disposition of a partnership interest, foreign gross income in excess of the U.S. capital gain amount be characterized instead by reference to the statutory and residual groupings of amounts maintained in partner-level accounts that track the partners' distributive shares of

partnership earnings in prior years. According to the comment, the tax book value method potentially distorts the allocation of tax to U.S. income items in cases in which the amount of income produced by the asset is disproportionate to its basis. For this reason, the comment recommended tracing foreign gross income to amounts in the partner's cumulative distributive share account in order to provide for more accurate matching of foreign gross income to partners' distributive shares of partnership income for the current and prior years. The comment recommended that these new partner-level accounts be increased as a partner includes a distributive share of partnership income and decreased as the partnership makes distributions. Under this multi-year account approach, foreign gross income arising from partnership distributions would be characterized by reference to the earnings in the account out of which the distribution is made, and foreign gross income arising from a disposition of a partnership interest would be characterized by reference to the earnings in the account at the time of disposition. In either case, additional rules (such as providing for the use of a pro rata, last-in-first-out, or other approach) would be required to determine the earnings in the account out of which a distribution is considered to be made, and for cases in which the amount in the partner-level account exceeds the foreign gross income arising from a disposition of that partner's partnership interest.

Recognizing the additional record-keeping requirements and complexity required by this approach, the comment suggested in the alternative that foreign gross income in excess of a U.S. capital gain amount recognized by reason of a partnership distribution or disposition of a partnership interest be characterized based on the partner's distributive share of the partnership's current year income, to the extent thereof, with any excess assigned based on the tax book value method provided for in the 2020 FTC proposed regulations.

The final regulations retain the approach from the 2020 FTC proposed regulations for characterizing foreign gross income arising from a partnership distribution or disposition. The Treasury Department and the IRS do not agree that it is appropriate to treat a partnership distribution as made out of a partner's distributive share of partnership income. Contrary to the ordering rules that apply to distributions by a corporation, under Federal income tax law partnership distributions are not sourced from current or accumulated partnership income. Similarly, under Federal income tax law, a partnership distribution reduces a partner's basis in its partnership interest without differentiating between basis from capital contributions and basis from a partner's distributive share of partnership income.

A common principle of the rules in § 1.861-20 is that Federal income tax law applies to characterize foreign gross income. To the extent a partnership distribution or disposition is treated as a return of basis for Federal income tax purposes, § 1.861-20(d)(3)(ii)(B) and (C) appropriately reflect this principle by allocating and apportioning any foreign tax imposed on the partnership distribution in the same manner as foreign tax on a return of capital with respect to stock. Furthermore, this approach to characterizing foreign gross income arising from a partnership distribution is consistent with the approach in § 1.861-20(d)(3)(v)(C)(

) that applies to a distribution that is a remittance by a taxable unit.

As acknowledged by the comment, characterizing foreign gross income by reference to a partner's distributive share of partnership income in prior years would require creating new partner-level accounts to track the partner's aggregate distributive share of unremitted partnership income. That type of partner-level account is not otherwise required to be maintained to characterize partnership distributions for Federal income tax purposes and would be unduly burdensome for both taxpayers and the IRS, as well as being generally inconsistent with the Federal income tax rules for characterizing partnership distributions. In addition, the Treasury Department and the IRS have determined that the suggested alternative approach of characterizing foreign gross income by reference to a partner's distributive share of current year partnership income would be susceptible to manipulation by timing partnership distributions to maximize foreign tax credit benefits. Therefore, the comment is not adopted.

4. Disregarded Payments

The 2020 FTC proposed regulations addressed the allocation and apportionment of foreign income taxes that are imposed by reason of a disregarded payment between taxable units. In the case of foreign income taxes paid or accrued by an individual or domestic corporation, the rules defined a taxable unit as a foreign branch, foreign branch owner, or non-branch taxable unit as defined in proposed § 1.904-6(b)(2)(i)(B). In the case of foreign income taxes paid by a foreign corporation, the rules defined a taxable unit by reference to the tested unit definition in proposed § 1.954-1(d)(2), as contained in proposed regulations (REG-127732-19) addressing the high-tax exception under section 954(b)(4), published in the

Federal Register

(85 FR 44650) on July 23, 2020 (the “2020 HTE proposed regulations”). See proposed § 1.861-20(d)(3)(v)(E)(

In general, the 2020 FTC proposed regulations characterized a disregarded payment as either a payment out of the current income attributable to a taxable unit (a “reattribution payment”), a contribution to a taxable unit, or a remittance out of accumulated earnings of a taxable unit. See proposed § 1.861-20(d)(3)(v). The rules assigned foreign gross income arising from a reattribution payment to the statutory and residual groupings of the recipient taxable unit based on the groupings to which the current income out of which the reattribution payment was made is assigned. See proposed § 1.861-20(d)(3)(v)(B). The rules assigned foreign gross income arising from a contribution received by a taxable unit to the residual grouping, and assigned foreign gross income arising from a remittance by reference to the statutory and residual groupings to which the assets of the payor taxable unit were assigned for purposes of apportioning interest expense, which served as a proxy for the accumulated earnings of the payor taxable unit. See proposed § 1.861-20(d)(3)(v)(C). For this purpose, the assets of a payor taxable unit were determined under the rules of § 1.987-6(b), modified to include in a taxable unit's assets any stock that it owned, and in certain circumstances reattributed another taxable unit's assets to the taxable unit or reattributed the taxable unit's assets to another taxable unit. See proposed § 1.861-20(d)(3)(v)(C)(

)(

Comments criticized the tax book value method as an inaccurate surrogate for accumulated earnings of a taxable unit in the case of an asset with a basis that is disproportionate to the income produced by the asset and requested that foreign gross income arising from a remittance be assigned to the statutory and residual groupings based on the current earnings of a taxable unit. In addition, comments requested that, rather than trace foreign gross income arising from disregarded payments to current or accumulated earnings of a taxable unit, the definition of which generally includes disregarded entities, the rules should only trace such foreign

gross income to current or accumulated income of a qualified business unit (“QBU”) to reduce the complexity and compliance burden of the rules. Finally, a comment suggested that the modifications to the rules of § 1.987-6(b) for purposes of determining the assets of a taxable unit should be expanded to include not only stock, but any interest of a taxable unit in another taxable unit, including a partnership.

The Treasury Department and the IRS do not agree that current earnings of a taxable unit, rather than the tax book value of its assets, should be the basis for characterizing foreign gross income included by reason of a remittance. The Treasury Department and the IRS have determined that, although the tax book value of the assets of a taxable unit may not be a perfect surrogate for the accumulated earnings of that taxable unit, it is a better surrogate than current-year earnings of the taxable unit. The use of current-year earnings is rejected because the current-year earnings may already have been accounted for through reattribution payments, may not reflect all of a taxable unit's assets, and could be subject to manipulation through the timing of disregarded payments, depending on the character of the earnings attributed to a taxable unit for a particular taxable year. Although a more accurate matching of foreign gross income to accumulated income for Federal income tax purposes could be achieved through the maintenance of multi-year accounts tracking accumulated earnings of a taxable unit, characterizing the accumulated earnings of a taxable unit by reference to the tax book value of its assets appropriately balances concerns about administrability, compliance burdens, manipulability, and accuracy.

The Treasury Department and the IRS do not agree that foreign gross income should be traced to income only when disregarded payments are made by a QBU, rather than a taxable unit. The purpose of this rule in the 2020 FTC proposed regulations was to implement a tracing regime for foreign income tax imposed on disregarded payments that more accurately distinguished payments made out of current income from those made out of accumulated income, rather than treating all disregarded payments as either remittances or contributions. Tracing cannot achieve the policy goal of improved accuracy in matching disregarded payments to the current or accumulated earnings out of which the payment is made if it does not fully account for all disregarded payments. Accordingly, this recommendation is not adopted.

The Treasury Department and the IRS agree that for purposes of § 1.861-20 the assets of a taxable unit should include not only stock that it owns, but also its interests in other taxable units. Asset tax book values serve as a surrogate for the accumulated earnings from which a taxable unit made a remittance; including a taxable unit's interests in all other taxable units appropriately reflects all of the income-producing assets of a taxable unit that could produce earnings. Accordingly, § 1.861-20(d)(3)(v)(C)(

)(

) of the final regulations provides that a taxable unit's assets include its pro rata share of the assets of another taxable unit in which it owns an interest.

The definitions of the terms “contribution” and “remittance” in § 1.861-20(d)(3)(v)(E) of the final regulations are revised so that, together, they describe all payments that are not reattribution payments. The proposed regulations defined a “contribution” as a transfer of property to a taxable unit that would be treated as a contribution to capital described in section 118 or a transfer described in section 351 if the taxable unit were a corporation under Federal income tax law, or the excess of a disregarded payment made by a taxable unit to another taxable unit that the first taxable unit owns over the portion of the disregarded payment that is a reattribution payment. The proposed regulations defined a “remittance” as a transfer of property that would be treated as a distribution by a corporation to a shareholder with respect to its stock if the taxable unit were a corporation for Federal income tax law, or the excess of a disregarded payment made by a taxable unit to a second taxable unit over the portion of the disregarded payment that is a reattribution payment, other than an amount treated as a contribution. The proposed definition of “contribution” did not encompass a disregarded payment that is neither a reattribution payment nor a transfer that would be described in section 351, such as, in some circumstances, disregarded interest payments. To fill this gap, § 1.861-20(d)(3)(v)(E) of the final regulations defines a “contribution” as the excess of a disregarded payment made by a taxable unit to another taxable unit that the first taxable unit owns over the portion of the disregarded payment, if any, that is a reattribution payment. This definition encompasses a transfer of property to a taxable unit that would be treated as a contribution to capital described in section 118 or a transfer described in section 351 if the taxable unit were a corporation. In addition, § 1.861-20(d)(3)(v)(E) of the final regulations defines a “remittance” as a disregarded payment that is neither a contribution nor a reattribution payment. This definition encompasses a transfer of property that would be treated as a distribution by a corporation to a shareholder with respect to its stock if the taxable unit were a corporation. These changes ensure that the final regulations provide rules for allocating foreign income taxes attributable to all disregarded payments.

In addition, the final regulations define a “taxable unit” by reference to the tested unit definition in § 1.951A-2(c)(7)(iv)(A), a final regulation, instead of by reference to the definition of a taxable unit in proposed § 1.954-1(d)(2). See § 1.861-20(d)(3)(v)(E)(

The final regulations provide a special rule at § 1.861-20(d)(3)(vi) for allocating and apportioning foreign income tax on foreign gross income included by a taxpayer by reason of its ownership of a U.S. equity hybrid instrument (defined in § 1.861-20(b)(22) as an instrument that is stock or a partnership interest under Federal income tax law but that is debt or otherwise gives rise to the accrual of income that is not treated as a dividend or a distributive share of partnership income under foreign law). This special rule, which generally allocates foreign income tax on foreign gross interest income with respect to a U.S. equity hybrid instrument to the grouping to which distributions with respect to the instrument are assigned, clarifies how section 245A(d) and § 1.245A(d)-1 apply to foreign income tax that is attributable to a hybrid dividend. As discussed in part I of this Summary of Comments and Explanation of Revisions, § 1.245A(d)-1 relies upon the rules of § 1.861-20 to determine whether foreign income tax is attributable to income described in section 245A, including a hybrid dividend described in section 245A(e), in which case a credit or deduction for the foreign income tax is disallowed.

Section 1.861-20(d)(3)(vi)(A) treats foreign gross income included by reason of an accrual of income with respect to a U.S. equity hybrid instrument as a distribution. Accordingly, it assigns the foreign gross income to the statutory and residual groupings as though the accrual were a foreign law distribution that was made on the date of the accrual. Section 1.861-20(d)(3)(vi)(B) provides an identical rule for a payment of interest under foreign law with respect to the U.S. equity hybrid instrument; therefore, withholding tax on the payment is also attributed to income (determined under Federal income tax law) from the instrument.

Finally, as part of finalizing the rules in § 1.861-20(d)(3)(v), conforming changes are made to § 1.951A-2(c)(7) and (8). In particular, § 1.951A-2(c)(7)(iii)(B) is deleted and Examples 1 and 3 in § 1.951A-2(c)(8)(iii)(A) and (C) are revised accordingly while Example 2 in § 1.951A-2(c)(8)(iii)(B) is removed as obsolete. Section 1.951A-2(c)(7)(iii)(B) is removed from the final regulations because the special rules in that paragraph for allocating and apportioning current year taxes imposed by reason of a disregarded payment are rendered obsolete by the final rules in § 1.861-20(d)(3)(v). Under § 1.951A-2(c)(7)(iii)(A), deductible expenses (including expenses for current year taxes) are allocated and apportioned under the principles of § 1.960-1(d)(3) and the rules in § 1.861-20.

