U.S. Treasury Department, IRS Reexamining Problematic Foreign Tax Credit Rules

After sustained advocacy from the manufacturing industry, the U.S. Treasury and the Internal Revenue Service (IRS) announced they are reevaluating harmful changes made last year to the foreign tax credit rules. While the Treasury Department revisits the changes, businesses can use the old regulations for taxable years beginning on or after Dec. 28, 2021 and ending on or before Dec. 31, 2023.

The agencies’ notice also said “additional temporary relief” may be provided to businesses.

For context: the U.S. tax code has long provided a foreign tax credit, which is intended to prevent double taxation for U.S. businesses that have foreign income subject to both U.S. and foreign income tax. But, in 2022, the Treasury Department and IRS finalized new rules in response to the rise of digital service taxes in other countries.

Those changes implemented significantly limited manufacturers’ ability to claim the foreign tax credit and, therefore, imposed significant competitive disadvantages on U.S. businesses, especially compared to businesses from other jurisdictions, such as China, that relieve international double taxation through a credit mechanism.

If last year’s rules are not reversed, the double taxation burden would fall particularly hard on U.S. business sectors that are leaders in global technological innovation and content creation, and that license and sell their U.S. products throughout the world.