United States: FTC regulations get a proposed makeover

Tax notes and developments November 2022

In brief

On 18 November 2022, Treasury and the IRS released proposed regulations meant to clarify and amend the controversial final foreign tax credit regulations released earlier this year under Code sections 861, 901, and 903. We expressed concerns with the final regulations in our special report, Final FTC Regulations Cause Double Taxation Burden(s) Falls on Taxpayers. The proposed regulations purport to address some of these concerns and put taxpayers on notice to quickly review and revise, as appropriate, certain license agreements. 


Key takeaways

  • The proposed regulations make a number of helpful clarifying changes to the cost recovery requirement, which should largely put to rest most of the uncertainties that exist under the current final regulations.
  • The proposed regulations also introduce a very limited single-country license exception pursuant to which a withholding tax on royalties may be creditable notwithstanding that the relevant foreign tax law has a royalty sourcing rule that is not compatible with the US place-of-use rule for sourcing royalties. The exception requires a written license agreement that characterizes the payment as a royalty and that either limits the territory of use of the IP to the country imposing the withholding tax or separately--and accurately--states the portion of the royalty that is attributable to the use of the IP in the country imposing the withholding tax.
  • Taxpayers have until 17 May 2023, to review and amend their existing or execute new, as appropriate, license agreements, both intercompany and with third parties. That exercise should begin immediately, especially if it will require negotiation with third parties.
  • Otherwise, the proposed regulations leave the controversial source-based attribution requirement for royalties largely intact.
  • The proposed regulations also include a narrow revision to the disregarded payment rules in Treas. Reg. § 1.861-20 that provides that a disregarded payment in exchange for property does not give rise to a reattribution asset.

The proposed regulations do nothing to address the following concerns under the current final regulations:

  • The attribution requirement for residents, as most relevant to Brazil.
  • The source-based attribution requirement for services.

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