5. Applicability Date

Section 1.861-20 (other than § 1.861-20(h)) applies to taxable years that begin after December 31, 2019, and end on or after November 2, 2020. Section 1.861-20(h) applies to taxable years beginning on or after December 28, 2021. In addition, the revisions to § 1.951A-2(c)(7) and (8) apply to taxable years that begin after December 28, 2021; however, taxpayers may choose to apply the final rules to taxable years that begin after December 31, 2019, and on or before December 28, 2021, consistent with the applicability date of § 1.861-20(d)(3)(v).

Several comments asked the Treasury Department and the IRS to provide a delayed applicability date for § 1.861-20. The rules in proposed § 1.861-20 revised the corresponding provisions in the 2019 FTC proposed regulations, which were not finalized with the 2020 FTC final regulations to provide an additional opportunity for comment. Because the regulations are finalized substantially as proposed, with primarily clarifying changes in response to comments, the Treasury Department and the IRS have determined that it is not appropriate to modify the proposed applicability date.

IV. Creditability of Foreign Taxes Under Sections 901 and 903

A. Jurisdictional Nexus Requirement

1. In General

The 2020 FTC proposed regulations added a jurisdictional nexus requirement for determining whether a foreign tax qualifies as a foreign income tax for purposes of section 901. Proposed § 1.901-2(a)(3) and (c) generally required that, for a foreign tax to be a foreign income tax, the foreign country imposing the tax must have sufficient nexus to the taxpayer's activities or investment of capital or other assets that give rise to the income base on which the foreign tax is imposed. In the case of a foreign tax imposed by a foreign country on nonresident taxpayers, the 2020 FTC proposed regulations provided that a foreign tax satisfies the jurisdictional nexus requirement if it meets one of three nexus tests.

First, under proposed § 1.901-2(c)(1)(i), a foreign tax meets the jurisdictional nexus requirement if it is imposed only on income that is attributable, under reasonable principles, to the nonresident's activities located in the foreign country (for this purpose, the nonresident's activities include its functions, assets, and risks) (“activities-based nexus”). To meet the activities-based nexus test, the allocation of a nonresident's income to the nonresident's activities in the foreign country cannot take into account, as a significant factor, the location of customers, users, or any similar destination-based criterion. Proposed § 1.901-2(c)(1)(i) further provided that reasonable principles for determining income attributable to a nonresident's activities include rules similar to those for determining effectively connected income under section 864(c).

Second, under proposed § 1.901-2(c)(1)(ii), a foreign tax imposed on the nonresident's income arising in the foreign country meets the jurisdictional nexus requirement only if the foreign tax law sourcing rules are reasonably similar to the sourcing rules that apply for Federal income tax purposes (“source-based nexus”).

Third, under proposed § 1.901-2(c)(1)(iii), a foreign tax imposed on income or gain from sales or other dispositions of property that is subject to tax in the foreign country on the basis of the situs of real or movable property meets the jurisdictional nexus requirement only if it is imposed with respect to income or gain from the disposition of real property situated in the foreign country or movable property forming part of the business property of a taxable presence in the foreign country (or from interests in certain entities holding such property) (“property-based nexus”).

In the case of a foreign tax imposed by a foreign country on its residents, proposed § 1.901-2(c)(2) provided that in determining whether the foreign tax meets the jurisdictional nexus requirement, any allocation of income, gain, deduction or loss between a resident taxpayer and a related or controlled entity under the foreign country's transfer pricing rules must follow arm's length principles, without taking into account as a significant factor the location of customers, users, or any other similar destination-based criterion.

Under the 2020 FTC proposed regulations, the jurisdictional nexus requirement also applied to determine whether a foreign levy is a tax in lieu of an income tax under section 903 (an “in lieu of tax”). Specifically, the 2020 FTC proposed regulations modified the substitution requirement to add proposed § 1.903-1(c)(1)(iv), which required that the generally-imposed net income tax would either continue to qualify as a net income tax under proposed § 1.901-2(a)(3), or would itself constitute a separate levy that is a net income tax if it were to be imposed on the excluded income that is covered by the tested in lieu of tax. This modification was intended to ensure that a foreign tax can qualify as an in lieu of tax only if the foreign country imposing the tax could instead have subjected the excluded income to a tax on net gain that would satisfy the jurisdictional nexus requirement in proposed § 1.901-2(c). In addition, proposed § 1.903-1(c)(2)(iii) provided that, to satisfy the substitution requirement, a withholding tax must meet the source-based jurisdictional nexus requirement in proposed § 1.901-2(c)(1)(ii) to qualify as a “covered withholding tax.” Comments regarding the jurisdictional nexus test of the substitution requirement are discussed in this part IV.A of this Summary of Comments and Explanation of Revisions; other comments regarding the proposed modifications to the in lieu of tax provisions are discussed in part IV.C of this Summary of Comments and Explanation of Revisions.

2. Reasonableness of Jurisdictional Nexus Requirement

i. Text and History of the Relevant Statutory Provisions

a. Income Tax in the U.S. Sense

Comments questioned the validity of the jurisdictional nexus requirement, stating that the requirement is inconsistent with the plain language, structure, and legislative history of the statutory foreign tax credit provisions. Comments stated that the plain meaning of “income tax” refers solely to whether the base of the tax is net income and does not require a justification (nexus) for the imposition of the tax. Some comments stated that the term “income tax” should not be interpreted to encompass U.S. rules or international norms regarding jurisdiction to tax

because, according to those comments, when the foreign tax credit provisions were first enacted there were limited source rules in the Code and international norms for determining the source of income were still developing. Other comments stated that the inclusion of a jurisdictional nexus requirement would require Congressional action and noted that other exceptions to creditability have been enacted by Congress (see, for example, section 901(f), (i) and (m)). Some comments stated that the Supreme Court in

Biddle

Comm'r,

302 U.S. 573 (1938), made only a passing reference to “an income tax in the U.S. sense,” and that neither

Biddle

nor any other case has interpreted the statute to include a jurisdictional nexus requirement.

The Treasury Department and the IRS have determined that the addition of a jurisdictional nexus requirement is a valid exercise of the government's rulemaking authority. The Treasury Department and the IRS have determined that it is reasonable and appropriate to interpret the terms “income tax” and “tax in lieu of an income tax” in sections 901 and 903, respectively, to incorporate a jurisdictional nexus requirement. Judicial decisions and administrative guidance over the past century have interpreted the term “income, war profits, and excess profits tax,” which is not defined in section 901 or by the limited initial explanation in the early legislative history. These interpretations have consistently followed the principle, introduced by the

Biddle

court, that the determination of whether a foreign tax is creditable under section 901 is made by evaluating whether such tax, if enacted in the United States, would be an income tax (in other words, whether the foreign tax is “an income tax in the U.S. sense”). See

PPL Corp.

Comm'r,

569 U.S. 329, 335 (2013). See also

Inland Steel Co.

United States,

230 Ct. Cl. 314, 325 (1982) (“Whether a foreign tax is an income tax under I.R.C. § 901(b)(1) is to be decided under criteria established by United States revenue laws and court decisions.”). It is well-settled that U.S. tax provisions should generally be interpreted with reference to domestic tax concepts absent a clear Congressional expression that foreign concepts control.

United States

Goodyear Tire & Rubber Co.,

493 U.S. 132, 145 (1989). The jurisdictional nexus requirement is consistent with the principle that U.S. tax principles, not varying foreign tax law policies, should control the determination of whether a foreign tax is an income tax (or a tax in lieu of an income tax) that is eligible for a U.S. foreign tax credit.

U.S. tax law has long incorporated a jurisdictional nexus limitation in taxing income of foreign persons. For example, the United States only taxes income of foreign persons that have income that is effectively connected with a U.S. trade or business or attributable to U.S. real property, or have income that is fixed or determinable, annual or periodic (FDAP) income sourced in the United States. See sections 871, 881, 882, and 897. In addition, U.S. foreign tax credit rules reflect international norms of taxing jurisdiction that assign the primary right to tax to the source country, the secondary right to tax to the country where the taxpayer is a resident or engaged in a trade or business, and the residual right to tax to the country of citizenship or place of incorporation. See sections 904(a) (limiting foreign tax credits to U.S. tax on foreign source income) and 906(b)(1) (limiting foreign tax credits allowed to foreign persons engaged in a U.S. trade or business to foreign taxes on foreign source effectively connected income). In keeping with these traditional U.S. taxing rules, international taxing norms (such as provisions included in the OECD Model Tax Convention), and the longstanding approach of the courts to apply U.S. tax principles in determining whether a foreign tax is an income tax in the U.S. sense, it is appropriate for the definition of a creditable tax to incorporate the concept of jurisdictional nexus from the U.S. tax law. The fact that U.S. tax rules have changed since the foreign tax credit provisions were first enacted does not preclude an interpretation of the term “income tax” to reflect U.S. norms, because the principle of “an income tax in the U.S. sense” incorporates an evolving standard of what constitutes an income tax in the U.S. sense.

In addition, the net gain requirement in existing § 1.901-2(b), which prescribes the elements of gross receipts and costs that must comprise the base of a foreign income tax, has historically reflected jurisdictional norms in limiting creditable taxes to those imposed on net income. The jurisdictional nexus requirement clarifies the limits on the scope of the items of gross receipts and costs that may properly be taken into account in computing the taxable base of a creditable foreign income tax. Absent this rule, U.S. tax on net income could be reduced by credits for a foreign levy whose taxable base was improperly inflated by unreasonably assigning income to a taxpayer, or by not appropriately taking into account significant costs that are attributable to gross receipts properly included in the taxable base.

Existing § 1.901-2(b)(4)(i)(A) has long contained a form of a nexus rule, by requiring recovery of significant costs and expenses that are “attributable, under reasonable principles” to gross receipts included in the foreign tax base. A rule providing the extent to which gross receipts and costs are within the scope of a jurisdiction's right to tax is therefore necessary to determine which items of gross receipts and costs a foreign levy must include to satisfy the net gain rules.

To better reflect the role of the jurisdictional nexus rule as an element of the net gain requirement, the rule in proposed § 1.901-2(c) is incorporated in the net gain requirement as new paragraph § 1.901-2(b)(5). In addition, the term “jurisdictional nexus requirement” is replaced with “attribution requirement” to more clearly reflect that the rule provides limits on the scope of gross receipts and costs that are attributable to a taxpayer's activities and thus appropriately included in the foreign tax base for purposes of applying the other components of the net gain requirement.

b. Relationship to Foreign Tax Credit Limitation

Some comments asserted that Congress explicitly removed a jurisdictional nexus requirement from the predecessor to section 901 in 1921, and since then, Congress has addressed concerns regarding jurisdiction to tax through the foreign tax credit limitation under section 904 (and its predecessor provisions). The comments pointed out that the foreign tax credit provision, when first enacted under the Revenue Act of 1918, provided that U.S. tax was “credited with . . . the amount of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign country,

upon income derived from sources therein,

or to any possession of the United States.” Public Law 65-254, § 222(a)(1) and 238(a), 40 Stat. 1057, 1073, 1080-81 (emphasis added). The comments stated that the phrase “upon income derived from sources therein” served as a jurisdictional nexus limit, which Congress eliminated and replaced by enacting the foreign tax credit limitation in the Revenue Act of 1921. The comments asserted that this legislative history shows that Congress has rejected including a jurisdictional nexus requirement in section 901. The comments also stated that the only concern regarding jurisdiction to tax

discussed in the legislative history to the 1918 and 1921 Revenue Acts was Congress' desire to preserve U.S. primary taxing rights over U.S. source income.

The Treasury Department and the IRS disagree with the comments' conclusion that Congress has expressly rejected a jurisdictional nexus requirement for creditable foreign taxes. Although source-based taxing rights are an appropriate element of jurisdictional nexus, tax residence and conducting business in a foreign country also provide jurisdictional nexus. The Treasury Department and the IRS view the introduction of the foreign tax credit limitation in 1921 as merely refining the 1918 Revenue Act's limitation of credits to tax imposed upon foreign source income. The legislative history does not explain why Congress removed the phrase “upon income from sources therein” in 1921, nor does it suggest that Congress believed it was removing a jurisdictional nexus requirement and replacing it with a foreign tax credit limitation.

