In a letter to Treasury Secretary Steven Mnuchin and Acting IRS Commissioner David Kautter, ATR President Grover Norquist urged the administration to craft a foreign tax credit transition rule that allows a simple and efficient transition to the new tax code and promotes economic growth and equity.  

The Tax Cuts and Jobs Act (TCJA) dramatically improved and updated the U.S. tax code. For instance, TCJA reduced the tax rate on businesses to a globally competitive rate and modernized the international system of taxation.

The law also significantly modified the treatment of foreign tax credits, which exist to mitigate double taxation and promote American competitiveness.

Under the new code, “general income” category FTCs are split into three categories – general income, foreign branch income and GILTI (Global Intangible Low Taxed Income). However, TCJA is silent on the treatment of pre-2018 general limitation FTC carryforwards, so this issue must be addressed through a transition rule released by Treasury.

As the letter notes, the appropriate transition rule would default existing FTC general limitation carryforwards into the post-TCJA general limitation basket and allow elective tracing of FTCs into new income baskets to the extent that reallocation is necessary and justified:  

“Treasury and the IRS should adopt a rule that defaults pre-2018 FTC general income carryforwards so that they are applied against the post-TCJA general category basket. The rule should also allow “elective tracing” so that businesses can reallocate FTCs into the foreign branch income basket if they can prove reallocation is justified. 

“This approach would be far simpler, less arbitrary, and matches the direction set following passage of the Tax Reform Act of 1986 and other laws.”

The alternative approach – a mandatory reallocation rule that forces general income FTC carryforwards into the new foreign branch income and GILTI categories should be rejected as bad policy, as noted by the letter:

“This approach will create significant compliance costs for businesses and the government, will pick winners and losers based on past decisions made, and runs counter to past transition rules for reallocating FTCs.

The full letter can be found here.