As GHJ explained earlier this year, the U.S. Treasury Department issued final and proposed foreign tax credit (FTC) regulations in 2022 that severely curtailed the ability of U.S. taxpayers to claim a foreign tax credit for certain non-U.S. taxes. The 2022 FTC Creditability Regulations introduced a new set of rules to determine whether a non-U.S. tax qualifies as a creditable income tax for purposes of the U.S. foreign tax credit rules. Initially targeted to deny taxpayers the ability to credit recently emerging foreign digital services taxes, this new set of rules received significant complaints from affected taxpayers and industry groups as being too strict and casting too wide a net in denying the creditability of non-U.S. taxes that were historically creditable under the Internal Revenue Code’s Sec. 901 and 903.
In an unexpected and surprising move, the U.S. Treasury Department published Notice 2023-55 on July 21, 2023, providing temporary relief to taxpayers for tax years beginning on or after December 28, 2021 and ending on or before December 31, 2023. During the relief period, U.S. taxpayers may rely on the historical foreign tax credit rules, which will qualify many foreign taxes for potential use in the foreign tax credit calculation that would have been disallowed under the 2022 FTC Creditability Regulations.
Relief is effectively claimed simply by applying the rules under Notice 2023-55 to all creditable foreign taxes paid by the taxpayer or any affiliated entity within a consolidated group on the respective federal tax return for each relief year.
Notice 2023-55 indicates further that the U.S. Treasury Department and the Internal Revenue Service continue to analyze issues related to the 2022 FTC Creditability Regulations and are considering proposing amendments to those regulations. They are also considering whether to provide additional temporary relief beyond 2023.
GHJ is closely monitoring ongoing developments in this space and will publish tax alerts as new information becomes available. Please contact GHJ’s International Tax Services Team for any questions on Notice 2023-55, U.S. Foreign Tax Credit rules or specific considerations for your business.