The Treasury Department and the IRS also disagree with the comments' assertion that statutory policy regarding jurisdiction to tax is confined to the section 904 foreign tax credit limitation. Congress has not explicitly addressed jurisdictional nexus with respect to the foreign tax credit. There is no statutory provision that addresses whether the foreign tax credit should be allowed for taxes imposed outside of traditional U.S. taxing norms. Section 904 does not address the threshold question of whether a foreign tax is an income tax in the U.S. sense. It only limits the allowable credit to the amount of pre-credit U.S. tax on particular categories of foreign source income, as revised by Congress from time to time. The foreign tax credit limitation preserves residual U.S. tax on foreign source income subject to a foreign rate of tax that is lower than the U.S. rate, but does not ensure that the foreign tax has an appropriate jurisdictional basis. The statute is silent with respect to jurisdictional nexus, and it is reasonable and appropriate for regulations to apply U.S. tax concepts in addressing the creditability of extraterritorial foreign levies that Congress could not have anticipated when the foreign tax credit provisions were first enacted.

c. Legislative Re-Enactment Doctrine

Some comments argued that the addition of a jurisdictional nexus requirement is precluded by the legislative re-enactment doctrine. These comments noted that the 1980 temporary and proposed section 901 regulations, which contained similar nexus requirements, drew numerous adverse comments and were the subject of Congressional hearings, and that the Treasury Department and the IRS did not finalize those provisions in TD 7918 (48 FR 46276) (“the 1983 regulations”). These comments asserted that in passing the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085 (1986), and the Tax Cuts and Jobs Act, Public Law 115-97, 131 Stat 2054 (2017) (“TCJA”), Congress was aware of the 1983 regulations (which do not contain a jurisdictional nexus requirement) and did not amend the statute to add one, with the result that Congress implicitly endorsed the 1983 regulations and precluded the Treasury Department and the IRS from modifying them.

The Treasury Department and the IRS disagree with these comments. The legislative re-enactment doctrine does not preclude an agency from changing its regulatory interpretation of a statute if Congress amends related provisions. See

Helvering

Reynolds,

313 U.S. 428, 432 (1941) (“[The doctrine of legislative reenactment] does not mean that the prior construction has become so imbedded in the law that only Congress can effect a change.”). See also

Helvering

Wilshire Oil Co.,

308 U.S. 90, 100 (1939) (holding that the legislative reenactment doctrine applies where “it does not appear that the rule or practice has been changed by the administrative agency through exercise of its continuing rule-making power”);

McCoy

U.S.,

802 F.2d 762 (4th Cir. 1986);

Interstate Drop Forge Co.

Com.,

326 F2d 743 (7th Cir. 1964).

Additionally, while a purported legislative re-enactment may indicate that Congress was aware of, and implicitly endorsed, the prior regulatory interpretation, a regulation or administrative ruling promulgated under a re-enacted statute is not treated as binding unless other evidence clearly manifests such a purpose. See

Oklahoma Tax Com.

Texas Co.,

336 U.S. 342 (1949);

Jones

Liberty Glass Co.,

332 U.S. 524 (1947). There is no indication that Congress intended to preclude the amendment of the section 901 and 903 regulations to add a jurisdictional nexus requirement. None of the comments identified any aspect of either the Tax Reform Act of 1986 or the TCJA that suggests that Congress intended to limit future regulations addressing the definition of creditable foreign taxes under sections 901 and 903. Therefore, the Treasury Department and the IRS have determined that the legislative re-enactment doctrine does not preclude the adoption of prospective regulations that include a jurisdictional nexus requirement.

ii. Policy and Purpose of the Statutory Foreign Tax Credit Provisions

Comments stated that adding a jurisdictional nexus requirement is contrary to the policy of the foreign tax credit, which is to mitigate double taxation of foreign source income. These comments asserted that double taxation results when the United States imposes tax on income that is taxed by another country, regardless of whether the other country had a proper jurisdictional basis for imposing the tax, and unrelieved double taxation could discourage foreign investment. The comments asserted that Congress enacted the foreign tax credit to enhance the competitiveness of American companies operating abroad, and the jurisdictional nexus requirement in the 2020 FTC proposed regulations would impede this competitiveness. The comments asserted that the policy goal of sections 901 and 903 is not to influence international norms or change the behavior of foreign governments.

However, another comment stated that the jurisdictional nexus requirement may reasonably be viewed as consistent with the underlying principles and purposes of the foreign tax credit regime. This comment asserted that the allowance of a foreign tax credit for a tax levied on amounts that do not have a significant connection to the foreign jurisdiction taxing such income, particularly U.S. source income, could effectively convert the foreign tax credit regime into a means of subsidizing foreign jurisdictions at the expense of the U.S. fisc. Similarly, one comment that questioned the government's authority to include a jurisdictional nexus requirement also acknowledged that taxes that have no nexus whatsoever to the taxing jurisdiction would not properly be considered taxes.

The Treasury Department and the IRS agree with the comment that the jurisdictional nexus requirement is consistent with the policy goals of the foreign tax credit. The foreign tax credit is not intended to subsidize foreign jurisdictions at the expense of the U.S. fisc. The legislative history to the predecessor provisions to section 901, as well as subsequent statutory amendments, reflect Congress' consistent concern that foreign tax credits should not be allowed to offset U.S. tax on income that does not have a significant connection to the foreign jurisdiction taxing such income. See, for example, S. Rep. No. 67-275, at 17 (1921) (describing the need to avoid

allowing a foreign tax credit to “wipe out” tax properly attributable to U.S. source income); Senate Comm. on Finance, 98th Cong., 2d Sess., Deficit Reduction Act of 1984, Explanation of Provisions Approved by the Committee on March 21, 1984, at 392 (Comm. Print 1984) (describing the need for separate foreign tax credit limitation categories to prevent the U.S. Treasury from inappropriately “bear[ing] the burden” of foreign taxes).

The 2020 FTC proposed regulations are also 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 income. See

Bowring

Comm'r,

27 B.T.A. 449, 459 (1932) (“In the case of the citizen and resident alien, the United States recognizes the primary right of the foreign government to tax income from sources therein . . . and accordingly, grants a credit.”). To ensure that the United States provides a foreign tax credit only where the foreign country appropriately asserts jurisdiction to tax income, creditable foreign levies must incorporate norms similar to those in U.S. tax law that limit the scope of income subject to the tax.

Some comments asserted that double taxation meriting relief exists in every case in which a foreign tax is not allowed as a foreign tax credit against U.S. tax. However, that assertion is inconsistent not only with the foreign tax credit limitation in section 904, but with the plain text of section 901. Section 901 allows a credit only for income, war profits, and excess profits taxes, and not for all foreign taxes that may be imposed by a foreign jurisdiction (such as value added taxes or sales taxes, which may qualify for a deduction under section 164), or for other levies such as tariffs. As explained in part IV.A.2.i.a of this Summary of Comments and Explanation of Revisions, determining which items of gross receipts and costs are properly included in a foreign taxable base is inherent to the determination of whether the foreign tax is an income tax in the U.S. sense.

As noted in the preamble to the 2020 FTC proposed regulations, the fundamental purpose of the foreign tax credit—to mitigate double taxation with respect to taxes imposed on income—is served most appropriately if there is substantial conformity in the principles used to calculate the base of the foreign tax and the base of the U.S. income tax. This conformity extends not just to ascertaining whether the foreign tax base approximates U.S. taxable income determined on the basis of realized gross receipts reduced by allocable costs and expenses, but also to whether there is a sufficient nexus between the income that is subject to tax and the foreign jurisdiction imposing the tax. Therefore, the final regulations retain the requirement in the 2020 FTC proposed regulations that for a foreign tax to qualify as an income tax, the tax must conform with established international jurisdictional norms, reflected in the Internal Revenue Code and related guidance, for allocating profit between associated enterprises, for allocating business profits of nonresidents to a taxable presence in the foreign country, and for taxing cross-border income based on source or the situs of property.

Recently, many foreign jurisdictions have disregarded international taxing norms to claim additional tax revenue, resulting in the adoption of novel extraterritorial taxes that diverge in significant respects from U.S. tax rules and traditional norms of international taxing jurisdiction. These extraterritorial assertions of taxing authority often target digital services, where countries seeking additional revenue have chosen to abandon international norms to assert taxing rights over digital service providers.

See OECD Inclusive Framework on BEPS,

Tax Challenges Arising from Digitalisation—Report on Pillar One Blueprint,

at 10 (Oct. 14, 2020) (“Globalisation and digitalisation have challenged fundamental features of the international income tax system, such as the traditional notions of permanent establishment and the arm's length principle (ALP), and brought to the fore the need for higher levels of enhanced tax certainty through more extensive multilateral tax co-operation. These transformational developments have taken place against a background of increasing public attention on the taxation of highly digitalised global businesses.”).

The Treasury Department and the IRS have determined that it is necessary and appropriate to adapt the regulations under sections 901 and 903 to address this change in circumstances, especially in relation to the taxation of the digital economy—a sector that did not exist when the foreign tax credit provisions were first enacted. Accordingly, regulations are necessary and appropriate to more clearly delineate the circumstances in which a tax does not qualify as an income tax in the U.S. sense due to the foreign jurisdiction's unreasonable assertion of jurisdictional taxing authority.

Some comments asserted that the jurisdictional nexus requirement in the 2020 FTC proposed regulations is inconsistent with Congressional policy reflected in the repeal of the per-country foreign tax credit limitation in favor of an overall foreign tax credit limitation. These comments suggested that the proposed jurisdictional nexus requirement would effectively revert to the more limited per-country limitation and, more generally, that the repeal of the per-country limitation reflects a general policy favoring broader availability of foreign tax credits. The Treasury Department and the IRS disagree with these comments. The jurisdictional nexus requirement does not prevent cross-crediting within a particular separate category described in section 904, which has been amended numerous times by Congress. For example, the nexus requirement does not preclude a foreign tax credit against U.S. tax on foreign source general category income derived from one country for a foreign tax imposed by another country that is assigned to the general category, whereas under the former per-country limitation, such cross-crediting would not be allowed.

Additionally, while comments frame the per-country limitation as more restrictive than the overall limitation, the debate concerning the limitation also highlighted circumstances in which the overall limitation is in fact the more restrictive of the two.

In 1960, when adding back the overall limitation, but retaining the per-country limitation, Congress explained that the overall limitation may not be appropriate based on the business model of a particular taxpayer. See S. Rep. No. 86-1393, at 3773-74 (1960). Thus, the Treasury Department and the IRS do not agree with the comments' assertion that Congress' choice in 1976 to retain only the overall limitation supports the broadest allowance of foreign tax credits, because either the per-country or overall limitation may more significantly restrict the amount of foreign tax credit, depending on the circumstances of a particular taxpayer.

For example, both houses of Congress, in retreating from the overall limitation in 1954, explained that “[t]he effect of the [overall] limitation is unfortunate because it discourages a company operating profitably in one foreign country from going into another country where it may expect to operate at a loss for a few years. Consequently your committee has removed the overall limitation.” H.R. Rep. No. 83-1337, at 4103 (1954); see also S. Rep. No. 83-1622, at 4739 (1954).

Similarly, the choice in 1976 to add back the overall limitation and make it the only limitation did not represent Congress's definitive choice to allow unlimited cross-crediting of high-rate foreign taxes against U.S. tax on foreign source income subject to a lower rate of foreign tax. S. Rep. No. 86-1393, at 3773-74. Rather, Congress has continually amended and debated the appropriate scope of the foreign tax

credit limitation since 1962. The ongoing Congressional amendments to the foreign tax credit limitation show that Congress had not definitively resolved the permissible scope of cross-crediting when it enacted the predecessor provision to section 901.

In addition, Congress did not repeal the per-country limitation in 1976 primarily as a policy choice to allow cross-crediting. Rather, Congress repealed the per-country limitation because it allowed a taxpayer to reduce U.S. tax on U.S. source income by application of a foreign source loss, and later to reduce U.S. tax on foreign source income through a foreign tax credit. See S. Rep. No. 94-938, at 236 (1976); H.R. Rep. No. 94-658, at 225 (1975); Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1976, at 236 (1976). In conclusion, the comments' claim that the jurisdictional nexus requirement in the 2020 FTC proposed regulations is inconsistent with the Congressional policy reflected in the repeal of the per-country limitation is not supported by the legislative history and is contradicted by subsequent amendments to section 904.

