Guidance Related to the Foreign Tax Credit (published)

Federal Register / Vol. 87, No. 224 / Tuesday, November 22, 2022 / Proposed Rules
than 50,000. Using this criterion, the
Census Bureau estimates that around
37,000 small governmental jurisdictions
would be impacted by this rulemaking.
Economic Impact
The Census Bureau does not
anticipate any economic impact as a
result of this proposed rule. This
rulemaking intends to resume the
implementation of the Population
Estimates Challenge Program in 2023 to
provide eligible entities the opportunity
to file a challenge to population
estimates for 2021 and subsequent years
in forthcoming estimates series,
beginning with the Vintage 2022 series
that is scheduled to be published in
2023. There are no direct costs imposed
on governmental entities (units) that
wish to initiate a challenge under the
Population Estimates Challenge
Program.
Executive Orders
This rulemaking has been determined
to be not significant for purposes of
Executive Order 12866. This proposed
rule does not contain policies with
federalism implications as that term is
defined in Executive Order 13132.
Paperwork Reduction Act
This notice of proposed rulemaking
does not contain a collection of
information subject to the requirements
of the Paperwork Reduction Act (PRA),
44 U.S.C., Chapter 35. Notwithstanding
any other provision of the law, no
person is required to respond to, nor
shall any person be subject to a penalty
for failure to comply with, a collection
of information subject to the
requirements of the PRA, unless that
collection of information displays a
currently valid Office of Management
and Budget (OMB) Control Number.
Robert L. Santos, Director, Census
Bureau, approved the publication of this
notification in the Federal Register.
List of Subjects in 15 CFR Part 90

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Administrative practice and
procedure, Census data, Population
census, Statistics.
For the reasons set forth in the
preamble, Census Bureau proposes to
amend 15 CFR part 90 as follows:
PART 90—PROCEDURE FOR
CHALLENGING POPULATION
ESTIMATES
1. The authority citation for part 90
continues to read as follows:

■

Authority: 13 U.S.C. 4 and 181.
■

2. Revise § 90.2 to read as follows:

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§ 90.2

Policy of the Census Bureau.

It is the policy of the Census Bureau
to provide the most accurate population
estimates possible given the constraints
of resources and available statistical
techniques. It is also the policy of the
Census Bureau, to the extent feasible, to
provide governmental units the
opportunity to seek a review of and
provide additional data for these
estimates and to present evidence
relating to the accuracy of the estimates.
■ 3. Revise § 90.7 to read as follows:
§ 90.7

Where to file a challenge.

A request for a population estimate
challenge must be prepared in writing
by the governmental unit and filed with
the Chief, Population Division, Census
Bureau by sending the request via email
to POP.challenge@census.gov. The
governmental unit must designate a
contact person who can be reached by
telephone or email during normal
business hours should questions arise
with regard to the submitted materials.
■ 4. Amend § 90.8 by revising
paragraphs (a), (c), and (d) to read as
follows:
§ 90.8

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used to produce those population
estimates and are not eligible to be
challenged. The Census Bureau will
consider a challenge based on data
related to changes in an area’s housing
stock, such as data on demolitions,
condemned units, uninhabitable units,
building permits, or mobile home
placements or other housing inventorybased data deemed comparable by the
Census Bureau. The Census Bureau will
also consider a challenge based on
additional information about the group
quarters population in a locality.
(d) The Census Bureau will also
provide a guide on its website as a
reference for governmental units to use
in developing their data as evidence to
support a challenge to the population
estimate. In addition, a governmental
unit may address any additional
questions by contacting the Census
Bureau at 301–763–2461 or by sending
emails to POP.challenge@census.gov.
Dated: November 17, 2022.
Shannon Wink,
Program Analyst, Policy Coordination Office,
U.S. Census Bureau.
[FR Doc. 2022–25415 Filed 11–21–22; 8:45 am]

Evidence required.

(a) The governmental unit shall
provide whatever evidence it has
relevant to the request at the time of
filing. The Census Bureau may request
further evidence when necessary. The
evidence submitted must be consistent
with the criteria, standards, and regular
processes the Census Bureau employs to
generate the population estimate. The
Census Bureau challenge process cannot
accept estimates developed from
methods different from those used by
the Census Bureau. The Census Bureau
will only accept a challenge when the
evidence provided indicates the use of
incorrect data, processes, or calculations
in the estimates.
*
*
*
*
*
(c) For minor civil divisions and
incorporated places, the Census Bureau
uses a housing unit method to distribute
a county population to places within its
legal boundaries. The components in
this method include housing units
estimates, average household
population per housing unit, and an
estimate of the population in group
quarters. The estimation formula was
simplified to increase the accuracy of
the estimates following the application
of differential privacy as per the Census
Bureau’s new disclosure avoidance
framework. As a result, the persons per
household (PPH) and occupancy rate
components were replaced with the
average household population per
housing unit. Consequently, the PPH
and occupancy rate are no longer inputs

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BILLING CODE 3510–07–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–112096–22]
RIN 1545–BQ46

Guidance Related to the Foreign Tax
Credit
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:

This document contains
proposed regulations relating to the
foreign tax credit, including guidance
with respect to the reattribution asset
rule for purposes of allocating and
apportioning foreign taxes, the cost
recovery requirement, and the
attribution rule for withholding tax on
royalty payments.
DATES: Written or electronic comments
and requests for a public hearing must
be received by January 23, 2023.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic
submissions via the Federal
eRulemaking Portal at
www.regulations.gov (indicate IRS and
REG–112096–22) by following the
online instructions for submitting
SUMMARY:

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Federal Register / Vol. 87, No. 224 / Tuesday, November 22, 2022 / Proposed Rules

comments. Once submitted to the
Federal eRulemaking Portal, comments
cannot be edited or withdrawn. The
Department of the Treasury (the
‘‘Treasury Department’’) and the
Internal Revenue Service (the ‘‘IRS’’)
will publish for public availability any
comment submitted electronically, and
on paper, to its public docket. Send
hard copy submissions to:
CC:PA:LPD:PR (REG–112096–22), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–112096–
22), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW,
Washington, DC 20224.
FOR FURTHER INFORMATION CONTACT:
Concerning §§ 1.901–2 and 1.903–1,
Teisha Ruggiero, (646) 259–8116;
concerning § 1.861–20, Suzanne Walsh,
(202) 317–4908; concerning submissions
of comments and requests for a public
hearing, Regina Johnson, (202) 317–
6901 (not toll-free numbers) or by
sending an email to publichearings@
irs.gov (preferred).
SUPPLEMENTARY INFORMATION:

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Background
On December 17, 2019, the Treasury
Department and the IRS published
proposed regulations (REG–105495–19)
addressing changes made by the Tax
Cuts and Jobs Act (Pub. L. 115–97, 131
Stat. 2054 (2017)) (the ‘‘TCJA’’) and
other related foreign tax credit rules in
the Federal Register (84 FR 69124) (the
‘‘2019 Foreign Tax Credit (‘‘FTC’’)
proposed regulations’’). Correcting
amendments to the 2019 FTC proposed
regulations were published in the
Federal Register on May 15, 2020 (85
FR 29368). The 2019 FTC proposed
regulations were finalized as part of TD
9922, published in the Federal Register
(85 FR 71998) on November 12, 2020
(the ‘‘2020 FTC final regulations’’). On
the same date, the Treasury Department
and the IRS published proposed
regulations (REG–101657–20) in the
Federal Register (85 FR 72078) (the
‘‘2020 FTC proposed regulations’’). The
2020 FTC proposed regulations
addressed changes made by the TCJA
and other foreign tax credit issues.
Correcting amendments to the 2020 FTC
final regulations were published in the
Federal Register on October 1, 2021 (86
FR 54367). A public hearing on the 2020
FTC proposed regulations was held on
April 7, 2021. The 2020 FTC proposed
regulations were finalized in TD 9959,
published in the Federal Register (87
FR 276) on January 4, 2022 (the ‘‘2022

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FTC final regulations’’). Correcting
amendments to the 2022 FTC final
regulations were published in the
Federal Register on July 27, 2022 (87 FR
45018 and 87 FR 45021).
This document contains proposed
regulations (the ‘‘proposed regulations’’)
addressing the following issues: (1) the
definition of a reattribution asset for
purposes of allocating and apportioning
foreign income taxes; (2) the application
of the cost recovery requirement; and (3)
the application of the source-based
attribution requirement to withholding
taxes on certain royalty payments.
Explanation of Provisions
I. Allocation and Apportionment of
Foreign Income Taxes
A. In General
Section 1.861–20 provides rules for
allocating and apportioning foreign
income taxes to the statutory and
residual groupings, including the
categories described in section 904 that
apply for purposes of calculating a
taxpayer’s foreign tax credit limitation.
In general, § 1.861–20 operates by first
assigning the foreign gross income on
which the foreign income tax is
imposed to statutory and residual
groupings based upon the character of
the item of U.S. gross income that
corresponds to the foreign gross income
(the ‘‘corresponding U.S. item’’).
§ 1.861–20(c) and (d). Foreign income
tax expense is allocated to the grouping
to which the foreign gross income is
assigned, and if foreign gross income is
assigned to more than one grouping,
deductions computed under foreign law
are allocated and apportioned to the
groupings and foreign tax expense is
apportioned among the groupings based
upon foreign taxable income in the
groupings. § 1.861–20(e) and (f).
The 2022 FTC final regulations
provide rules for allocating and
apportioning foreign income tax arising
from a disregarded payment. Foreign
gross income included by reason of the
receipt of a disregarded payment has no
corresponding U.S. item because
Federal income tax law does not give
effect to the payment as a receipt of
gross income. Section 1.861–20(d)(3)(v)
therefore characterizes the disregarded
payment under Federal income tax law
for purposes of assigning this foreign
gross income to the statutory and
residual groupings. These rules treat the
portion of a disregarded payment, if
any, that causes U.S. gross income of the
payor taxable unit to be reattributed
under either § 1.904–4(f)(2) (in the case
of a taxpayer that is an individual or
domestic corporation) or § 1.951A–
2(c)(7)(ii)(B) (in the case of a taxpayer

