The IRS published temporary and proposed regulations on allocations of creditable foreign tax expenditures (CFTEs). The regulations make various technical changes to the existing regulatory safe harbor for allocating CFTEs. The regulations are effective on February 4, 2016.
The existing regulations provide special rules for foreign tax expense allocations when those expenses are eligible for a credit under section 901(a) or an applicable U.S. income tax treaty, stating that allocations of such items do not have substantial economic effect and must be allocated in accordance with the partners’ interests in the partnership. The regulations provide a safe harbor for CFTE allocations to be deemed in accordance with the partners’ interests in the partnership if: (1) the CFTE is allocated and reported on the partnership return in proportion to the distributive shares of income to which the CFTE relates; and (2) allocations of all other partnership items that, in the aggregate, have a material effect on the amount of CFTEs allocated to a partner are valid. In general, the purpose of the safe harbor is to match allocations of CFTEs with the income to which the CFTEs relate. The new regulations make a series of highly-technical tweaks to this safe harbor.