Comments also stated that section 904(d)(2)(H)(i), which provides a rule for assigning to a separate category foreign tax imposed by a foreign country on an amount that does not constitute income under U.S. tax principles, provides further support for the view that foreign tax credit provisions should be construed broadly, with limited reference to U.S. rules. One comment pointed to cases, including

Schering Corp.

Comm'r,

69 T.C. 579 (1978) and

Helvering

Campbell,

139 F.2d 865 (1944), in which courts allowed a credit for foreign taxes on amounts that the U.S. does not tax due to timing or base differences, for example, as a result of characterization differences.

The Treasury Department and the IRS find these comments unpersuasive, because the jurisdictional nexus requirement in the 2020 FTC proposed regulations would not preclude a credit for foreign taxes imposed on an amount of taxable income that exceeds taxable income computed under U.S. tax law rules due to base or timing differences. The nexus rule requires that the activity subject to the tax have sufficient connection to the foreign country imposing the tax. It does not require that every item included in the foreign tax base conform in timing or amount to items included in U.S. taxable income. Consistent with section 904(d)(2)(H)(i), the jurisdictional nexus requirement in the 2020 FTC proposed regulations does not preclude a credit for foreign income taxes imposed on base difference amounts.

3. Other Policy Considerations

Several comments questioned the policy reasons discussed in the preamble to the 2020 FTC proposed regulations that motivated the Treasury Department and the IRS to add the jurisdictional nexus requirement. Comments disagreed with the notion that destination-based taxing rights lack sufficient connection to a jurisdiction. They noted that Congress's deliberations of alternative approaches to the U.S. corporate income tax and the current multilateral negotiations by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (“Inclusive Framework”) with respect to reallocating taxing rights under the “Pillar 1” proposal demonstrate that there is a legitimate debate about claims to destination-based taxing rights. This ongoing debate, the comments stated, indicates that market-based or destination-based taxes are income taxes. As such, some comments asserted that the jurisdictional nexus rule in the 2020 FTC proposed regulations is inconsistent with changes that have occurred in how income can be generated through technology and changes that various taxing jurisdictions, including U.S. states, have made to their taxing regimes in response to those changes. The comments recommended that if the jurisdictional nexus requirement is not eliminated in the final regulations, the requirement should be modified such that it is more flexible and takes into account evolving jurisdictional norms. One comment asked that the requirement be expansive enough to allow credits for taxes imposed on income sourced to a jurisdiction based on the situs of users or customers, as well as taxes imposed on a taxpayer that generates income from customers in a jurisdiction without having a physical presence in that jurisdiction.

One comment pointed out that U.S. income tax principles incorporate destination-based taxing rights. As an example, the comment noted that proposed § 1.861-18(f)(2)(ii) provided that when a copyrighted article is sold and transferred through an electronic medium, the sale is deemed to have occurred at the location of download or installation onto the end-user's device. As another example, the comment cited § 1.250(b)-4(d)(1)(ii)(D), which provides that a sale of certain property that primarily contains digital content is for a foreign use if the end user downloads, installs, receives, or accesses the purchased digital content on the end user's device outside the United States. Another comment noted that Congress considered imposing a destination-based income tax as part of the 2017 tax reform.

In addition, comments stated that over half of U.S. states with a corporate income tax determine the amount of a taxpayer's income subject to the state's corporate income tax by apportioning the taxpayer's federal taxable income using sales as the single factor. The comments stated that under the proposed jurisdictional nexus requirements, these state income taxes would fail to be an “income tax” in the U.S. sense even though the income subject to the state corporate income taxes is based in significant respects on the taxpayer's taxable income determined under the Code. The comments also questioned whether this policy means that a foreign country can deny a foreign tax credit for otherwise eligible U.S. state corporate income taxes simply because the states rely on sales-based apportionment factors to source income and a market-based jurisdictional nexus standard.

In general, the Treasury Department and the IRS disagree with these comments. As explained in part IV.A.2 of this Summary of Comments and Explanation of Revisions, whether a foreign tax is creditable under section 901 depends on whether the tax is an “income tax in the U.S. sense.” Neither prior unenacted legislative proposals nor potential future (yet undetermined) changes to the Code with respect to U.S. jurisdictional limits are determinative of what constitutes an income tax in the U.S. sense under current law.

The Treasury Department and the IRS acknowledged in the preamble to the 2020 FTC proposed regulations that future changes in U.S. law may necessitate rethinking the rules for determining creditable foreign income taxes. It is nevertheless important that these final regulations be issued promptly to address novel extraterritorial taxes. Existing law is unclear on the extent to which foreign taxes that are inconsistent with existing jurisdictional norms meet the definition of an income tax under section 901, and the Treasury Department and the IRS had previously received comments requesting guidance on this matter.

In addition, to the extent these novel extraterritorial taxes, which many foreign jurisdictions have already adopted, are being paid by taxpayers

and claimed as a foreign tax credit, this would have an immediate and detrimental impact on the U.S. fisc. Therefore, the Treasury Department and the IRS disagree with the suggestion in comments that the potential for future law changes necessitates a delay in the issuance of these necessary and appropriate regulations.

See New York State Bar Association Tax Section,

Report on Issues Relating to the Definition of a Creditable tax for Purposes of Sections 901 and 903 of the Code,

Rep't No. 1332 (Nov. 24, 2015).

The Treasury Department and the IRS also disagree that the manner in which U.S. states determine the amount of income that is taxable in a particular state has any bearing on whether a foreign tax is an income tax in the U.S. sense. See, for example,

Heiner

Mellon,

304 U.S. 271, 279 (1937) (“It is well settled that in the interpretation of the words used in a federal revenue act, local law is not controlling unless the federal statute by express language or necessary implication, makes its own operation dependent upon state law.”). Nothing in the Code, legislative history, or case law suggests that whether a tax is an income tax in the U.S. sense should be determined by reference to state, as opposed to Federal, income tax principles. Furthermore, it is immaterial whether a foreign country would provide a foreign tax credit under its own law for U.S. state income taxes.

In addition, U.S. tax law imposing U.S. tax on income of nonresidents is not based on notions of destination or customer location. See sections 864(c), 871, 881, and 882. Moreover, the comment citing section 250 is inapposite, as that provision merely defines the scope of sales and services that constitute income from export activity that qualifies for a special U.S. tax deduction; it does not operate to assert taxing jurisdiction over income of nonresidents. Similarly, while proposed § 1.861-18(f)(2)(ii) interprets the place of sale as being the place of download solely for the purpose of determining the source of certain types of income from the sale or exchange of digital property in cases where the statutory source rule looks to the place where the sale occurs, this rule does not expand the scope of U.S. tax on income derived by nonresidents. U.S. law does not tax income from the sale or exchange of property by a nonresident unless the nonresident conducts a trade or business in the United States (if applicable, through a U.S. permanent establishment) or disposes of a United States real property interest as provided under section 897.

One comment stated that the jurisdictional nexus requirement may be reasonably viewed as consistent with the policy of the foreign tax credit regime, which, as discussed in part IV.A.2 of this Summary of Comments and Explanation of Revisions, is not intended to subsidize foreign jurisdictions at the expense of the U.S. fisc. However, the comment also asserted that defining what are acceptable standards of taxing jurisdiction based upon U.S. principles may be unduly restrictive and may result in non-creditability of foreign taxes even when the foreign tax law is mostly aligned with U.S. principles. As an example, the comment posited that if a foreign country's generally-imposed net income tax on its residents could in certain instances apply in a manner that is inconsistent with traditional arm's length principles, that tax would be non-creditable with respect to all resident taxpayers, even for taxpayers to which income would be allocated in a manner consistent with arm's length principles.

Comments also pointed out that the jurisdictional nexus requirement that was included in the 1980 temporary and proposed regulations at § 4.901-2(a)(1) (flush language) was a more flexible standard because it required only that the foreign tax follow reasonable rules regarding source of income, residence, or other bases for tax jurisdiction, and did not require specific rules that are similar to Federal income tax rules. In addition, one comment noted that the 1980 temporary regulations also provided that a foreign tax may satisfy the definition of an income tax even if the foreign tax law differs substantially from the income tax provisions of the Code. That comment recommended that the final regulations should provide flexibility to accommodate the continued evolution of international tax policy consensus, which may diverge from the U.S. view of traditional taxing norms.

Comments also asserted that certain U.S. sourcing rules reflect domestic policies other than jurisdiction to tax. As an example, one comment noted that the title passage rule for inventory in sections 861(a)(6) and 862(a)(6) reflects administrative simplification concerns, and former section 863(b) served as an incentive for certain activities. The comments argued that foreign countries that adopt a rule different from U.S. source rules due to different choices among competing policies should not cause the foreign tax to be non-creditable. One comment argued that diverging views of taxing rights, especially as between developed and developing countries, have long existed outside the context of novel extraterritorial taxes. The comment asserted that diverging views on taxing rights is what makes relief from double taxation necessary; it is not a reason to deny creditability of a foreign tax.

The Treasury Department and the IRS generally agree that different countries may diverge in their approach to asserting jurisdictional taxing rights, just as countries may have different approaches in determining the amounts of realized gross receipts and recoverable costs and expenses included in the foreign taxable base. As a result, the net gain requirement in existing § 1.901-2, as well as in these final regulations, does not require strict conformity between foreign and U.S. tax law. However, the final regulations do require that a foreign tax must be consistent with the general principles of income taxation reflected in the Code for it to be an “income tax in the U.S. sense.” These principles include not only those related to determining realization, gross receipts, and cost recovery, but also principles related to assertion of taxing rights. The purpose of section 901 is not to provide double tax relief in all cases in which foreign tax is imposed on income of a U.S. taxpayer, but rather, to relieve double taxation only in the case of foreign taxes that are “

income,

war profits, and excess profits taxes”. Accordingly, the purpose of the regulations under section 901 is to provide clarity and certainty as to which income tax principles reflected in the Code the foreign tax law must have for a tax to be an income tax in the U.S. sense within the meaning of section 901. However, the Treasury Department and the IRS agree with the comments asserting that certain aspects of the source requirement can appropriately be revised to be more flexible; these changes are described in part IV.A.4 of this Summary of Comments and Explanation of Revisions.

Several comments recommended that the Treasury Department and the IRS address the policy concerns regarding extraterritorial taxes through alternative approaches. These comments recommended that the Treasury Department utilize international forums, such as the Inclusive Framework and bilateral treaty negotiations, to dissuade foreign jurisdictions from enacting or imposing these taxes. Comments argued that the denial of foreign tax credits is unlikely to prevent foreign jurisdictions from imposing extraterritorial taxes and will instead harm the U.S. taxpayers operating in those foreign jurisdictions.

One comment asserted that the foreign tax credit regulations should not be used as a tool to further U.S. foreign policy goals. Another comment recommended that, instead of adopting the jurisdictional nexus requirement, the Treasury Department and the IRS consider an alternative approach for defining what exceeds appropriate taxing jurisdiction by reference to the criteria that the U.S. Trade Representative has used to evaluate whether these taxes are discriminatory and burden U.S. commerce. Finally, one comment asserted that the jurisdictional nexus requirement would disproportionately disallow credits for taxes imposed by developing countries, which are more likely to assert taxing rights in a manner that is inconsistent with international norms, as compared to taxes imposed by developed countries.

The Treasury Department and the IRS agree that international forums can be an effective way of discouraging foreign jurisdictions from enacting extraterritorial taxes; indeed, the Treasury Department is actively engaged in and supporting negotiations under the auspices of the Inclusive Framework that would result in their elimination.

However, contrary to the comments' assertion, the Treasury Department and the IRS's determination that regulations are necessary and appropriate to ensure that the U.S. fisc does not bear the costs of such taxes derives from the text, purpose, and policy of section 901, and not from any foreign policy goals. The Treasury Department and the IRS have concluded that these novel extraterritorial taxes (some of which are currently in force and being levied on U.S. taxpayers) are contrary to the text and purpose of section 901 and therefore must be addressed now. Furthermore, nothing in the text, structure, or history of section 901 suggests that the Treasury Department or the IRS should consider the level of economic development of a country in determining whether a foreign tax imposed by that country meets the standards in section 901. Lastly, the Treasury Department and the IRS have considered the recommendation to use the criteria used by the U.S. Trade Representative but have determined that those criteria are designed for a different purpose (that of evaluating whether the foreign tax is unreasonable or discriminatory and burdens or restricts U.S. commerce under U.S. trade laws), and are not suitable for purposes of defining whether a tax is an income tax in the U.S. sense for purposes of U.S. tax laws.