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that is a foreign corporation) to the
recipient taxable unit as a ‘‘reattribution
payment.’’ § 1.861–20(d)(3)(v)(E)(7); see
also part I.B of this Explanation of
Provisions for a description of the
reattribution payment rules. The excess
of a disregarded payment over the
portion that is a reattribution payment
is treated either as a contribution from
one taxable unit to another taxable unit
owned by the first taxable unit, or as a
remittance of a taxable unit’s current
and accumulated earnings. § 1.861–
20(d)(3)(v)(E)(2) and (8). Section 1.861–
20(d)(3)(v)(D) provides a special rule for
characterizing disregarded payments
that are made in exchange for property
and are not reattribution payments.
B. Reattribution Payments, Remittances,
and the Reattribution of Assets
Section 1.861–20(d)(3)(v)(B) assigns
foreign gross income from a disregarded
payment that is a reattribution payment
to the same statutory and residual
grouping as the U.S. gross income that
is reattributed to the recipient taxable
unit. This assignment occurs before
taking into account any reattribution
payments made by the recipient taxable
unit.
Foreign gross income included by
reason of a remittance is assigned to the
statutory and residual groupings by
reference to the proportion of the tax
book value of the assets of the remitting
taxable unit in the groupings as assigned
for purposes of apportioning interest
expense. § 1.861–20(d)(3)(v)(C)(1)(i). In
other words, the character of the assets
of the remitting taxable unit is a proxy
for the character of the current and
accumulated earnings out of which the
remittance is made. To more accurately
reflect the character of the remitting
taxable unit’s earnings, the reattribution
asset rule in § 1.861–20(d)(3)(v)(C)(1)(ii)
requires that a reattribution of income
from one taxable unit (payor taxable
unit) to another taxable unit (recipient
taxable unit) result in a concomitant
reattribution of the tax book value of the
assets of the payor taxable unit that
generated the reattributed income
(‘‘reattribution assets’’) from the payor
taxable unit to the recipient taxable
unit.
After further study, the Treasury
Department and the IRS have concluded
that the reattribution asset rule is not
needed for allocating and apportioning
foreign tax on a remittance in the case
of disregarded property sales, and
particularly with respect to disregarded
sales of inventory property. For
example, consider a domestic
corporation that directly owns two
taxable units that are disregarded for
U.S. Federal income tax purposes: DE1,

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Federal Register / Vol. 87, No. 224 / Tuesday, November 22, 2022 / Proposed Rules
which manufactures inventory property,
and DE2, which distributes inventory
property to unrelated customers. DE1
sells the manufactured inventory to DE2
in exchange for a disregarded payment.
The disregarded payment that DE1
receives for the sale of inventory
property to DE2 becomes a reattribution
payment when DE2 on-sells the
inventory property and generates gain in
a transaction that is regarded for U.S.
tax purposes. Accordingly, gain from
the sale of the inventory is reattributed
from the distributing taxable unit to the
manufacturing taxable unit, and a
portion of the distributing taxable unit’s
assets is reattributed to the
manufacturing taxable unit. Although
the assets of the manufacturing taxable
unit contributed to the production of the
income of both taxable units, the tax
book value of the manufacturing taxable
unit’s assets is not reattributed to the
distributing taxable unit. As a result, the
reattribution asset rule, by reattributing
assets only from the distributor taxable
unit to the manufacturing taxable unit,
does not more accurately balance among
the taxable units all of the assets that
produced the gain from the inventory
sale. The reattribution of assets instead
changes the ratios of the assets
considered held by the taxable units
such that a greater percentage of the
distributor taxable unit’s assets consist
of non-inventory assets (for example,
cash), and a greater percentage of the
manufacturing taxable unit’s assets
consist of inventory.
Accordingly, proposed § 1.861–
20(d)(3)(v)(E)(6) retains the general
definition of reattribution asset but
excludes any portion of the tax book
value of property transferred in a
disregarded sale from being attributed
back to the selling taxable unit.
Comments are requested on whether
similar revisions should be made to the
reattribution asset rule in situations
other than disregarded property sales.
Comments are further requested on
other issues related to the allocation and
apportionment of foreign income taxes
to disregarded payments, which may be
considered in future guidance projects.

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II. Creditability of Foreign Taxes Under
Sections 901 and 903
A. In General
Section 901 allows a credit for foreign
income, war profits, and excess profits
taxes, and section 903 provides that
such taxes include a tax in lieu of a
generally-imposed foreign income, war
profits, or excess profits tax
(collectively, ‘‘foreign income taxes’’).
Before its amendment by the 2022 FTC
final regulations, § 1.901–2(a)(1)

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provided that a foreign levy was an
income tax if and only if (1) it was a tax,
and (2) the predominant character of
that tax was that of an income tax in the
U.S. sense. Under former § 1.901–
2(a)(3), the predominant character of a
foreign tax was that of an income tax in
the U.S. sense if the tax (1) was likely
to reach net gain in the normal
circumstances in which it applied (the
‘‘net gain requirement’’), and (2) was not
a ‘‘soak-up’’ tax. To satisfy the net gain
requirement, a foreign tax needed to
meet the realization, gross receipts, and
net income requirements. See former
§ 1.901–2(b).
The 2022 FTC final regulations
revised the net gain requirement to
better align the regulatory tests with
principles in the Internal Revenue Code
(‘‘Code’’) for determining the base of a
U.S. income tax, as well as to simplify
and clarify the application of these tests.
The revisions made by the 2022 FTC
final regulations ensure that a foreign
tax is a creditable net income tax only
if the determination of the foreign tax
base conforms in essential respects to
the determination of taxable income
under the Code. In particular, the 2022
FTC final regulations limit the role of
the predominant character analysis
generally required under the prior
regulations, which often required
empirical analysis, in determining
whether a foreign tax meets each of the
net gain requirements. Under the 2022
FTC final regulations, a foreign tax
satisfies the net gain requirement only if
the tax satisfies the realization
requirement, the gross receipts
requirement, the cost recovery
requirement (formerly the net income
requirement), and the attribution
requirement. In addition, the 2022 FTC
final regulations provide that the
determination of whether a foreign tax
satisfies each component of the net gain
requirement is generally based on the
terms of the foreign tax law governing
the computation of the tax base and not
based on empirical analysis. § 1.901–
2(b)(1). The 2022 FTC final regulations
also maintained the long-standing all-ornothing rule; that is, a foreign tax either
is or is not a foreign income tax, in its
entirety, for all persons subject to the
foreign tax. § 1.901–2(a)(1)(i).
B. Cost Recovery Requirement
1. Application Under 2022 FTC Final
Regulations
Consistent with the net income
requirement in former § 1.901–2(b)(4),
the 2022 FTC final regulations require,
under the cost recovery requirement,
that the base of a foreign tax permits the
recovery of significant costs and

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71273

expenses attributable, under reasonable
principles, to the gross receipts
included in the tax base. § 1.901–
2(b)(4)(i)(A). However, to ensure that a
foreign tax is a foreign income tax only
if the foreign tax allows for the recovery
of costs and expenses in a manner that
conforms in essential respects to the
determination of taxable income under
the Code, and to limit the empirical
analysis that would otherwise be
required, the 2022 FTC final regulations
modified the cost recovery requirement
in several respects. For example, the
2022 FTC final regulations provide a list
of costs and expenses that are always
treated as significant (costs and
expenses related to capital
expenditures, interest, rents, royalties,
wages or other payments for services,
and research and experimentation).
§ 1.901–2(b)(4)(i)(C)(1). Whether other
costs and expenses are significant
continues to be determined under an
empirical analysis; that is, based on
whether, for all taxpayers in the
aggregate to which the foreign tax
applies, the item of cost or expense
constitutes a significant portion of the
taxpayers’ total costs and expenses. Id.
However, the 2022 FTC final
regulations also recognized that, similar
to the United States, foreign countries
limit the recovery of certain significant
costs and expenses. As a result, § 1.901–
2(b)(4)(i)(C)(1) provides that foreign tax
law is considered to permit the recovery
of significant costs and expenses, even
if recovery of certain significant costs
and expenses is disallowed in whole or
in part, if such disallowance is
consistent with any principle
underlying the disallowances required
under the Code (‘‘principles-based
exception’’).
2. Response to the 2022 FTC Final
Regulations
Following the publication of the 2022
FTC final regulations, the Treasury
Department and the IRS have received
a number of questions regarding the
application of the cost recovery
requirement as well as requests to
modify the requirement. In particular,
taxpayers and other stakeholders
identified a number of foreign tax laws
that impose disallowances or other
limitations on the recovery of costs and
expenses that are not clearly matched to
a principle underlying a similar
disallowance under the Code, even
though, in the view of these
stakeholders, the foreign tax as a whole
is consistent with a net income tax in
the U.S. sense. Moreover, taxpayers
noted that, in some instances, it was
difficult to determine the principle
underlying the foreign disallowance

