The IRS has adopted final regulations with respect to the allocation by a partnership of foreign income taxes. The final regulations are intended to improve the operation of an existing safe harbor rule. This safe harbor rule, under Reg. §1.704-1(b)(4)(viii), determines whether allocations of creditable foreign tax expenditures (CFTEs) are deemed to be in accordance with the partners’ interests in the partnership.

The final regulations—

  • clarify the effect of Code Sec. 743(b) adjustments on the determination of net income in a CFTE category;
  • include special rules regarding how deductible allocations (that is, allocations that give rise to a deduction under foreign law) are taken into account for purposes of determining net income in a CFTE category;
  • include special rules regarding how nondeductible guaranteed payments (that is, guaranteed payments that do not give rise to a deduction under foreign law) are taken into account for purposes of determining net income in a CFTE category; and
  • include a clarification of the rules regarding the treatment of disregarded payments between branches of a partnership for purposes of determining income attributable to an activity included in a CFTE category.

A transition rule applies to partnerships whose agreements were entered into before February 14, 2012.