See OECD/G20 Base Erosion and Profit Shifting Project,

Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy

(October 8, 2021) (describing agreement reached by 136 countries to “remove all Digital Services Taxes and other relevant similar measures with respect to all companies, and to commit not to introduce such measures in the future.”).

Finally, one comment recommended that the Treasury Department and the IRS develop a list of per se creditable and non-creditable taxes to provide taxpayers certainty and reduce compliance burdens. A per se list of creditable and non-creditable taxes would require significant government resources to analyze foreign taxes and maintain such a list, which would need to be updated every time foreign tax laws change. Therefore, the final regulations do not adopt this comment.

4. Modifications to the Source-Based Nexus Requirement

Comments argued that the determination of whether foreign sourcing rules are reasonably similar to U.S. sourcing rules would be complex and result in significant uncertainty because U.S. sourcing rules are not sufficiently well-defined. Comments pointed out that the preamble to the 2020 FTC proposed regulations acknowledged that the U.S. rules for determining income effectively connected with a U.S. trade or business have been developed through case law, are not strictly delineated, and thus were not used as the standard for the activities-based nexus requirement. The comments suggested that the U.S. sourcing rules for royalties and services are similarly addressed only in case law and not well-developed. They contended that it would be difficult to apply the sparse and inconsistent U.S. case law on royalty sourcing to determine if a foreign tax law's sourcing rules for royalties are reasonably similar to U.S. rules. In addition, comments asserted that the U.S. sourcing rules are designed to distinguish between U.S. and foreign source income, and are not well-suited for determining, for example, whether a royalty paid from one CFC to another is specifically sourced to the payor CFC's jurisdiction of residence. With respect to services income, one comment noted that it is unclear whether services should be sourced solely based on the source of the labor or by also taking into account the location of capital, especially when significant intangible property is involved. Another comment asked for clarification on how to evaluate whether a foreign withholding tax that is imposed both on services performed in the country imposing the tax and on technical service fees paid by a resident of such foreign country (regardless of where the services are performed) meets the source-based nexus requirement; this comment asked whether the determination of “reasonably similar” would depend on how important technical services are relative to that foreign country's economy.

In response to these comments, the final regulations modify the source-based nexus requirement to provide additional flexibility and clarity. Section 1.901-2(b)(5)(i)(B) continues to require that the foreign sourcing rules must be reasonably similar to the sourcing rules under the Code. However, in recognition that the Code does not provide detailed sourcing rules addressing every category of income, or every type of income within that category, and that the interpretation and application of the Code sourcing rules are sometimes addressed only in case law and sub-regulatory guidance, § 1.901-2(b)(5)(i)(B) also provides that the foreign tax law's application of sourcing rules need not conform in all respects to the interpretation that applies for Federal income tax purposes. Thus, for example, the final regulations require that in the case of gross income arising from gross receipts from royalties, the foreign tax law must impose tax on such royalties based on the place of use of, or the right to use, the intangible property. However, the final regulations do not require that the foreign law, in determining the place of use of an intangible in a particular transaction or fact pattern, reach the same conclusion as the IRS in a particular revenue ruling or a U.S. court in a particular case.

The final regulations provide additional certainty by specifying the source principles that foreign tax law must apply to be considered reasonably similar to U.S. source rules. With respect to income from services, § 1.901-2(b)(5)(i)(B)(

) provides that gross income arising from services must be sourced based on where the services are performed, as determined under reasonable principles, which do not include determining the place of performance based on the location of the service recipient. Thus, a withholding tax that is imposed on payments for services performed in the country imposing the tax would meet the source-based nexus requirement, but a withholding tax on fees for technical services performed outside of that country would not meet the source-based nexus requirement. In addition, the separate levy rules at § 1.901-2(d)(1)(iii) are modified to provide that withholding taxes that apply different

sourcing rules to subsets of a single class of gross income of nonresidents are treated as separate levies. Therefore, a withholding tax that applies a nonqualifying source rule to a subset of service income would not be creditable, but because it is treated as a separate levy the nonqualifying source rule would not prevent a withholding tax on other services that satisfies the source-based nexus requirement from qualifying as a creditable tax.

Several comments also pointed out that the United States and the foreign jurisdiction may disagree on how to characterize the income from a particular transaction, making it more difficult to determine whether the foreign tax meets the jurisdictional nexus requirement. The comments noted that issues of characterization are particularly prevalent with respect to cross border payments for digital goods. The comments stated that in respect of software transactions that are treated as sales of copyrighted articles under § 1.861-18, some foreign countries regard some or all payments by their resident taxpayers for software copies as royalties, and accordingly, impose a royalty withholding tax on those payments. The comments also asserted that even in cases where a foreign country may not consider the payment subject to royalty withholding tax, the foreign country may nonetheless tax other copyrighted article transactions as royalties. As such, the comments argued, cross border payments for digital goods should be excepted from the jurisdictional nexus requirement. Another comment noted that similar characterization questions may arise when distinguishing between technical service fees and royalties; the comment queried whether a foreign withholding tax imposed on royalties that the United States would view as a payment for services would be determined to be non-creditable or would require an evaluation of the magnitude of the services relative to the royalty.

Comments also argued that the United States lacks guidance on the classification and sourcing of income from cloud computing transactions, noting that the Treasury Department and the IRS have not yet finalized the proposed cloud computing regulations that were issued in 2019. The comments asserted that given the evolving U.S. guidance on the character and source of cloud computing transactions, the creditability of a foreign tax imposed on such transactions should not depend on whether foreign law is reasonably similar to U.S. law.

In response to these comments, the final regulations provide that, in general, foreign tax law applies for purposes of determining the character of the gross income or gross receipts that arise from a transaction. See § 1.901-2(b)(5)(i)(B). The determination of whether the foreign law source rule is reasonably similar to the source rules under the Code will follow from the foreign law characterization of that income. If there is no statutory source rule in the Code for a particular amount that is subject to foreign tax, then the foreign law source rule will satisfy the source-based nexus requirement if it is reasonably similar to the U.S. source rule that applies by closest analogy. However, the final regulations also clarify that in the case of copyrighted articles, to satisfy the source-based nexus requirement, the foreign tax law must treat a transaction that is considered the sale of a copyrighted article under § 1.861-18 (where the acquirer receives only the right to use a copyrighted article and not, for example, the right to duplicate and publicly distribute, or the right to publicly display the article) as a sale of tangible property and not as a license. See § 1.901-2(b)(5)(i)(B)(

). This rule is consistent with established U.S. law and international norms. See § 1.861-18(c); see also OECD Model Tax Convention (2017), commentary to art. 12. The Treasury Department and the IRS have determined that this rule is necessary to ensure that foreign jurisdictions cannot reclassify income from sales of copyrighted articles as royalties to assert taxing rights that are extraterritorial in nature and outside the scope of what is an income tax in the U.S. sense.

Comments recommended that, if the jurisdictional nexus requirement is not withdrawn entirely in the final regulations, then payments for services and payments for digital goods should be excepted from the source-based nexus requirement. With respect to payment for services, the comments argued that the U.S. source rule for services is not the international norm; many countries impose withholding tax on payment for services made by a resident in the country (or by a nonresident with a permanent establishment in the country). Comments noted that the UN Model Tax Convention allows contracting states to impose withholding taxes on a variety of services fees, and that the United States has income tax treaties with foreign jurisdictions that allow the foreign country to withhold tax on payments for services not performed in that country. Several comments also asserted that withholding taxes on payments for services are not novel taxes, but rather are long-standing taxes that are also creditable under existing § 1.903-1. Specifically, comments pointed to Example 3 of existing § 1.903-1(b)(3), which concludes that a gross basis tax imposed on a nonresident for technical services performed outside the country imposing the tax are creditable. As such, the comments stated, these withholding taxes are consistent with international norms and the final regulations should continue to allow these taxes to be creditable.

In addition, comments expressed concern about the increased incidence of unrelieved double taxation in respect of cross-border payments for digital services. The comments suggested that under proposed § 1.861-19, essentially all cloud transactions, as defined in those proposed regulations, will be classified as services for Federal income tax purposes. As such, foreign withholding taxes imposed on payments for those services, if not imposed on the basis that the services are performed in the country, would be non-creditable under the proposed source-based nexus requirement. Comments also pointed out that the effect of the source-based nexus requirement in the 2020 FTC proposed regulations is to create disparate treatment for software suppliers based on the approach a supplier adopts to commercializing the software. As an example, comments pointed out that a software supplier that makes software available through limited time subscription is treated under Federal income tax rules as receiving payments of service fees, whereas a software supplier that provides software to users through downloads under limited-time licenses is treated as receiving payments of rents. If a foreign country imposes withholding taxes on both payments, the withholding tax paid by the first software supplier would not be creditable (because the U.S. source rules would not permit the service payment to be sourced based on the location of the user) whereas the taxes paid by the second supplier would be creditable (because U.S. source rules would permit the rental payment to be sourced based on where the user installs the software copy). The comments argued that there is no policy justification for such disparate results.

The Treasury Department and the IRS have determined that it is necessary and appropriate to narrow the circumstances under existing law (for example, as illustrated in Example 3 of § 1.901-1(b)(3)) in which withholding taxes on payment for services are creditable. The taxation of services performed by

nonresidents, under U.S. tax law, is clearly limited to cases in which the services are performed in the United States. Nothing in the Code, legislative history, or case law indicates that a different approach is appropriate for technical or digital services. The Treasury Department and the IRS have determined that the assertion of foreign withholding taxes on income from services that are not performed within the foreign jurisdiction is not consistent with an income tax in the U.S. sense and therefore should not qualify for a credit under section 901.

Furthermore, the Code provides for disparate treatment of classes of income depending on whether the transaction that gives rise to the income is characterized as a service, license, sale, or something else. This different treatment is also reflected in existing international norms, including the OECD Model Tax Convention. Seeking to conform the treatment of digital transactions under the Code, or to anticipate possible future changes to the treatment or classification of digital transactions, is beyond the scope of these regulations. Instead, the Treasury Department and the IRS have determined that analyzing whether a foreign tax is an income tax based on how such income is characterized under foreign law and comparing the foreign tax law sourcing rule to U.S. tax principles, provides adequate flexibility to account for differences between U.S. and foreign law, while adhering to the requirement that a foreign tax be an income tax in the U.S. sense to be creditable. Thus, the final regulations do not adopt the recommendation to except digital services from the jurisdictional nexus requirement.

One comment noted that the 2020 FTC proposed regulations could create different results for sales of software, depending on whether the software is delivered on tangible media or delivered by way of digital download because there are different U.S. source rules for such transactions. As an example, the comment explained that a sale of a software copy that is delivered on tangible media is sourced, under U.S. income tax principles, based on title passage, whereas the sale of a copyrighted article delivered through an electronic medium is deemed to occur, under proposed § 1.861-18(f)(2)(ii), at the location of download or installation. The comment further noted that if proposed § 1.861-18(f)(2)(ii) is not finalized, and the title passage rule continues to apply to digital deliveries, then for U.S. income tax purposes, the source of the income would be determined based upon where the servers from which the software copy is made available is located. The comment argued that these distinctions should not be the basis for causing the supplier of the software to be eligible or ineligible for a foreign tax credit.

The Treasury Department and the IRS have determined that it is unnecessary to require a foreign tax law's sourcing rule for income derived from the sale or other disposition of property to conform with U.S. source rules. This is because under the Code, the United States imposes tax on such income of a nonresident only if the nonresident conducts a U.S. trade or business (if applicable, through a U.S. permanent establishment) or the income is derived from real or movable property situated in the United States. Thus, the final regulations provide that, with respect to foreign tax imposed on income derived from the sale or other disposition of property, including copyrighted articles sold through an electronic medium, the tax meets the attribution requirement only if the inclusion of the income in the foreign tax base meets the activities-based nexus requirement in § 1.901-2(b)(5)(i)(A) or the property-based nexus requirement in 1.901-2(b)(5)(i)(C).

5. Activities-Based Nexus Requirement

One comment stated that the physical presence and permanent establishment standard is not an inherent part of the U.S. tax system; rather, it is a political invention in the 1920s that was the result of bargaining between the United States and its treaty partners. The comment stated that by adopting this standard in the 2020 FTC proposed regulations, the Treasury Department and the IRS ignored the economic realities of digital economies and lacked reasoned decision-making. The comment recommended that the final regulations provide that the jurisdictional nexus requirement is satisfied when consumers of a service rendered by a foreign corporation are located in the taxing jurisdiction.