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because of a lack of information from
the foreign country.
The Treasury Department and the IRS
agree that, in certain instances, the cost
recovery requirement should be
satisfied even if the foreign tax law
contains a disallowance or other
limitation on the recovery of a particular
cost or expense that may not reflect a
specific principle underlying a
particular disallowance in the Code.
The income tax provisions of the Code
contain a number of disallowances and
other limitations on the deductibility of
certain costs and expenses. In some
instances, the principle or principles
behind the limitation is clear, either
because the motivation is articulated in
legislative history or because it is
possible to determine the principle from
the terms of the limitation itself.
However, the principles underlying
other limitations may be less apparent,
making it difficult to determine whether
a foreign limitation on the deductibility
of certain costs and expenses is
consistent with any principle
underlying the disallowances under the
Code.
As explained in the preamble to the
2022 FTC final regulations, section 901
allows credits for foreign taxes that are
income taxes in the U.S. sense, and this
standard is met if there is substantial
conformity in the principles used to
calculate the foreign tax base and the
U.S. tax base. Complete conformity
between the rules for determining the
foreign tax base and the U.S. tax base is
not required. Accordingly, the proposed
regulations provide additional guidance
for evaluating disallowances under
foreign tax law that may not mirror the
expense disallowance rules in the Code,
but that nonetheless do not prevent the
foreign tax from being a tax imposed on
net income.
Proposed § 1.901–2(b)(4)(i) retains the
general cost recovery requirement under
the 2022 FTC final regulations, but
provides that the relevant foreign tax
law need only permit recovery of
substantially all of each item of
significant cost or expense. Consistent
with the general approach of the 2022
FTC final regulations, whether a foreign
tax permits recovery of substantially all
of each item of significant cost or
expense is determined based solely on
the terms of the foreign tax law.
Proposed § 1.901–2(b)(4)(i)(C)(1).
Proposed § 1.901–2(b)(4)(i)(C)(2)
provides a safe harbor for purposes of
applying this requirement. Under the
safe harbor, a disallowance of a stated
portion of an item (or multiple items) of
significant cost or expense does not
prevent a foreign tax from satisfying the
cost recovery requirement if the portion

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of the item (or items) that is disallowed
does not exceed 25 percent. This safe
harbor also permits the foreign tax law
to cap deductions of a single item of
significant cost or expense or multiple
items that relate to a single category of
per se significant costs and expenses
described in proposed § 1.901–
2(b)(4)(i)(B)(2) so long as the cap, based
solely on the terms of the foreign tax
law, is not less than 15 percent of gross
receipts, gross income, or a similar
measure, or in the case of a cap based
on a percentage of taxable income, or a
similar measure, the cap is not less than
30 percent. A foreign law limitation that
caps deductions of multiple items that
relate to different categories of per se
significant costs and expenses at a
stated percentage (for example, a cap on
the deduction of all interest and
royalties, combined, at 15 percent of
gross receipts), or that caps deductions
of multiple items of significant costs or
expense that are significant under
proposed § 1.901–2(b)(4)(i)(B)(1) at a
stated percentage, would not meet the
safe harbor. The safe harbor is intended
to provide additional certainty where a
foreign tax law disallowance is in the
form of a stated portion or cap.
Taxpayers will not need to identify a
corresponding principle underlying the
disallowances required under the Code
for foreign tax law disallowances that
meet the safe harbor. If the foreign tax
law contains a disallowance that is not
within the safe harbor, and that
otherwise prevents the recovery of
substantially all of an item of significant
cost or expense, then the limitation
would be examined under the
principles-based exception from the
2022 FTC final regulations, retained in
proposed § 1.901–2(b)(4)(i)(F)(1), which
permits more substantial disallowances
(including complete disallowances) of
an item of significant cost or expense
that are consistent with any principle
underlying the disallowances required
under the Code. The proposed
regulations make additional
clarifications to this rule, to provide that
the principle must be reflected in a
disallowance within the income tax
provisions of the Code, and if the
disallowance addresses a non-tax public
policy concern, then such concern must
be similar to the non-tax public policy
concerns reflected in the Code. In
addition, the proposed regulations
remove the example of a limit on
recovery of interest based upon a
measure of taxable income from this
principles-based exception because
such a limitation would generally be
covered by the safe harbor. See
proposed § 1.901–2(b)(4)(iv)(H)

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(Example 8). If the foreign law
disallowance does not meet the safe
harbor or otherwise permit recovery of
substantially all of each item of
significant cost or expense, the
principles-based exception would be
relevant for determining whether the
foreign tax could satisfy the cost
recovery requirement.
Additionally, proposed § 1.901–
2(b)(4)(iv)(F) through (J) provide new
examples illustrating the application of
the cost recovery requirement. The
proposed regulations also reorganize the
provisions of the cost recovery
requirement to accommodate the
addition of these new provisions, as
well as to better reflect the structure of
the requirement.
C. Attribution Requirement for Royalty
Payments
1. Application Under 2022 FTC Final
Regulations
The 2022 FTC final regulations added
an attribution requirement in § 1.901–
2(b)(5) as an element of the net gain
requirement to require that a foreign tax
conform to the concepts of taxing
jurisdiction reflected in the Code that
define an income tax in the U.S. sense.
The purpose of the attribution
requirement is to allow a credit for a
foreign tax only if the country imposing
the tax has sufficient nexus to the
taxpayer’s activities or investment of
capital that generates the income
included in the tax base. This result is
consistent with the statutory purpose of
the foreign tax credit to relieve double
taxation of income through the United
States ceding its own taxing rights only
where the foreign country has the
primary right to tax the income.
With respect to a foreign levy
imposed on nonresident taxpayers, the
attribution requirement limits the scope
of gross receipts and costs included in
the base of a foreign tax to those that
satisfy the activities-based attribution,
source-based attribution, or propertybased attribution tests. § 1.901–
2(b)(5)(i). These tests are consistent with
U.S. income tax principles reflected in
the Code’s provisions that only tax
foreign persons’ income that is
effectively connected with a U.S. trade
or business or attributable to U.S. real
property, or that is fixed or
determinable annual or periodical
(FDAP) income sourced in the United
States.
Under the source-based attribution
requirement in § 1.901–2(b)(5)(i)(B), a
foreign tax imposed on the
nonresident’s income on the basis of
source meets the attribution
requirement only if the foreign tax law’s

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sourcing rules are reasonably similar to
the sourcing rules that apply for Federal
income tax purposes. In the case of
gross income arising from royalties,
§ 1.901–2(b)(5)(i)(B)(2) provides that the
foreign tax law must source royalties
based on the place of use of, or the right
to use, the intangible property,
consistent with how the Code sources
royalty income.
For foreign taxes imposed in lieu of
an income tax, the 2022 FTC final
regulations also modified the
substitution requirement in § 1.903–1,
including by adding an attribution
requirement. Under § 1.903–1(c)(2)(iii),
a foreign withholding tax must meet the
source-based attribution requirement in
§ 1.901–2(b)(5)(i)(B) to qualify as a
‘‘covered withholding tax’’ that may be
creditable as a tax in lieu of an income
tax. Thus, a withholding tax on a royalty
payment is creditable only if the foreign
tax law sources royalties based upon the
place of use of, or the right to use, the
intangible property, consistent with
how the Code sources royalty income.
The 2022 FTC final regulations also
maintained the all-or-nothing rule for
the substitution requirement; that is, a
foreign tax either is or is not a tax in lieu
of an income tax, in its entirety, for all
persons subject to the foreign tax.
§ 1.903–1(b)(1). Accordingly, a
withholding tax on royalties that is
imposed on the basis of the residence of
the payor of the royalty is not creditable,
whether or not the relevant intangible
property is in fact used within the
territory of the taxing jurisdiction.
§ 1.903–1(d)(3) and (4) (Examples 3 and
4).
The determination of whether a
foreign levy meets the requirements
under §§ 1.901–2 and 1.903–1 is made
on a levy-by-levy basis. Section 1.901–
2(d) provides rules for determining
whether one foreign levy is separate
from another foreign levy. In general,
§ 1.901–2(d)(1)(ii) provides that separate
levies are imposed on particular classes
of taxpayers if the tax base is different
for those taxpayers. The 2022 FTC final
regulations added a special rule for
withholding taxes imposed on
nonresidents that treats each such tax as
a separate levy with respect to each
class of gross income (as listed in
section 61) to which the tax applies.
§ 1.901–2(d)(1)(iii). This rule allows
withholding taxes that are imposed on
classes of income that are subject to
different sourcing rules of the taxing
jurisdiction to be analyzed as separate
levies under the covered withholding
tax requirement in § 1.903–1(c)(2). The
2022 FTC final regulations also
provided that if a foreign country
imposes a withholding tax on two or

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more subsets of a separate class of
income and a different source rule
applies to each subset of income, then
separate levies are considered imposed
on each subset of that separate class of
income. § 1.901–2(d)(1)(iii). These
special rules reflect the general
principle in § 1.901–2(d)(1) that the
separate levy determination is based
upon U.S. principles and not whether
foreign tax law imposes the levy or
levies pursuant to a single or separate
statutes. The rules also enable testing
the creditability of a withholding tax on
a more granular basis. This approach
better reflects the purpose of the
attribution requirement to allow a
foreign tax credit only where, in the
U.S. view, the taxing jurisdiction has
the primary right to tax the income.
2. Response to the 2022 FTC Final
Regulations
Following the publication of the 2022
FTC final regulations, the Treasury
Department and the IRS received
questions regarding the application of
the source-based attribution
requirement to certain royalty
withholding taxes. In addition, the
Treasury Department and the IRS
received requests (including a petition
for rulemaking) to change the
requirement, by allowing a credit even
if a foreign country sources royalties
based on the residence of the payor or
by applying a different standard.1
As an initial matter, some taxpayers
questioned whether the sourcing rule
for royalties was applied differently
than that for services because § 1.901–
2(b)(5)(i)(B)(1) includes a reference to
the use of ‘‘reasonable principles’’ for
purposes of applying the source-based
attribution requirement to a payment for
services, while the equivalent rule in
§ 1.901–2(b)(5)(i)(B)(2) for royalties does
not. Since the introductory text in
§ 1.901–2(b)(5)(i)(B) states that, in all
instances, sourcing rules must be
reasonably similar to the sourcing rules
under the Code, the same standard
applies regardless of whether the
relevant payment is for services or for
1 The Treasury Department and the IRS received
a petition for rulemaking with respect to the
attribution requirement as applied to a tax on a
resident but declined to engage in rulemaking on
that subject. The Treasury Department and the IRS
have determined that the attribution requirement as
contained in the 2022 FTC final regulations,
including as applied to residents, is appropriate to
ensure that a foreign tax is consistent with the
general principles of income taxation reflected in
the Code. These principles include not only those
related to determining realization, gross receipts,
and cost recovery, but also principles for
determining the scope of the items of gross receipts
and costs that may be properly taken into account
in computing the tax base on which the foreign tax
is imposed.

