David Rosenbloom Comments on Foreign Tax Credit

Members of the ABA tax section argued that expenses allocated to GILTI should not be taken into account for the GILTI foreign tax credit basket. Alternatively, the government should hold off on that allocation until worldwide allocation of interest expense becomes effective in 2021 (section 864(f)). The members suggested that taxpayers be excused from expense allocation on a showing that the GILTI had been subject to a foreign tax of at least 13.125 percent.

The preamble to the proposed regulations argues that amendments to the foreign tax credit limits demonstrate congressional intent to require expense allocation to GILTI (section 904(b)(4)(B)). The drafters acknowledged that expense allocation could produce unusable excess credits for GILTI earners. But there is no right to the preservation of those credits, which are statutorily cut off. The drafters accuse the complainants of arguing that they should be entitled to wash out their other U.S. tax liability with excess credits, but Congress didn’t change the existing foreign tax credit limits.

“Enact in haste, repent at leisure,” said H. David Rosenbloom of Caplin & Drysdale. “The statute clearly indicates that allocation and apportionment of deductible expenses against GILTI is contemplated,” he noted. “Section 904(b)(5)(B) specifically precludes allocation and apportionment with respect to income from CFCs except for amounts includable under section 951A(a),” Rosenbloom explained. “The last time I checked, statutory language was a preferred indicator of congressional intent. Isn’t that what Justice Scalia would say?”

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Excerpt taken from the article “What Remains of the Foreign Tax Credit?” by Lee A. Sheppard for Tax Notes.