The Treasury Department and the IRS disagree with the comment's assertion that the physical presence and permanent establishment standard is not an appropriate measure for nexus. The permanent establishment standard is a critical part of the U.S. Model Income Tax Convention, existing U.S. bilateral tax treaties, and the OECD Model Tax Convention. Furthermore, a physical presence standard is consistent with the nexus rules in section 864, which provide that only income effectively connected with a trade or business that a foreign resident conducts in the United States is subject to U.S. tax. Contrary to the comment's contention, the 2020 FTC proposed regulations did not ignore the economic realities of digital economies; rather, they adopted a standard based on the existing Code and traditional international taxing norms. The Treasury Department and the IRS have determined that the income tax principles in the Code do not allow for the assertion of taxing rights based solely on the existence of consumers in a jurisdiction.

One comment asserted that, where the foreign law includes elements in common with the effectively connected income standard under section 864(c), a broader standard for attributing income to nonresidents on the basis of the nonresidents' activities as well as activities of the nonresident's related parties should satisfy the activities-based nexus requirement of the 2020 FTC proposed regulations. The Treasury Department and the IRS disagree with this comment. Taking into account activities of the nonresident's related parties would be inconsistent with the principles reflected in the U.S. Model Income Tax Convention, and the OECD Model Tax Convention, as well as in section 864 (unless the other party is acting on behalf of the nonresident). Accordingly, the final regulations at § 1.901-2(b)(5)(i)(A) clarify that the activities-based attribution requirement is not met when the nonresident is deemed to have a trade or business in the taxing jurisdiction by reason of activities conducted by another person, or when the foreign tax law attributes profits to the nonresident based upon the activities of another person, other than in the case of a party acting on behalf of the nonresident or in the case of a pass-through entity of which the nonresident is an owner. In addition, the final regulations clarify in § 1.901-2(b)(5)(i)(A) that foreign tax law that attributes income to a nonresident by taking into account as a significant factor the mere location of persons from which a nonresident makes purchases does not meet the activities-based nexus requirement.

Comments requested that taxes paid to Puerto Rico be exempted from the application of the jurisdictional nexus requirement because, as a U.S. territory, its taxes should not be treated in the same manner as taxes imposed by a foreign country. For Federal income tax purposes, a credit is allowed for income taxes paid or accrued to any foreign country or United States territory. See section 901(b)(1); see also section 903. As no distinction is made between taxes imposed by foreign countries and those imposed by U.S. territories, the final regulations follow the 2020 FTC

proposed regulations in applying the same standards in defining what is a creditable income tax regardless of whether the tax is imposed by a foreign country or a U.S. territory. However, as described in more detail in part IV.F.2 of this Summary of Comments and Explanation of Revisions, a special transition rule applies to defer for one year the applicability date of the final regulations under section 903 with respect to certain taxes paid to Puerto Rico.

Another comment recommended that the example in proposed § 1.901-2(c)(3) (§ 1.901-2(b)(5)(iii) of the final regulations) be expanded to illustrate the application of the attribution requirement in the case where a nonresident taxpayer is earning income from electronically supplied services in a country that imposes tax on such services (ESS tax) and the taxpayer either (1) maintains its own branch in the foreign country imposing the tax, with employees of the branch conducting routine sales, marketing, and customer support functions or (2) uses a related party disregarded entity resident in that country to perform local marketing, customer support, and other routine functions. With respect to the second scenario, the comment noted that where the ESS tax is imposed on the resident disregarded entity, if the entity's tax base is determined under arm's length principles, without taking into account as a significant factor the location of customers, users, or any other similar destination-based criterion, then the ESS tax would meet the residence-based nexus requirement and would be creditable. The comment suggested that in the first scenario, although the ESS tax is not imposed on the basis of a nonresident's activities located in the country, the portion of the ESS tax that corresponds to the portion of a separate nonresident corporate income tax imposed on the branch's effectively-connected income that would meet the activities-based requirement (based on the actual activities performed by the branch) should be considered to meet the activities-based nexus requirement if the country does not impose the tax on the branch's effectively-connected income.

The Treasury Department and the IRS agree with the comment's analysis and conclusion in the second scenario but disagree with the analysis and conclusion in the first scenario. Whether a foreign tax meets the requirements of § 1.901-2(b), including the attribution requirement, is determined based solely on the terms of the foreign tax law, and not on a taxpayer's specific facts. Thus, the fact that a separate levy that the foreign country could have imposed on nonresident taxpayers with respect to their branch operations in the foreign country could meet the attribution requirement in a particular factual circumstance does not mean that a different tax that is an ESS tax, or any portion of an ESS tax, would be deemed to meet the attribution requirement.

6. Property-Based Nexus Requirement

One comment requested clarification on whether a foreign tax law similar to the U.S. Foreign Investment in Real Property Tax Act (FIRPTA) regime under section 897 would satisfy the proposed property-based nexus requirement. It noted that under the 2020 FTC proposed regulations, a foreign tax law identical to FIRPTA may not meet the proposed property-based nexus rule if (consistent with section 897) it included in the tax base a portion of the gain from the sale of shares in a foreign real property holding corporation (within the meaning of section 897(c)(2)) that does not correspond to foreign real property interests. The comment further noted that a foreign levy imposed on a nonresident's gain from the sale of shares of a corporation attributable to real property in the taxing jurisdiction would be creditable under the proposed property-based nexus rule, even if (inconsistent with section 897) the corporation is not a resident of the taxing jurisdiction.

In response to this comment, the final regulations at § 1.901-2(b)(5)(i)(C) clarify that a foreign tax may include in its base gross receipts that are attributable to the sale or disposition of real property situated in the foreign country, or to the disposition of an interest in a corporation or other entity that is a resident of the foreign country that owns real property situated in the foreign country, under rules reasonably similar to those in section 897. In addition, a foreign tax imposed on the basis of the situs of property may include in its base gains derived from the sale or other disposition of property forming part of the business property of a taxable presence in the foreign country as well as gains from the disposition of an interest in a partnership or other passthrough entity that has a taxable presence in the foreign country to the extent the gains are attributable to the entity's business property in that foreign country, under rules that are reasonably similar to those in section 864(c). A foreign tax on any other gains of a nonresident will not satisfy the property-based attribution requirement.

7. Interaction With Income Tax Treaties

The preamble to the 2020 FTC proposed regulations confirmed that the proposed regulations in §§ 1.901-2 and 1.903-1, when finalized, would not affect the application of existing income tax treaties to which the United States is a party with respect to covered taxes (including any specifically identified taxes) that are creditable under the treaty.

One comment recommended that the final regulations expressly provide that the regulations will not affect the creditability of foreign taxes covered by an existing income tax treaty. The comment also argued, however, that relying on the U.S. treaty network as the sole mechanism for relieving double tax for companies operating in foreign countries with source or other jurisdictional taxing norms that differ from U.S. taxing norms is not equitable. It noted that the United States only has income tax treaties with 68 countries, and that the United States has few treaties with countries in South America and Africa. The comment stated that the treaty negotiation process is laborious and that the Treasury Department considers the level of trade and investment between the countries in determining with which countries it engages in treaty negotiations, with the result being that the United States has historically declined to negotiate treaties with countries that have smaller economies, including developing countries.

Another comment requested that the Treasury Department and the IRS specifically address the interaction of the jurisdictional nexus requirement with U.S. income tax treaties that have allowed the treaty partner to impose a capital gains tax on a nonresident taxpayer on the sale of stock of a corporation resident in the treaty country regardless of whether the shares constitute a real property interest or are attributable to a permanent establishment in the treaty country. The comment noted that, despite the statement in the preamble to the 2020 FTC proposed regulations, it is unclear how the double taxation articles of U.S. income tax treaties, which often provide that the United States agrees to allow a foreign tax credit subject to the limitations of U.S. law, would be interpreted in light of these regulations. The comment recommended that the Treasury Department and the IRS modify the jurisdictional nexus requirement such that foreign taxes imposed on gains from the disposition of stock of a corporation sourced on the

basis of residence of the corporation continue to be creditable.

Comments also asked for clarification regarding the effect the final regulations would have on a foreign tax that is a covered tax under an existing U.S. income tax treaty if the foreign tax is paid by a CFC, which is not eligible for the benefits given to U.S. residents under the treaty. One comment noted that because CFCs are not U.S. residents, taxes paid by the CFC on a foreign-to-foreign payment would not be creditable under the U.S. income tax treaty with the source country. The comment questioned whether this means that a foreign tax would not be creditable when paid or accrued by a CFC even though it would be creditable if paid or accrued directly by a U.S. taxpayer.

The comment pointed out that in this case, the United States has already acknowledged the legitimacy of the treaty partner's claim to taxing rights, even if it conflicts with U.S. principles; thus, the tax should be creditable even if paid by a CFC. Another comment similarly noted that, in respect of foreign taxes imposed on gains from the disposition of stock of a resident corporation that are creditable under certain U.S. treaties, such treaties would ensure creditability of those taxes only when paid by U.S. persons, and not, for example, when paid by an upper-tier CFC upon the disposition of lower-tier CFC stock.

Another comment made a similar point in connection with recommending that all proposed revisions to the net gain requirement be withdrawn. That comment noted that taxpayers that are operating in a country with which the United States has an income tax treaty may not be insulated from uncertainty regarding the creditability of foreign taxes because the treaties are unclear as to the creditability of foreign taxes listed in the treaty that are incurred by foreign subsidiaries and deemed paid by U.S. taxpayers under section 960. That comment is addressed in this part IV.A.7. of the Summary of Comments and Explanation of Revisions.

In response to these comments, the final regulations clarify in § 1.901-2(a)(1)(iii) that a foreign tax that is treated as an income tax under the relief from double taxation article of an income tax treaty that the United States has entered into with the country imposing the tax meets the definition of a foreign income tax as to U.S. citizens and residents of the United States that elect to claim benefits under that treaty. However, as the comments noted, CFCs are not treated as U.S. residents under U.S. income tax treaties, so CFCs resident in a third country do not qualify for benefits under U.S. income tax treaties. Because U.S. income tax treaties do not limit the application of the treaty partner's taxes imposed on third-country CFCs, the final regulations clarify that taxes paid to a U.S. treaty partner by a third-country CFC are treated as a separate levy that must independently satisfy the requirements of section 901 or 903 to be creditable.

However, the final regulations clarify that any limitations that a foreign country has agreed to under its treaties with other jurisdictions that apply to nonresident CFCs would be taken into account in determining whether such levy meets the requirements of § 1.901-2(b) or § 1.903-1(b) when paid by the CFC. See § 1.901-2(a)(1)(iii). Thus, for example, in determining whether a foreign country's nonresident corporate income tax meets the activities-based jurisdictional requirement of § 1.901-2(b)(5)(i)(A), when the tax is paid by a CFC that is resident in a third country, any limitations or modifications that the first foreign country has agreed to under the permanent establishment and business profits articles of an income tax treaty with the third country are taken into account. The final regulations make corresponding modifications to the separate levy rules to provide that a foreign levy that is modified by a particular treaty is treated as a separate levy. See § 1.901-2(d)(1)(iv).

B. Net Gain Requirement

1. In General

The 2020 FTC proposed regulations modified the net gain requirement to limit the role of the predominant character analysis in determining whether a tax meets each of the components of the net gain requirement—the realization requirement, the gross receipts requirement, and the net income requirement (which under the 2020 FTC proposed regulations is referred to as the cost recovery requirement). The 2020 FTC proposed regulations also limited the prevalence of the empirical analysis required by the existing regulations, which asks whether a foreign tax is likely to reach net gain in the “normal circumstances” in which it applies. Instead, the 2020 FTC proposed regulations generally provided that the determination of whether a tax satisfies each of the realization, gross receipts, and cost recovery requirements under the net gain requirement is based on the terms of the foreign tax law governing the computation of the tax base. See proposed § 1.901-2(a)(3). The preamble to the 2020 FTC proposed regulations explained that reduced reliance on empirical analysis would allow taxpayers and the IRS to evaluate the nature of the foreign tax based on objective and readily available information and would lead to more consistent and predictable outcomes.

Several comments recommended that instead of finalizing the proposed modifications to the net gain requirement, the Treasury Department and the IRS should either retain the predominant character test of the existing regulations or propose less extensive changes to the net gain requirement and provide transition rules. Some of these comments stated that the proposed rules would create too rigid a standard that would lead to increased instances of double taxation, putting U.S. companies at a competitive disadvantage. One comment stated that under the proposed standard, a credit may not be allowed for a foreign tax that is an income tax in the U.S. sense based on the actual operation of the foreign tax. Another comment asserted that the proposed standard would place U.S. multinationals operating in developing countries at a significant competitive disadvantage compared with foreign competitors operating in the same developing countries that do not face the same risk of double taxation because they are subject to a participation exemption or a less restrictive foreign tax credit regime.