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royalties. However, to avoid further
confusion, the proposed regulations
conform the language of § 1.901–
2(b)(5)(i)(B)(1) and (2).
Additionally, the Treasury
Department and the IRS are aware that,
in some cases, a taxpayer may license
intangible property for use solely within
the foreign country in which the
licensee is resident, but the foreign
country sources royalties based on the
residence of the payor. In these cases,
notwithstanding the actual use of the
licensed property in the taxing
jurisdiction, a credit would not be
allowed for the royalty withholding tax
under the source-based attribution
requirement for royalties in § 1.901–
2(b)(5)(i)(B). However, in these cases,
the foreign country imposing tax on the
royalty income should, from a U.S.
perspective, have the primary taxing
right over the royalty income because
the intangible property giving rise to the
royalty is in fact being used solely in
that foreign country. That is,
notwithstanding the difference in
sourcing rules for royalty income, there
is complete overlap between the
jurisdiction with the primary right to tax
based on U.S. tax principles and the
taxing rights exercised by the taxing
jurisdiction.
The Treasury Department and the IRS
have concluded that it is appropriate to
provide a limited exception to the
source-based attribution requirement of
the 2022 FTC final regulations where
the taxpayer can substantiate that a
withholding tax is imposed on royalties
received in exchange for the right to use
intangible property solely within the
territory of the taxing jurisdiction. The
Treasury Department and the IRS have
concluded that it would be unduly
burdensome for both the taxpayer and
the IRS to determine the place of use of
all intangible property on a country-bycountry basis based on each taxpayer’s
facts and circumstances. While
taxpayers may need to determine the
place of use of certain intangible
property to determine whether the
royalty income is U.S. or foreign source,
or for other purposes, those
determinations generally do not require
taxpayers or the IRS to separately
determine the use in a specific foreign
country. For this reason, this limited
exception applies only if the taxpayer
has a written license agreement that
provides for the payment of the royalty
and that limits the use of the intangible
property giving rise to the royalty
payment to the territory of the foreign
country imposing the tax.

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3. The Single-Country Exception
Reflecting this new limited exception,
proposed § 1.903–1(c)(2)(iii) provides
that a tested foreign tax satisfies the
source-based attribution requirement if
the tax meets either the source-based
attribution requirement in § 1.901–
2(b)(5)(i)(B) or the exception in
proposed § 1.903–1(c)(2)(iii)(B) (the
‘‘single-country exception’’).
In general, the single-country
exception applies where (1) the income
subject to the tested foreign tax is
characterized as gross royalty income,
and (2) the payment giving rise to such
income is made pursuant to a singlecountry license. Proposed § 1.903–
1(c)(2)(iii)(B). Consistent with § 1.901–
2(b)(5)(i)(B), proposed § 1.903–
1(c)(2)(iii)(B) provides that foreign tax
law generally applies for purposes of
determining whether the gross income
or gross receipts arising from a
transaction are characterized as a
royalty, except in the case of a
transaction that is considered the sale of
a copyrighted article under § 1.861–18,
which is not treated as a license of
intangible property but as a sale of
tangible property.
A payment is made pursuant to a
single-country license if the terms of the
written license agreement under which
the payment is made characterize the
payment as a royalty and limit the
territory of the license to the foreign
country imposing the tested foreign tax.
Proposed § 1.903–1(c)(2)(iv)(A).
However, a payment (or portion of a
payment) may be treated as made
pursuant to a single-country license
even if the written agreement does not
limit the territory of the license to the
foreign country imposing the tax or
provides for payments in addition to
those for the use of intangible property
(for example, for related services), if the
agreement separately states the portion
(whether as a specified amount or as a
formula) of the payment subject to the
tested foreign tax that is characterized as
a royalty and that is with respect to the
part of the territory of the license that
is solely within the foreign country
imposing the tax. See proposed
§§ 1.903–1(c)(2)(iv)(B) and (d)(9)
(Example 9).
The Treasury Department and the IRS
are aware that, to qualify for the singlecountry exception, taxpayers may need
to revise existing license agreements.
Additionally, because certain
withholding taxes may remain noncreditable, taxpayers may be
incentivized to maximize the portion of
a payment that is made pursuant to a
single-country license. For example, a
taxpayer that receives royalty payments

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pursuant to a related-party license
agreement that grants the licensee rights
to several different types of intangible
property—some of which will be
exploited solely within the taxing
jurisdiction and some outside of the
taxing jurisdiction—may be
incentivized to amend the related-party
license agreement to separately state a
royalty amount that purports to qualify
for the single-country exception but that
may exceed an amount that, under the
arm’s length principles of section 482
and sourcing principles of section 861,
is attributable to the exploitation of the
intangible property within the taxing
jurisdiction. Additionally, taxpayers
may be disincentivized from revising
existing agreements to reflect changes in
facts and circumstances if doing so
would decrease the amount of the
royalty that is eligible for the singlecountry exception.
To address these concerns, proposed
§ 1.903–1(c)(2)(iv)(C) provides that a
payment is treated as not made pursuant
to a single-country license if the
taxpayer knows, or has reason to know,
that the required agreement misstates
the territory in which the intangible
property is used or overstates the
amount of the royalty with respect to
the part of the territory of the license
that is solely within the foreign country
imposing the tax. Thus, the required
agreement must reflect the relevant facts
and circumstances, as known by the
taxpayer or as would be known by a
reasonably prudent person in the
position of the taxpayer, regarding both
the amount of the relevant royalty and
the territory in which the intellectual
property is actually used.
In general, a taxpayer cannot qualify
for the single-country exception without
satisfying the documentation
requirement in proposed § 1.903–
1(c)(2)(iv)(D). Under proposed § 1.903–
1(c)(2)(iv)(D), the required agreement
pursuant to which the qualifying royalty
is paid must be executed no later than
the date on which the royalty is paid.
However, recognizing that the singlecountry exception is proposed to be
applicable to periods preceding the
release of this notice of proposed
rulemaking, a special transition
documentation rule is provided for
royalties paid on or before May 17,
2023. In that case, to satisfy the
documentation requirement, the
required agreement must be executed no
later than May 17, 2023, and the
agreement must state (whether in the
terms of the agreement or in recitals)
that royalties paid on or before the
execution of the agreement are
considered paid pursuant to the terms of
the agreement.

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The required agreement must be
maintained by the taxpayer and
provided to the IRS within 30 days of
a request by the Commissioner or
another period as agreed between the
Commissioner and the taxpayer. Id. For
purposes of the rule, the term taxpayer
includes a partnership upon which
foreign law imposes a tax. See § 1.901–
2(f)(4) and (g)(7). Therefore, if the
royalty withholding tax is imposed at
the partnership level, the
documentation required by the
proposed regulations must be
maintained by the partnership, even
though the party that claims the credit
is the partner and not the partnership.
The Treasury Department and the IRS
request comments as to whether special
rules may be necessary to address the
documentation requirement in the case
of partnerships.
Finally, proposed § 1.903–1(d)(3) and
(8) through (11) provide new examples
illustrating the application of the
source-based attribution rule and singlecountry exception for covered
withholding taxes on royalties.
4. Separate Levy
The proposed regulations also modify
the separate levy rule in § 1.901–
2(d)(1)(iii) for withholding taxes
imposed on nonresidents. Specifically,
§ 1.901–2(d)(1)(iii)(B)(3) provides that a
withholding tax that is imposed on a
royalty payment made to a nonresident
pursuant to a single-country license is
treated as a separate levy from a
withholding tax that is imposed on
other royalty payments made to such
nonresident and from any other
withholding taxes imposed on other
nonresidents. As with the special
separate levy rule for withholding taxes
on different classes of income or
different subsets of income within a
class of income, this rule may result in
a foreign withholding tax being
considered a separate levy in cases
where the foreign tax law considers only
a single levy to be imposed. In contrast
to a net income tax, this separate levy
rule can be applied to withholding taxes
because withholding taxes on royalties
are imposed on gross income and on a
payment-by-payment basis. In addition,
as with the other special levy rules, this
separate levy rule better aligns the
outcomes of the test with the purposes
of the foreign tax credit rules, including
that of the attribution requirement. The
proposed regulations also reorder and
reorganize the paragraphs of proposed
§ 1.901–2(d)(1)(iii) to accommodate the
addition of this new provision, and to
reflect the structure of the rules more
logically.

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III. Applicability Dates
In general, except for proposed
§ 1.861–20(d)(3)(v)(E)(6), the proposed
regulations are proposed to apply to
taxable years ending on or after
November 18, 2022. However, once the
proposed regulations are finalized,
taxpayers may choose to apply some or
all of the final regulations to earlier
taxable years, subject to certain
conditions.
Proposed § 1.861–20(d)(3)(v)(E)(6) is
proposed to apply to taxable years
ending on or after the date final
regulations adopting these rules are
filed with the Federal Register.
Taxpayers may choose to apply the
rules of § 1.861–20(d)(3)(v)(E)(6), once
finalized, to taxable years that begin
after December 31, 2019, and end before
the date final regulations adopting these
rules are filed with the Federal Register
provided they apply § 1.861–
20(d)(3)(v)(E)(6) consistently to their
first taxable year beginning after
December 31, 2019, and any subsequent
taxable year ending before the date final
regulations adopting these rules are
filed with the Federal Register.
Proposed § 1.901–2(b)(4)(i) and (iv),
(b)(5)(i)(B)(2), and (d)(1)(iii) and
proposed § 1.903–1(c)(2) and (d)(3), (4),
and (8) through (11) are proposed to
apply to foreign taxes paid in taxable
years ending on or after November 18,
2022. Taxpayers may choose to apply
the rules of § 1.901–2(b)(4)(i) and (iv),
once finalized, for foreign taxes paid in
taxable years beginning on or after
December 28, 2021, and ending before
November 18, 2022, provided that they
consistently apply those rules to such
taxable years. Taxpayers may also
choose to apply the rules of §§ 1.901–
2(b)(5)(i)(B)(2) and (d)(1)(iii) and 1.903–
1(c)(2) and (d)(3), (4), and (8) through
(11), once finalized, for foreign taxes
paid in taxable years beginning on or
after December 28, 2021, and ending
before November 18, 2022, provided
that they consistently apply those rules
for such taxable years.
Finally, until the effective date of
final regulations, a taxpayer may rely on
all or part of the proposed regulations,
subject to certain conditions.
Specifically, a taxpayer may choose to
rely on the provisions addressing the
reattribution asset rule (proposed
§ 1.861–20(d)(3)(v)(E)(6)) for taxable
years that begin after December 31,
2019, and end before the effective date
of final regulations adopting these rules.

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A taxpayer may also choose to rely on
the provisions addressing the cost
recovery requirement (proposed
§ 1.901–2(b)(4)(i) and (iv)) for foreign
taxes paid in taxable years beginning on
or after December 28, 2021, and ending
before the effective date of final
regulations adopting these rules.
Finally, a taxpayer may choose to rely
on the provisions addressing the
attribution requirement for royalty
payments (proposed § 1.901–
2(b)(5)(i)(B)(2) and (d)(1)(iii) and
proposed § 1.903–1(c)(2) and (d)(3), (4),
and (8) through (11)) for foreign taxes
paid in taxable years beginning on or
after December 28, 2021, and ending
before the effective date of final
regulations adopting these rules.
If a taxpayer chooses to rely on any
of the three portions of the proposed
regulations described in the preceding
paragraph, the taxpayer and its related
parties, within the meaning of sections
267(b) (determined without regard to
section 267(c)(3)) and 707(b)(1), must
consistently follow all proposed
regulations with respect to that portion
for all relevant years until the effective
date of the final regulations adopting the
rules.
Conforming Amendments to Other
Regulations and Guidance
The Treasury Department and the IRS
intend to make conforming amendments
to other regulations, including the cost
recovery rules that are not being revised
in these proposed regulations and the
examples in §§ 1.901–2(b)(4)(iv) and
1.903–1(d), upon finalization of the
proposed regulations.
Special Analyses
I. Regulatory Planning and Review
The Administrator of the Office of
Information and Regulatory Affairs
(‘‘OIRA’’), Office of Management and
Budget, has determined that this
proposed rule is not a significant
regulatory action, as that term is defined
in section 3(f) of Executive Order 12866.
Therefore, OIRA has not reviewed this
proposed rule pursuant to section
6(a)(3)(A) of Executive Order 12866 and
the April 11, 2018, Memorandum of
Agreement between the Treasury
Department and the Office of
Management and Budget (‘‘OMB’’).
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3520) (‘‘PRA’’) requires
that a federal agency obtain the approval

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of the OMB before collecting
information from the public, whether
such collection of information is
mandatory, voluntary, or required to
obtain or retain a benefit.
A. Overview
The collection of information in these
proposed regulations is in proposed
§ 1.903–1(c)(2)(iv)(D). As discussed in
part II.C.3 of the Explanation of
Provisions, proposed § 1.903–
1(c)(2)(iii)(B) provides an exception (the
‘‘single-country exception’’) to the
source-based attribution requirement if
a taxpayer can substantiate that the
payment on which the royalty
withholding tax is imposed was made
pursuant to an agreement that limits the
right to use intangible property to the
jurisdiction imposing the tested foreign
tax. Proposed § 1.903–1(c)(2)(iv)(A). The
exception applies only where the
taxpayer has a written license agreement
that provides for the payment of the
royalty and that limits the use of the
intangible property giving rise to the
royalty payment to the territory of the
foreign country imposing the tax. A
payment may also qualify for the singlecountry exception if the agreement
separately states the portion (whether as
a specified amount or as a formula) of
the payment subject to the tested foreign
tax that is characterized as a royalty and
that is with respect to the portion of the
territory of the license that is solely
within the foreign country imposing the
tax. Proposed § 1.903–1(c)(2)(iv)(B).
Proposed § 1.903–1(c)(2)(iv)(D)
requires taxpayers who claim eligibility
for the exception to provide an
agreement described in proposed
§ 1.903–1(c)(2)(iv)(A) or (B), as
applicable, (the ‘‘required agreement’’)
within 30 days of a request by the
Commissioner or another period as
agreed between the Commissioner and
the taxpayer. Proposed § 1.903–
1(c)(2)(iv)(D) also provides a transition
rule in the case of a royalty paid on or
before May 17, 2023, that requires the
required agreement to be executed no
later than May 17, 2023.
B. Collection of Information—Proposed
§ 1.903–1(c)(2)(iv)(D)
The Treasury Department and the IRS
intend that the information collection
requirement in proposed § 1.903–
1(c)(2)(iv)(D) will be set forth in the
forms and instructions identified in
Table 1.

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Federal Register / Vol. 87, No. 224 / Tuesday, November 22, 2022 / Proposed Rules
TABLE 1—TAX FORMS IMPACTED
Number of
respondents
(estimated)

Collection of information
Proposed § 1.903–1(c)(2)(iv)(D) .................................................

2 42,030

Forms to which the information may be attached
Form 1116 and Form 1118.

Source: IRS’s Compliance Data Warehouse.

The estimate for the number of
impacted filers with respect to the
collection of information in proposed
§ 1.903–1(c)(2)(iv)(D) is based on the
number of U.S. corporations that filed a
return that had a Form 1118 that
reported an amount of withholding tax
on rents, royalties, and license fees on
Schedule B, Part I, column e; U.S.
corporations that filed a return that had
a Form 1118 that reported an amount of
deemed paid taxes and a Form 5471 that
reported an amount of gross royalties
and license fees on Schedule C (and
thus may have incurred a withholding
tax on those royalties); and U.S.
individuals that filed a return and had
a Form 1116 that reported an amount of
withholding tax on rents and royalties
on Part II, column n.3 This represents an
upper bound of potentially affected
taxpayers: not all taxpayers that have
reported an amount of royalty
withholding tax paid to a foreign
country or that have royalty income on
which they may have paid a
withholding tax are expected to claim a

credit for such tax, and not all taxpayers
who claim such a credit are expected to
rely on the single country exception in
proposed § 1.903–1(c)(2)(iii)(B).
The Treasury Department and the IRS
expect that taxpayers subject to the
collection of information in proposed
§ 1.903–1(c)(2)(iv)(D) will not have a
significant increase in burden (if any)
because some taxpayers may already
have existing license agreements that
qualify for the single-country exception
in place for a variety of tax and non-tax
law reasons, and other taxpayers may
not elect to take advantage of the singlecountry exception. The reporting
burden associated with this collection of
information will be reflected in future
PRA submissions associated with Form
1118 (OMB control number 1545–0123),
Form 1065 (OMB control number 1545–
0123), and Form 1116 (OMB control
numbers 1545–0074 for individuals, and
1545–0121 for estates and trusts). The
collection of information in proposed
§ 1.903–1(c)(2)(iv)(D) will be reflected in
future Paperwork Reduction Act

submissions that the Treasury
Department and the IRS will submit to
OMB for these forms. The current status
of the Paperwork Reduction Act
submissions related to these forms is
summarized in Table 2.
Because the proposed regulations,
including the collection of information
in proposed § 1.903–1(c)(2)(iv)(D), are
proposed to apply to taxes paid in
taxable years ending on or after the date
the proposed regulations are filed with
the Federal Register, the Treasury
Department and the IRS have submitted
the collection of information in
proposed § 1.903–1(c)(2)(iv)(D) to the
OMB for review in accordance with the
Paperwork Reduction Act and requested
a new OMB control number (the
‘‘temporary OMB control number’’).
After the rulemaking is finalized, the
information collection contained within
the regulations will be incorporated into
the OMB control numbers described in
Table 2.

TABLE 2—STATUS OF CURRENT PAPERWORK REDUCTION SUBMISSIONS
Type of filer

Form 1116 .............................................................

Trusts & estates ...................................................
Individual ..............................................................
Business ...............................................................

Form 1118 .............................................................

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Temporary
OMB control No.

Form

1545–NEW
1545–NEW
1545–NEW

Incorporated into
OMB control No.(s)
after final
rulemaking
1545–0121
1545–0074
1545–0123

Commenters are strongly encouraged
to submit public comments
electronically. Comments and
recommendations for the proposed
information collection should be sent to
https://www.reginfo.gov/public/do/
PRAMain, with electronic copies
emailed to the IRS at pra.comments@
irs.gov (indicate REG–112096–22 on the
subject line). This particular
information collection can be found by
selecting ‘‘Currently under Review—
Open for Public Comments’’ then by

using the search function. Comments
can also be mailed to OMB, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies mailed to the IRS,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collections of
information should be received by
January 23, 2023.
The likely respondents associated
with the temporary OMB control

number are U.S. persons who pay or
accrue foreign withholding taxes on
royalty income.
Estimated total annual reporting
burden: 420,300 hours.
Estimated average annual burden per
respondent: 10 hours.
Estimated number of respondents:
42,030.
Estimated frequency of responses:
Annually.
The Treasury Department and the IRS
expect to add the burden for this

2 The estimated number of respondents in this
Table 1 is based on the number of respondents from
the 2020 tax year.
3 As explained in part II.C.3 of the Explanation of
Provisions, the collection of information in
proposed § 1.903–1(c)(2)(iv)(D) also impacts
partnerships and S corporations that pay a

withholding tax that is imposed at the partnership
or S corporation level under foreign law even
though it is the partners or S corporation
shareholder that claims the credit for those taxes.
The Treasury Department and the IRS lack
sufficient data to identify the number of
partnerships and S corporations that pay foreign

withholding taxes on royalty income. However, the
IRS and Treasury Department do not expect that
this will impact the number of affected taxpayers
since the partners and shareholders that claim a
credit for the royalty withholding tax would be
captured within the Form 1116 and Form 1118
filers.