Comments stated that the predominant character and facts and circumstances analysis of the existing regulations is a better approach because there is a lack of uniformity in the income tax systems across different jurisdictions and because a particular country's tax system can regularly change over time. Comments stated that the existing regulations provide the necessary flexibility to allow a credit to be claimed for foreign taxes that are calculated with variations from U.S. tax principles. In addition, several comments questioned whether administrative difficulties with applying the predominant character test of the existing regulations was a legitimate or sufficient justification for removing the test, noting that the controversies over creditability of foreign taxes have not been pervasive or unresolved enough to justify the new more objective standard.

Several comments stated that instead of reducing administrative burdens the proposed changes add complexity and reduce certainty

because they require taxpayers to compare foreign and U.S. tax law, including statutes, regulations, case law, rulings, and pronouncements, with any subsequent changes to either foreign or U.S. law requiring re-evaluation of whether there is sufficient conformity.

One comment made this assertion specifically with respect to the removal of the alternative gross receipts test of the existing regulation, noting that there have been only three court cases involving the gross receipts test over the past four decades. That comment is addressed in this part IV.B.1 of the Summary of Comments and Explanation of Revisions; other comments regarding the gross receipts requirement are discussed in part IV.B.2 of the Summary of Comments and Explanation of Revisions.

Comments also asserted that it is not realistic for the Treasury Department and the IRS to expect foreign tax law to conform substantially to U.S. tax law. These comments noted that different jurisdictions use different means to protect their tax base and that some countries may have a relatively simple tax regime and choose to protect their base through disallowance of deductions. Comments suggested that a foreign tax should not have to strictly conform to U.S. rules; it should be creditable if it has the essential elements of an income tax in the U.S. sense. Comments also asserted that the Code definition of gross income and allowable deductions reflect evolving priorities of Congress and should not serve as the determinative standard of a model income tax that other countries should follow. Finally, another comment stated that the significant changes made by the 2020 FTC proposed regulations would fundamentally change existing U.S. tax laws and policies to a degree that only Congress can implement through legislation.

As explained in part IV.A.2 of this Summary of Comments and Explanation of Revisions, Congress did not prescribe a fixed definition of the term “income tax” for purposes of section 901 or 903. As a result, the meaning of the term has been developed and refined through administrative guidance and case law since 1919. This body of law has followed the guiding principle that the determination of whether a foreign tax is an income tax for purposes of sections 901 and 903 is made by reference to U.S. tax law. The 1983 final regulations followed this principle and, influenced by court opinions decided in the years preceding those regulations, adopted an approach that required a foreign tax to be examined in the normal circumstances in which the tax is applied to determine whether the predominant character of the tax is that of an income tax in the U.S. sense. As explained in the preamble to the 2020 FTC proposed regulations, the IRS's experience over the past 40 years has highlighted the significant administrative difficulties with applying the predominant character test, the ambiguities inherent in the empirical analysis required to apply the test, and the inconsistent outcomes that may result from applying the predominant character test. See 85 FR 72089-72092. In addition, the courts that applied the 1983 regulations further brought into focus the type of quantitative empirical evidence, such as private financial data on the extent of disallowed expenses, that the IRS and the taxpayer may need to obtain and analyze to determine whether a foreign tax is an income tax under the empirical tests of the existing regulations. See, for example,

Texasgulf Inc.

Comm'r,

172 F.3d 209, 216 (2d Cir. 1999) (court examined statistics for claimed processing allowances and for nonrecoverable expenses across a 13-year period derived from a study conducted by taxpayer's expert to determine if alternative allowance provided under the Ontario Mining Tax effectively compensated for nonrecovery of significant expenses);

Exxon Corp.

Comm'r,

113 T.C. 338 (1999) (both parties relied heavily on expert witnesses from the petroleum industry, the U.K. government, and from legal, tax, accounting, and economic professions).

The comments that recommended against the approach in the 2020 FTC proposed regulations did not suggest any alternative approaches that would not require the empirical analysis necessitated by the existing regulations. Due to the difficulty that taxpayers and the IRS face in properly applying the existing regulations, the Treasury Department and the IRS have determined that it is necessary and appropriate to finalize the rule in the 2020 FTC proposed regulations that the determination of whether a foreign tax meets the net gain requirement is primarily based on the terms of the foreign tax law governing the computation of the tax base. This approach allows taxpayers and the IRS to evaluate the nature of the foreign tax based on more objective and readily available information.

The Treasury Department and the IRS disagree with the comments that suggested that the existing regulations entail minimal administrative burdens or that the rules in the 2020 FTC proposed regulations will increase administrative burdens. Although the final regulations require a comparison of foreign law to U.S. law, that comparison is generally done by examining the terms of the foreign tax law, which taxpayers must do in any case in order to compute their foreign tax liability, rather than by examining difficult-to-obtain foreign tax return and private financial data to determine the effect of the tax (as is required under the existing regulations).

In addition, the Treasury Department and the IRS disagree that the final regulations will add complexity or create more disputes. The fact that relatively few court cases have addressed the definition of an income tax under § 1.901-2 does not suggest that the existing regulations are clear and easy to apply, but rather that they are challenging for the IRS to administer. It is unclear whether taxpayers are correctly applying the existing requirements in § 1.901-2 by performing the empirical analysis required by the regulations. Because the existing regulations are difficult for taxpayers to apply and for the IRS to administer, there is potential for the requirements in existing § 1.901-2 to be applied incorrectly, a result that is detrimental to sound tax administration.

The Treasury Department and the IRS have determined that the changes made in the final regulations will increase certainty and will prevent the need for the IRS to gather and evaluate data that are not readily available in order to ensure that taxpayers are appropriately applying the relevant empirical analysis—particularly in the case of novel extraterritorial taxes that are generally imposed on a gross basis (such as digital services taxes) and that would meet the requirements of the existing regulations only if the nonrecoverable costs and expenses attributable to that gross income, together with the tax paid by all persons subject to the tax, can empirically be proven almost never to result in a loss. The Treasury Department and the IRS disagree with comments that suggest that administrative concerns are not a sufficient reason for revising the regulations. Having clear, administrable rules that can be consistently applied is critical to sound tax administration.

The Treasury Department and the IRS also disagree with the comments suggesting that the 2020 FTC proposed regulations reflect a fundamental change to existing foreign tax credit policies or that the existing regulations do not require taxpayers to compare foreign and U.S. tax law (including statutes, regulations, case law, rulings, and pronouncements) to determine whether a tax is creditable. In fact, for a foreign taxable base that deviates from the U.S. computational norm of realized gross receipts reduced by significant costs and expenses, the predominant character test by its terms requires taxpayers to perform an empirical analysis every year to determine whether a tax is creditable, such that changes in the empirical impact of a foreign tax (despite no change in the terms of the tax) could impact the creditability analysis. The final regulations will simplify the determination of whether a

foreign levy is an income tax in the U.S. sense by eliminating this burdensome inquiry.

Furthermore, the Treasury Department and the IRS disagree that the final regulations will result in additional double taxation in a manner that is inconsistent with the statute, or that they inappropriately place U.S. multinationals at a competitive disadvantage compared to foreign competitors from a country with a participation exemption regime or a less-restrictive foreign tax credit system. Section 901 allows credits only for foreign taxes that are income taxes in the U.S. sense, and this standard is met only if there is substantial conformity in the principles used to calculate the foreign tax base and the U.S. tax base. Absent such conformity, no credit is appropriate under section 901. Finally, the manner in which foreign countries relieve double taxation for its resident taxpayers does not have any bearing on the appropriate interpretation of section 901, which provides a credit only for foreign income taxes, not all foreign taxes.

In addition, some comments stated that the proposed rules, which focus on the terms of the foreign law in determining whether the net gain requirement is met, inappropriately shift the analysis from the substance to the form of a foreign levy. In particular, some comments asserted that this is inconsistent with court cases, including

PPL Corp.

Comm'r,

569 U.S. 329 (2013), in which courts have stated that the substantive effects of a tax should be considered when determining whether a tax constitutes a foreign income tax. Other comments stated that the predominant character analysis of the existing regulations better reflects the guidance from cases such as

Biddle

and

Keasbey & Mattison Co.

Rothensies,

133 F.2d 894 (3rd Cir. 1943), which confirm that whether a foreign tax is creditable should be determined on the basis of its substantive resemblance to an income tax in the U.S. sense.

The Treasury Department and the IRS disagree with comments suggesting that the approach adopted in the 2020 FTC proposed regulations to minimize the role of empirical analysis is inconsistent with the principles applied by the courts in

PPL, Biddle,

Keasbey

to determine whether a foreign tax is an income tax in the U.S. sense. The Supreme Court in

Biddle

established that statutory terms such as “income tax” are properly interpreted to have the meaning understood under U.S. tax law; the

Keasbey

court, citing

Biddle,

stated that “a tax paid [to] a foreign country is not an income tax within the meaning of [section 901] unless it conf[o]rms in its substantive elements to the criteria established under our revenue laws.”

Keasbey,

133 F.2d at 897. The Supreme Court in

PPL

determined the creditability of the U.K. windfall tax by applying the predominant character test of the existing regulations, which evaluates the substantive effect of the tax by resort to empirical analysis of the effect of alternative methods of determining gross receipts and deductible expenses. Citing

Biddle,

the Supreme Court stated that “instead of the foreign government's characterization of the tax, the crucial inquiry is the tax's economic effect. In other words, foreign tax creditability depends on whether the tax, if enacted in the U.S., would be an income, war profits, or excess profits tax.”

PPL,

569 U.S. at 335.

Consistent with the guiding principle that a creditable tax must be an income tax in the U.S. sense, the 2020 FTC proposed regulations required a comparison of the foreign tax law to the U.S. tax law to determine whether the provisions for computing the base on which the foreign tax is imposed conforms with U.S. criteria for an income tax (that is, a tax imposed on realized gross receipts reduced by allocable costs and expenses). Under the 2020 FTC proposed regulations, the foreign government's characterization of the tax or the name given to the tax do not control the determination of creditability; rather, the determination involves an examination of the substantive provisions of the foreign tax law that govern the computation of the income that is subject to tax. The Supreme Court in

PPL

was applying the predominant character test in the existing regulations and was not interpreting the statute. Because the final regulations modify the standard for determining whether a foreign levy is an income tax in the U.S. sense, the final regulations do not conflict with the

PPL

decision. Thus, the Treasury Department and the IRS disagree with the comments' contentions that the 2020 FTC proposed regulations have inappropriately shifted the inquiry away from the substance, or the substantive economic effect, of the foreign tax.

2. Alternative Gross Receipts Test

The 2020 FTC proposed regulations removed the “alternative gross receipts test” in existing § 1.901-2(b)(3), which provided that a foreign tax meets the gross receipts requirement if it is computed under a method that is likely to produce an amount that is not greater than the fair market value of actual arm's length gross receipts. Under proposed § 1.901-2(b)(3)(i), a foreign tax meets the gross receipts tests only if the tax is imposed on actual gross receipts, or is imposed on deemed gross receipts arising from pre-realization timing difference events (for example, a mark-to-market regime, tax on the physical transfer, processing, or export of readily marketable property, or a deemed distribution or inclusion), or is imposed on the basis of gross receipts from an insignificant non-realization event. In addition, proposed § 1.901-2(b)(3)(i) provided that, for purposes of the gross receipts test, amounts that are properly allocated to a taxpayer under the jurisdictional nexus rules in proposed § 1.901-2(c), such as pursuant to transfer pricing rules that properly allocate income to a taxpayer on the basis of costs incurred by that entity, are treated as the taxpayer's actual gross receipts.

Several comments criticized the removal of the alternative gross receipts test and asked that it be retained. Comments stated that eliminating the alternative gross receipts test creates an overly restrictive gross receipts requirement that can cause foreign taxes to not qualify as income taxes due to small or formalistic differences in how foreign law measures gross receipts as compared to U.S. law. One comment noted that it is not unusual for taxing jurisdictions to provide alternate measures of gross receipts to avoid compliance difficulties. The comment also noted that U.S. tax law uses alternative gross receipts, such as using the applicable Federal rate (determined by the IRS) to determine interest deemed to be received by certain lenders. Other comments noted that the U.S. standards for measuring gross receipts and gross income have changed over time, and there is no static view of gross receipts against which to measure foreign law. One such comment pointed to realized cash receipts, the accrual method, financial statement income, and in limited instances mark-to-market as examples of varying ways to compute gross receipts. Another comment pointed to the changes to the rules for determining the taxable year for income inclusions under section 451 from 2012 to 2018.