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temporary OMB control number to OMB
control numbers 1545–0123, 1545–0074,
and 1545–0121 after the final
rulemaking. For 1545–0123 and 1545–
0074, the Treasury Department and the
IRS estimate burdens on a taxpayer-type
basis rather than a provision-specific
basis.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby
certified that the proposed regulations
will not have a significant economic
impact on a substantial number of small
entities within the meaning of section
601(6) of the Regulatory Flexibility Act.
The proposed regulations provide
guidance affecting individuals and
corporations claiming foreign tax
credits. The domestic small business
entities that are subject to the foreign tax
credit rules in the Code and in the
proposed regulations are generally those
that operate in a foreign country or that
have income from sources outside of the

United States and pay foreign taxes. The
reattribution asset definition in
proposed § 1.861–20(d)(3)(v)(E)(6)
applies only to taxable units that make
or receive disregarded payments that are
considered reattribution payments
which result in the reattribution of
assets from one taxable unit to another.
§ 1.861–20(d)(3)(v)(C)(1)(ii). In addition,
some provisions of these proposed
regulations, such as proposed § 1.903–1,
apply only to entities that license
intellectual property for use in a foreign
country and receive royalty payments
that are subject to foreign withholding
tax. The Treasury Department and the
IRS do not expect that the proposed
regulations will likely affect a
substantial number of domestic small
business entities because it is infrequent
for domestic small entities to engage in
significant foreign operations or in the
types of transactions giving rise to the
foreign taxes addressed by these
proposed regulations. However, the
Treasury Department and the IRS do not

have adequate data readily available to
assess the number of small entities
potentially affected by the final
regulations.
The Treasury Department and the IRS
have determined that the proposed
regulations will not have a significant
economic impact on domestic small
business entities. To provide an upper
bound estimate of the impact these final
regulations could have on business
entities, the Treasury Department and
the IRS calculated, based on e-file data
for the 2020 tax year, foreign tax credits
as a percentage of four different taxrelated measures of annual receipts (see
Table 3 for variables) by corporations.
As demonstrated by the data in Table 3
below, foreign tax credits as a
percentage of all four measures of
annual receipts are substantially less
than the three to five percent threshold
for significant economic impact for
corporations with business receipts less
than $250 million.

TABLE 3—FTCS AS PERCENTAGE OF ANNUAL RECEIPTS
Size
(by business receipts)

Under
$500k

FTC/Gross Receipts (%) ..................................
FTC/Business Receipts (%) .............................
FTC/Total Income (%) .....................................
FTC/(Total Income—Total Deductions) (%) ....

$500k
to $1M

0.00
0.00
0.00
¥0.02

0.00
0.00
0.00
0.03

$1M to
$5M
0.00
0.00
0.00
0.05

$5M to
$10M
0.01
0.00
0.01
0.11

$10M to
$50M

$50M to
$100M

0.01
0.01
0.02
0.16

0.02
0.02
0.04
0.41

$100M to
$250M

$250M or
more

0.03
0.03
0.07
0.72

0.05
0.05
0.57
3.33

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Source: RAAS:KDA (Tax Year 2020 CDW E-File Data 9–26–22).
Note: Business Receipts = Total Income + Cost of Goods Sold.

The Treasury Department and the IRS
anticipate that only a small fraction of
existing foreign tax credits would be
impacted by these regulations, and thus,
the economic impact of these
regulations will be considerably smaller
than the effects shown in Table 3. A
portion of economic impact of these
proposed regulations derive from the
collection of information requirement in
proposed § 1.903–1(c)(2)(iv)(D). The
Treasury Department and the IRS do not
have readily available data to determine
the incremental burden that this
collection of information will have on
small business entities. However, the
Treasury Department and the IRS
believe this collection of information
will only marginally increase taxpayers’
burdens because some taxpayers may
already have existing license agreements
that qualify for the single-country
exception for a variety of tax and nontax law reasons, and other taxpayers
may not elect to take advantage of the
single-country exception. Furthermore,
as demonstrated in Table 3 in this Part
III of the Special Analyses, foreign tax
credits do not have a significant

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economic impact for any gross-receipts
class of business entities. Therefore,
proposed § 1.903–1(c)(2)(iv)(D) will not
have a significant economic impact on
small business entities. Accordingly, it
is hereby certified that the proposed
regulations will not have a significant
economic impact on a substantial
number of small entities.
IV. Section 7805(f)
Pursuant to section 7805(f), these
proposed regulations will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for
comment on its impact on small
businesses. The Treasury Department
and the IRS also request comments from
the public on the certifications in this
Part III of the Special Analyses.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated
costs and benefits and take certain other
actions before issuing a final rule that
includes any Federal mandate that may
result in expenditures in any one year
by a state, local, or tribal government, in

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the aggregate, or by the private sector, of
$100 million in 1995 dollars, updated
annually for inflation. This proposed
rule does not include any Federal
mandate that may result in expenditures
by state, local, or tribal governments, or
by the private sector in excess of that
threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
State and local governments, and is not
required by statute, or preempts State
law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive order. This
proposed rule does not have federalism
implications and does not impose
substantial direct compliance costs on
state and local governments or preempt
State law within the meaning of the
Executive order.

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Comments and Request for Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
comments that are submitted timely to
the IRS as prescribed in this preamble
under the ADDRESSES heading. The
Treasury Department and the IRS
request comments on all aspects of the
proposed rules, and specifically on the
issues identified in Parts I.B and II.C.3
of the Explanation of Provisions. All
comments will be available at
www.regulations.gov or upon request.
A public hearing will be scheduled if
requested in writing by any person that
timely submits written comments.
Requests for a public hearing are
encouraged to be made electronically. If
a public hearing is scheduled, notice of
the date and time for the public hearing
will be published in the Federal
Register. Announcement 2020–4, 2020–
17 IRB 1, provides that until further
notice, public hearings conducted by
the IRS will be held telephonically. Any
telephonic hearing will be made
accessible to people with disabilities.
Drafting Information
The principal authors of the proposed
regulations are Jeffrey L. Parry, Teisha
M. Ruggiero, and Suzanne M. Walsh of
the Office of Associate Chief Counsel
(International). However, other
personnel from the Treasury
Department and the IRS participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, the Treasury Department
and IRS propose to amend 26 CFR part
1 as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:

■

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.861–20 is amended
by revising paragraphs (d)(3)(v)(E)(6)
and (i) to read as follows:

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■

§ 1.861–20 Allocation and apportionment
of foreign income taxes.

*

*
*
*
*
(d) * * *
(3) * * *
(v) * * *
(E) * * *
(6) Reattribution asset. The term
reattribution asset means an asset that

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produces one or more items of gross
income, computed under Federal
income tax law, to which a disregarded
payment, other than a disregarded
payment received in exchange for
property, is allocated under the rules of
paragraph (d)(3)(v)(B)(2) of this section.
*
*
*
*
*
(i) Applicability dates. (1) Except as
provided in paragraphs (i)(2) through (4)
of this section, this section applies to
taxable years beginning after December
31, 2019.
(2) Paragraphs (b)(19) and (23) and
(d)(3)(i), (ii), and (v) of this section
apply to taxable years that begin after
December 31, 2019, and end on or after
November 2, 2020.
(3) Paragraph (d)(3)(v)(E)(6) of this
section applies to taxable years that end
on or after [date the final rule is filed
with the Federal Register]. Taxpayers
may choose to apply the rules in
paragraph (d)(3)(v)(E)(6) of this section
to taxable years beginning after
December 31, 2019, and ending before
[date the final rule is filed with the
Federal Register], provided they apply
paragraph (d)(3)(v)(E)(6) of this section
consistently to their first taxable year
beginning after December 31, 2019, and
any subsequent taxable year beginning
before [date the final rule is filed with
the Federal Register]. Otherwise, for
taxable years beginning after December
31, 2019, and ending before [date the
final rule is filed with the Federal
Register], see § 1.861–20(d)(3)(v)(E)(6)
as contained in 26 CFR part 1 revised as
of July 27, 2022.
(4) Paragraph (h) of this section
applies to taxable years beginning after
December 28, 2021.
■ Par 3. Section 1.901–2 is amended:
■ 1. By revising paragraph (b)(4)(i)(A).
■ 2. By redesignating paragraphs
(b)(4)(i)(B), (b)(4)(i)(C)(3), and
(b)(4)(i)(D) as paragraph (b)(4)(i)(G),
(b)(4)(i)(D), and (b)(4)(i)(E), respectively.
■ 3. By adding new paragraph
(b)(4)(i)(B).
■ 4. By revising paragraph (b)(4)(i)(C).
■ 5. By revising the first sentence of
newly redesignated paragraph
(b)(4)(i)(D).
■ 6. By adding paragraph (b)(4)(i)(F).
■ 7. In newly redesignated paragraph
(b)(4)(i)(G)(1), by removing the language
‘‘one or more significant costs and
expenses’’ and adding the language
‘‘substantially all of each item of
significant cost or expense’’ in its place.
■ 8. In paragraph (b)(4)(iv)(A)(2), by
removing the language ‘‘significant costs
and expenses’’ and adding the language
‘‘substantially all of each item of
significant cost or expense’’ in its place.
■ 9. In paragraph (b)(4)(iv)(B)(2), by
removing the language ‘‘(b)(4)(i)(B)(2)’’

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and adding the language ‘‘(b)(4)(i)(G)(2)’’
in its place.
■ 10. By removing and reserving
paragraph (b)(4)(iv)(C).
■ 11. In paragraphs (b)(4)(iv)(D)(2) and
(b)(4)(iv)(E)(2), by removing the
language ‘‘(b)(4)(i)(C)(2)’’ and adding the
language ‘‘(b)(4)(i)(F)(2)’’ in its place.
■ 12. By adding paragraphs (b)(4)(iv)(F)
through (J).
■ 13. By revising paragraphs
(b)(5)(i)(B)(2), (d)(1)(iii), and (h).
The revisions and additions read as
follows:
§ 1.901–2 Income, war profits, or excess
profits tax paid or accrued.

*

*
*
*
*
(b) * * *
(4) * * *
(i) * * *
(A) In general. A foreign tax satisfies
the cost recovery requirement if the base
of the tax is computed by reducing gross
receipts (as described in paragraph
(b)(3) of this section) to permit recovery
of substantially all of each item of
significant cost or expense (including
each item of cost or expense related to
the categories described in paragraph
(b)(4)(i)(B)(2) of this section)
attributable, under reasonable
principles, to such gross receipts. See
paragraph (b)(4)(i)(B) of this section for
rules regarding the determination of
what is a significant cost or expense,
paragraph (b)(4)(i)(C) of this section for
rules regarding the recovery of
substantially all of an item, paragraph
(b)(4)(i)(E) of this section for rules
regarding principles for attributing costs
and expenses to gross receipts, and
paragraph (b)(4)(i)(F) of this section for
exceptions to this rule. A foreign tax
need not permit recovery of significant
costs and expenses, such as certain
personal expenses, that are not
attributable, under reasonable
principles, to gross receipts included in
the foreign tax base. A foreign tax whose
base is gross receipts, with no reduction
for costs and expenses, satisfies the cost
recovery requirement only if there are
no significant costs and expenses
described in paragraph (b)(4)(i)(B) of
this section attributable to the gross
receipts included in the foreign tax base.
See paragraph (b)(4)(iv)(A) of this
section (Example 1). A foreign tax that
provides an alternative cost allowance
satisfies the cost recovery requirement
only as provided in paragraph
(b)(4)(i)(G) of this section.
(B) Significant costs and expenses—
(1) In general. Except as provided in
paragraph (b)(4)(i)(B)(2) of this section,
whether an item of cost or expense is
significant for purposes of this
paragraph (b)(4)(i) is determined based

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on whether, for all taxpayers in the
aggregate to which the foreign tax
applies, the item of cost or expense
constitutes a significant portion of the
taxpayers’ total costs and expenses.
(2) Per se significant costs and
expenses. An item of cost or expense (as
characterized under foreign law) related
to capital expenditures, interest, rents,
royalties, wages or other payments for
services, and research and
experimentation is always treated as an
item of significant cost or expense for
purposes of this paragraph (b)(4)(i).
(C) Recovery of substantially all of
each item—(1) In general. Whether a
foreign tax permits recovery of
substantially all of each item of
significant cost or expense is
determined based solely on the terms of
the foreign tax law.
(2) Safe harbor. One or more
disallowances of a stated portion of an
item (or multiple items) of significant
cost or expense does not prevent a
foreign tax from being considered to
permit recovery of substantially all of
each item of significant cost or expense
if the total portion of the item (or items)
that is disallowed does not exceed 25
percent. A limitation that caps the
recovery of an item of significant cost or
expense, or multiple items of cost or
expense that relate to a single category
of significant costs and expenses
described in paragraph (b)(4)(i)(B)(2) of
this section does not prevent a foreign
tax from being considered to permit
recovery of substantially all of each item
of significant cost or expense if the
limitation is a qualifying cap. For such
purpose, a limitation that caps the
recovery at a stated portion of gross
receipts, gross income, or a similar
measure is a qualifying cap if the stated
portion of such measure is not less than
15 percent. A limitation that caps the
recovery at a stated portion of taxable
income (determined without regard to
the item at issue) or a similar measure
is a qualifying cap if the stated portion
of such measure is not less than 30
percent.
(3) Non-recovery of significant costs
and expenses. Significant costs and
expenses (such as interest expense) are
not considered to be recovered by
reason of the time value of money
attributable to the acceleration of a tax
benefit or economic benefit attributable
to the timing of the recovery of other
costs and expenses (such as the current
expensing of debt-financed capital
expenditures).
(D) * * * A foreign tax law permits
recovery of substantially all of each item
of significant cost or expense even if
such item of cost or expense is
recovered earlier or later than it is

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recovered under the Internal Revenue
Code unless the time of recovery is so
much later as effectively to constitute a
denial of such recovery. * * *
*
*
*
*
*
(F) Exceptions—(1) Disallowances
consistent with U.S. principles.
Notwithstanding paragraph (b)(4)(i)(A)
of this section, a disallowance of all or
a portion of an item of significant cost
or expense does not prevent a foreign
tax from satisfying the cost recovery
requirement if such disallowance is
consistent with any principle
underlying the disallowances required
under the income tax provisions of the
Internal Revenue Code, including the
principles of limiting base erosion or
profit shifting and addressing non-tax
public policy concerns similar to those
reflected in the Internal Revenue Code.
For example, a foreign tax may satisfy
the cost recovery requirement even if
the foreign tax law disallows deductions
in connection with hybrid transactions,
disallows deductions attributable to
gross receipts that in whole or in part
are excluded, exempt or eliminated
from taxable income, or disallows
certain deductions consistent with nontax public policy considerations similar
to those underlying the disallowances
contained in section 162. See
paragraphs (b)(4)(iv)(I) and (J) of this
section (Examples 9 and 10).
(2) Amounts that need not be
recovered. A foreign tax law may satisfy
the cost recovery requirement even if
the foreign tax law does not permit
recovery of costs and expenses
attributable to wage income or to
investment income that is not derived
from a trade or business. In addition, in
determining whether a foreign tax (the
‘‘tested foreign tax’’) meets the cost
recovery requirement, it is immaterial
whether the tested foreign tax allows a
deduction for other taxes that would
qualify as foreign income taxes
(determined without regard to whether
such other tax allows a deduction for
the tested foreign tax). See paragraphs
(b)(4)(iv)(D) and (E) of this section
(Examples 4 and 5).
*
*
*
*
*
(iv) * * *
(F) Example 6: Substantially all;
application of the safe harbor—(1) Facts.
Country X imposes a tax (‘‘Country X tax’’)
on the income of corporations that are
resident in Country X. Under Country X tax
law, full deductions are allowed for each
item of significant cost or expense
attributable under reasonable principles to
the gross receipts included in the Country X
tax base, except that Country X tax law
disallows a deduction for 25 percent of a
taxpayer’s costs and expenses for royalties
related to patents.

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71281

(2) Analysis. Under paragraph
(b)(4)(i)(B)(2) of this section, an item of cost
or expense related to royalties is always
treated as a significant cost or expense, and
therefore, under paragraph (b)(4)(i)(A) of this
section, absent an exception, Country X tax
law must permit recovery of substantially all
of each item of cost or expense related to
royalties, including the item of royalties
related to patents. The stated percentage of
costs and expenses from royalties related to
patents (25 percent) that is disallowed under
Country X tax law does not exceed 25
percent. Accordingly, under the safe harbor
in paragraph (b)(4)(i)(C)(2) of this section, the
disallowance does not prevent the Country X
tax from being considered to permit recovery
of substantially all of each item of cost or
expense related to royalties, and therefore the
Country X tax satisfies the cost recovery
requirement.
(G) Example 7: Substantially all;
application of the safe harbor—(1) Facts.
Country X imposes a tax (‘‘Country X tax’’)
on the income of corporations that are
resident in Country X. Under Country X tax
law, full deductions are allowed for each
item of significant cost or expense
attributable under reasonable principles to
the gross receipts included in the Country X
tax base, except that Country X tax law
disallows a deduction for 15 percent of a
taxpayer’s costs and expenses for rents and
25 percent of a taxpayer’s costs and expenses
for interest.
(2) Analysis. Under paragraph
(b)(4)(i)(B)(2) of this section, an item of cost
or expense related to rents or interest is
always treated as a significant cost or
expense, and therefore, under paragraph
(b)(4)(i)(A) of this section, absent an
exception, Country X tax law must permit
recovery of substantially all of each item of
cost or expense related to royalties and
interest. The stated percentage of the costs
and expenses related to rents (15 percent)
that is disallowed under Country X tax law
does not exceed 25 percent. Additionally, the
stated percentage of the costs and expenses
related to interest (25 percent) that is
disallowed under Country X law does not
exceed 25 percent. Accordingly, under the
safe harbor in paragraph (b)(4)(i)(C)(2) of this
section, the disallowances do not prevent the
Country X tax from being considered to
permit recovery of substantially all of each
item of cost or expense related to rents and
interest, and therefore the Country X tax
satisfies the cost recovery requirement.
(H) Example 8: Substantially all;
application of the safe harbor—(1) Facts.
Country X imposes a tax (‘‘Country X tax’’)
on the income of corporations that are
resident in Country X. Under Country X tax
law, full deductions are allowed for each
item of significant cost or expense
attributable under reasonable principles to
the gross receipts included in the Country X
tax base, except that Country X tax law caps
the recovery of the deduction of interest at
30 percent of the taxpayer’s taxable income
determined without regard to interest
expense.
(2) Analysis. Under paragraph
(b)(4)(i)(B)(2) of this section, an item of cost
or expense related to interest is always