One comment asserted that the proposed regulation's treatment of alternative measures of gross receipts determined by applying a markup to costs (which does not meet the gross receipts requirement) is irreconcilable with the rule in proposed § 1.901-2(b)(3)(i) that treated allocations of gross income under transfer pricing methods to a taxpayer as actual gross receipts. The comment contended that there is no

logical reason for treating a foreign law that allows taxpayers to use a cost-plus transfer pricing methodology as meeting the gross receipts test, but not a foreign law that uses a measurement of gross receipts based on costs, and that the 2020 FTC proposed regulations will result in significant controversy in distinguishing the two situations. The comment recommended that the Treasury Department and the IRS continue to treat foreign income taxes based on alternative measurements of gross receipts as meeting the gross receipts test, so long as the taxpayer can show that the alternative is likely to produce an amount not greater than fair market value.

One comment requested clarification on how the proposed rules would apply in situations where the foreign jurisdiction imposes a levy on a combination of actual gross receipts and receipts computed based on some other method.

In addition, comments pointed out that the Treasury Department and the IRS previously proposed to eliminate the alternative gross receipts test in the 1980 proposed and temporary regulations under sections 901 and 903, but after extensive consideration decided to retain it in the 1983 final regulations. The comments asked the Treasury Department and the IRS to justify the reconsideration of the elimination of the alternative gross receipts test, given that such elimination was previously rejected.

The Treasury Department and the IRS have determined that it is necessary and appropriate to remove the alternative gross receipts test because, in general, a tax that is imposed on an amount greater than actual realized gross receipts, or greater than the value of property, is not an income tax in the U.S. sense. In addition, the decision to provide an alternative gross receipts test in the 1983 final regulations, even if made in response to comments, does not preclude the Treasury Department and the IRS from later re-evaluating and removing the rule. The IRS' experience with applying the alternative gross receipts test has shown that the test is vague and unduly burdensome to administer because of the empirical evaluation needed to determine whether the alternative method is likely to produce an amount that is not greater than fair market value.

However, in response to comments received, the final regulations provide that deemed gross receipts resulting from deemed realization events or insignificant non-realization events that meet the realization requirement in § 1.901-2(b)(2) will meet the gross receipts requirement if the deemed gross receipts are reasonably calculated to produce an amount that is not greater than fair market value. For example, deemed gross receipts resulting from a mark-to-market regime or foreign tax law that imputes interest income under a provision similar to section 7872 would satisfy the gross receipts requirement.

The Treasury Department and the IRS disagree with the comment that seems to conflate a situation when actual gross receipts arise from a transaction between related parties that is priced under a cost-plus transfer pricing methodology with the transactions contemplated in the 2020 FTC proposed regulations. Such a related-party transaction is distinct from a foreign levy that imposes tax on deemed gross receipts that are determined based upon a markup of costs rather than the actual gross receipts from the transaction among unrelated parties. The former involves using a transfer pricing methodology to determine the appropriate payment (that is, the actual gross receipts as reported or adjusted for tax purposes) that a taxpayer in a transaction with a related party should receive based upon arm's length principles. In contrast, in the context of transactions between unrelated parties, using a measure of deemed gross receipts based on costs may have no relationship to the actual gross receipts.

However, the Treasury Department and the IRS have determined that the reference in proposed § 1.901-2(b)(3)(i) to gross receipts that are properly allocated to a taxpayer under a foreign tax meeting the jurisdictional nexus requirement was potentially confusing and unnecessary, because such a related party transfer pricing methodology would result in actual gross receipts, either by means of an actual payment or a constructive payment resulting from a receivable recorded on the taxpayer's books and records. Accordingly, the reference to gross receipts determined under a transfer pricing methodology is removed from the final regulations, and an example is added to the final regulations at § 1.901-2(b)(3)(ii)(B) to illustrate the intended application of the rule.

3. Cost Recovery Requirement

The 2020 FTC proposed regulations modified various aspects of the net income test of the existing regulations (referred to as the “cost recovery requirement” under the 2020 FTC proposed regulations) to ensure that a foreign tax is a creditable tax only if the determination of the foreign tax base conforms in essential respects to the determination of taxable income under the Code.

Several comments recommended against adopting the proposed changes to the cost recovery requirement out of concern that the proposed changes will result in more instances of unrelieved double taxation. One comment asserted that the effect of the revisions to the cost recovery requirement would be to limit creditability of foreign levies that have been traditionally characterized as income taxes based solely on minor deviations between U.S. tax principles and the foreign law. The comment asserted that the revised standard is stricter than the standard traditionally applied by the courts, and unreasonably narrows the standard since the term “foreign income, war profits, and excess profits taxes” in the statute has not been changed.

In general, the Treasury Department and the IRS disagree with comments that the revised cost recovery standard will result in additional unrelieved double taxation in a manner that is inconsistent with the policies underlying section 901. This is because double taxation that merits relief under section 901 occurs only if there is substantial conformity in the principles used to calculate the foreign tax base and the U.S. tax base. However, the final regulations modify certain aspects of the cost recovery requirement in order to provide additional flexibility and to reduce instances where minor deviations between U.S. principles and foreign tax law could cause a foreign levy to be non-creditable; these changes are described in part IV.B.3.ii and iii of this Summary of Comments and Explanation of Revisions.

i. Gross Basis Taxes

The 2020 FTC proposed regulations removed the nonconfiscatory gross basis tax rule of the existing regulations. That rule provided that a foreign levy whose base is gross receipts is treated as meeting the cost recovery requirement if the foreign levy is almost certain to reach net gain in the normal circumstances in which it applies because costs and expenses will almost never be so high as to offset gross receipts or gross income, and the rate of the tax is such that after the tax is paid persons subject to the tax are almost certain to have net gain. Instead, proposed § 1.901-2(b)(4)(i)(A) provided that a foreign levy must permit recovery of the significant costs and expenses attributable to such gross receipts, or permit recovery of an alternative amount that by its terms may be greater, but will never be less, than the actual amounts of such significant costs and

expenses. Proposed § 1.901-2(b)(4)(i)(A) further provided that a foreign tax that is imposed on gross receipts or gross income and that does not permit recovery of any costs or expenses does not meet the cost recovery requirement, even if in practice there are no or few costs and expenses attributable to all or particular types of gross receipts included in the foreign tax base.

One comment stated that the removal of the nonconfiscatory gross basis tax rule is inconsistent with court decisions that predate the 1983 regulations and that have concluded that a tax on gross receipts may qualify as a creditable income tax so long as it reaches net income. The comment specifically cited

Seatrain Lines, Inc.

Comm'r,

46 B.T.A. 1076 (1942),

Santa Eulalia Mining Co.

Comm'r,

2 T.C. 24 (1943), and

Bank of America Nat. Trust & Sav. Ass'n

U. S.,

459 F.2d 513 (Ct. Cl. 1972). The comment stated that in determining whether a foreign levy is an income tax, the courts focus on the nature of the income that is the subject of the tax and whether that type of income is likely to involve significant expenses that could result in a net loss being realized from the activity being taxed. The comment further contended that digital services taxes would qualify as creditable income taxes under this analysis, because the amounts of costs and expenses associated with the type of gross receipts subject to the digital services taxes are never so high as to cause businesses subject to the tax to incur a loss after payment of the tax. No explanation or evidence (whether empirical or anecdotal) was provided to support this assertion.

The comment further asserted that the explanation for the proposed change in the preamble to the 2020 FTC proposed regulations is unpersuasive. It contended that the court decisions involving the net gain requirement have not reflected any administrative difficulties. As such, the comment stated that the removal of the nonconfiscatory gross basis tax rule in the 2020 FTC proposed regulations is unjustified and recommended that the existing rule be retained.

The Treasury Department and the IRS have determined that foreign taxes that do not permit recovery of significant costs and expenses are not income taxes in the U.S. sense. Although some cases preceding the 1983 regulations, such as those cited in the comment, determined that a gross basis tax could be an income tax in the U.S. sense, other cases reached a different conclusion. See

C.I.R.

American Metal Co.,

221 F.2d 134 (1955) (a Mexican Production Tax was not creditable because it applied regardless of whether miners made a profit or sales);

Keasbey,

133 F.2d 894 (tax imposed under the Quebec Mining Act was not an income tax in the U.S. sense because the levy permitted deductions only for costs incurred in the mining operation, and not for expenses incident to the general conduct of the business);

Bank of America,

459 F.2d 513 (gross basis tax on income of banks did not qualify as an income tax under section 901). The Treasury Department and the IRS do not agree that a tax is properly considered a tax on net income so long as empirical evidence demonstrates that the nonrecoverable costs and expenses attributable to the gross receipts or gross income are almost never so high as to eliminate any profit after the tax is paid. It is unlikely, as a practical matter, that the data required to make such an empirical showing of the amounts of disallowed expenses of all taxpayers subject to the tax will be available to either taxpayers or the IRS other than in the context of a targeted tax of narrow application such as the levies considered in

Texasgulf

Exxon.

In any event, such a gross basis tax is so dissimilar to the U.S. income tax against which the foreign tax credit is allowed that the Treasury Department and the IRS have determined it should not qualify as an income tax in the U.S. sense. With respect to the comment that asserted that gross basis digital services taxes never result in a loss to affected companies, the fact that the comment failed to provide any evidence may be indicative of the difficulty of making this empirical showing. Furthermore, comments made by the affected industries have made clear that gross basis taxes are inconsistent with the fundamental nature of an income tax, and could in fact result in taxation of companies that are in a loss position.

Accordingly, the final regulations largely maintain the approach of the 2020 FTC proposed regulations in eliminating the nonconfiscatory gross basis tax rule.

United States Trade Representative, Section 301 Investigation, Report on France's Digital Services Tax at 57-58 (Dec. 2, 2019), available at

https://ustr.gov/sites/default/files/Report_On_France%27s_Digital_Services_Tax.pdf

(quoting numerous comments from digital companies and industry groups attesting that the digital service taxes' application to revenue rather than income is inconsistent with prevailing principles of international taxation). In particular, a member from National Foreign Trade Council stated that a “tax imposed on gross revenue has no relationship to net income or profits, which are the only proper bases for a corporate income tax.”

Id.

at 57. Another industry representative stated that a “tax on ordinary business profits, imposed on gross revenue, has no relationship to net income. . . . Gross revenue has no relationship to net income, and therefore such taxes are not limited to taxing the gains of an enterprise, and will drive companies into deeper losses if they are not profitable. Thus, such a tax is likely to harm growing companies. . . .”).

Id.

at 58.

However, upon consideration of the comments, the Treasury Department and the IRS agree that a gross basis tax may meet the cost recovery requirement if in fact there are no significant costs and expenses attributable to the gross receipts included in the taxable base. Accordingly, the final regulations at § 1.901-2(b)(4)(i)(A) remove the rule in the 2020 FTC proposed regulations that provided that a gross basis tax could never meet the cost recovery requirement, even if in practice there are no significant costs and expenses attributable to the gross receipts included in the foreign tax base. Instead, § 1.901-2(b)(4)(i)(A) provides that a gross basis tax satisfies the cost recovery requirement if there are no significant costs and expenses attributable to the gross receipts included in the foreign tax base that must be recovered under the rules of § 1.901-2(b)(4)(i)(C)(

). In addition, the Treasury Department and the IRS recognize that the Code contains various limitations on the recovery of non-business expenses that have been modified from time to time. For example, miscellaneous itemized deductions, including unreimbursed employee expenses, are generally not deductible. Thus, the final regulations provide in § 1.901-2(b)(4)(i)(C)(

) that a foreign tax law that does not permit recovery of costs and expenses attributable to wages and investment income not derived from a trade or business satisfies the cost recovery requirement. Furthermore, the final regulations clarify in § 1.901-2(b)(4)(i)(A) that a foreign tax need not permit recovery of costs and expenses, such as certain personal expenses, that are not attributable, under reasonable principles, to gross receipts included in the foreign taxable base.

ii. Significant Costs

Proposed § 1.901-2(b)(4)(i)(A) provided that the cost recovery requirement is satisfied if the foreign tax law permits recovery of significant costs and expenses attributable to the gross receipts included in the foreign tax base. The significance of the cost is de

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