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treated as a significant cost or expense, and
therefore, under paragraph (b)(4)(i)(A) of this
section, absent an exception, Country X tax
law must permit recovery of substantially all
of each item of cost or expense related to
interest. The stated cap on recovery in
Country X tax law with respect to interest (30
percent of taxable income determined
without regard to interest expense) is not less
than 30 percent of taxable income
determined without regard to interest
expense. Additionally, the cap on recovery
relates to a single category of significant costs
and expenses described in paragraph
(b)(4)(i)(B)(2) of this section. Accordingly,
under the safe harbor in paragraph
(b)(4)(i)(C)(2) of this section, the
disallowance does not prevent the Country X
tax from being considered to permit recovery
of substantially all of each item of cost or
expense related to interest, and therefore the
Country X tax satisfies the cost recovery
requirement.
(I) Example 9: Permissible disallowance
based on U.S. principles—(1) Facts. Country
X imposes a tax on the income of
corporations that are resident in Country X.
Under Country X tax law, full deductions are
allowed for each item of significant cost or
expense attributable under reasonable
principles to the gross receipts included in
the Country X tax base, except that under
Country X’s anti-hybrid rules, a deduction is
disallowed for any payment, including
interest, royalties, rents, or payments for
services, made by a Country X resident to a
related entity located outside of Country X if
the payment is not included in gross income
by the payee or the payee is not subject to
tax.
(2) Analysis. Under paragraph
(b)(4)(i)(B)(2) of this section, each item of cost
or expense related to interest, rents, royalties,
and payments for services is always treated
as a significant cost or expense, and
therefore, under paragraph (b)(4)(i)(A) of this
section, absent an exception, Country X tax
law must permit recovery of substantially all
of each item of cost or expense related to
interest, rents, royalties, and payments for
services. Country X tax law does not permit
recovery of any portion of any item of
significant cost or expense that is subject to
the anti-hybrid rules. As a result, the safe
harbor in paragraph (b)(4)(i)(C)(2) of this
section does not apply to such item. Further,
because a deduction is disallowed for any
item of cost or expense that is subject to the
Country X anti-hybrid rules, the Country X
tax law completely disallows certain items of
cost and expense related to interest, rents,
royalties, and payments for services and thus
does not permit recovery of substantially all
of each item of significant cost or expense
related to interest, rents, royalties, and
payments for services. However, under
paragraph (b)(4)(i)(F)(1) of this section, a
disallowance of all or a portion of an item of
significant cost or expense does not prevent
a foreign tax from satisfying the cost recovery
requirement if the disallowance is consistent
with any principle underlying the
disallowances required under the income tax
provisions of the Internal Revenue Code. The
income tax provisions of the Internal
Revenue Code, specifically section 267A,

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contain disallowances of deductions based
on the principle of limiting base erosion or
profit shifting. Country X’s disallowance of
deductions for any payment, including
interest, royalties, rents, or payments for
services also reflects the principle of limiting
base erosion or profit shifting. Accordingly,
because Country X’s anti-hybrid rules are
consistent with the principle of limiting base
erosion or profit shifting, the Country X tax
satisfies the cost recovery requirement.
(J) Example 10: Permissible disallowance
based on U.S. principles—(1) Facts. Country
X imposes a tax on the income of
corporations that are resident in Country X.
Under Country X tax law, full deductions are
allowed for each item of significant cost or
expense attributable to the gross receipts
included in the Country X tax base, except
that no deduction is permitted for any stockbased payments for services.
(2) Analysis. Under paragraph
(b)(4)(i)(B)(2) of this section, each item of cost
or expense related to wages or other
payments for services is always treated as a
significant cost or expense, and therefore,
under paragraph (b)(4)(i)(A) of this section,
absent an exception, Country X tax law must
permit recovery of substantially all of each
item of cost or expense related to wages or
other payments for services. Country X tax
law denies a deduction for any stock-based
payments for services, and therefore the safe
harbor in paragraph (b)(4)(i)(C)(2) of this
section is not satisfied. Further, given that no
deduction is allowed for stock-based
payments for services, the Country X tax law
completely disallows an item of cost or
expense related to wages or other payments
for services and thus does not permit
recovery of substantially all of each item of
significant cost or expense related to wages
or other payments for services. However,
under paragraph (b)(4)(i)(F)(1) of this section,
a disallowance of all or a portion of an item
of significant cost or expense does not
prevent a foreign tax from satisfying the cost
recovery requirement if such disallowance is
consistent with any principle underlying the
disallowances required under the income tax
provisions of the Internal Revenue Code. The
income tax provisions of the Internal
Revenue Code contain targeted disallowances
or limits on the deductibility of certain items
of compensation in particular circumstances
based on non-tax public policy reasons,
including to influence the amount or use of
a certain type of compensation in the labor
market. For example, section 162(m) imposes
limits on deductions for compensation of
certain highly-paid employees, and section
280G limits the deductibility of certain
‘‘parachute payments’’ provided to
individuals when an entity undergoes a
change of control. Country X’s targeted
disallowance of deductions for the portion of
payments for services attributable to stockbased compensation also reflects a principle
of influencing the amount or use of a certain
type of compensation (stock-based
compensation) in the labor market.
Accordingly, because the Country X tax law’s
disallowance is consistent with a principle
underlying the disallowances required under
the income tax provisions of the Internal
Revenue Code, the Country X tax satisfies the
cost recovery requirement.

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(5) * * *
(i) * * *
(B) * * *

(2) Royalties. Under the foreign tax
law, gross income from royalties must
be sourced based on the place of use of,
or the right to use, the intangible
property, as determined under
reasonable principles (which do not
include determining the place of use of,
or the right to use, the intangible
property based on the location of the
payor).
*
*
*
*
*
(d) * * *
(1) * * *
(iii) Tax imposed on nonresidents—
(A) In general. A foreign levy imposed
on nonresidents is always treated as a
separate levy from that imposed on
residents, even if the base of the tax as
applied to residents and nonresidents is
the same, and even if the levies are
treated as a single levy under foreign tax
law.
(B) Withholding tax—(1) In general.
Except as otherwise provided in this
paragraph (d)(1)(iii)(B), a withholding
tax (as defined in section 901(k)(1)(B))
that is imposed on a payment giving rise
to gross income of nonresidents is
treated as a separate levy as to each
separate class of income described in
section 61 (for example, interest,
dividends, rents, or royalties) subject to
the withholding tax.
(2) Subsets of income. If two or more
subsets of a separate class of income are
subject to a withholding tax based on
different income attribution rules (for
example, if technical services are
subject to tax based on the residence of
the payor and other services are subject
to tax based on where the services are
performed), separate levies are
considered to be imposed with respect
to each subset of that separate class of
income.
(3) Royalty income. A withholding tax
that is imposed on a payment giving rise
to gross royalty income of a nonresident
that is made pursuant to a singlecountry license (as determined under
§ 1.903–1(c)(2)(iv)) is treated as a
separate levy from a withholding tax
that is imposed on other gross royalty
income of such nonresident and is also
treated as a separate levy from any
withholding tax imposed on other
nonresidents.
*
*
*
*
*
(h) Applicability dates—(1) In general.
Except as provided in paragraphs (h)(2)
and (3) of this section, this section
applies to foreign taxes paid (within the
meaning of paragraph (g) of this section)
in taxable years beginning on or after
December 28, 2021. For foreign taxes

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that relate to (and if creditable are
considered to accrue in) taxable years
beginning before December 28, 2021,
and that are remitted in taxable years
beginning on or after December 28,
2021, by a taxpayer that accounts for
foreign income taxes on the accrual
basis, see § 1.901–2 as contained in 26
CFR part 1 revised as of April 1, 2021.
(2) Certain foreign taxes paid to
Puerto Rico. For foreign taxes paid to
Puerto Rico by reason of section 1035.05
of the Puerto Rico Internal Revenue
Code of 2011, as amended (13 L.P.R.A.
30155) (treating certain income, gain or
loss as effectively connected with the
active conduct of a trade or business
with Puerto Rico), this section applies to
foreign taxes paid (within the meaning
of paragraph (g) of this section) in
taxable years beginning on or after
January 1, 2023. For foreign taxes
described in the preceding sentence that
are paid in taxable years beginning
before January 1, 2023, see § 1.901–2 as
contained in 26 CFR part 1 revised as of
April 1, 2021.
(3) Modifications to cost recovery and
royalty attribution rules. Paragraphs
(b)(4)(i) and (iv), (b)(5)(i)(B)(2), and
(d)(1)(iii) of this section apply to foreign
taxes paid (within the meaning of
paragraph (g) of this section) in taxable
years ending on or after November 18,
2022. For foreign taxes described in the
preceding sentence that are paid in
taxable years ending before November
18, 2022, see § 1.901–2(b)(4)(i) and (iv),
(b)(5)(i)(B)(2), and (d)(1)(iii) as
contained in 26 CFR part 1 revised as of
July 27, 2022. Taxpayers may choose to
apply the rules in paragraphs (b)(4)(i)
and (iv) of this section to foreign taxes
paid in taxable years beginning on or
after December 28, 2021, and ending
before November 18, 2022 provided that
they consistently apply those rules to
such taxable years. Additionally,
taxpayers may choose to apply the rules
of paragraphs (b)(5)(i)(B)(2) and
(d)(1)(iii) of this section to foreign taxes
paid in taxable years beginning on or
after December 28, 2021, and ending
before November 18, 2022, provided
that they consistently apply those rules
and the rules of § 1.903–1(c)(2) and
(d)(3), (4), and (8) through (11) to such
taxable years.
*
*
*
*
*
■ Par 4. Section 1.903–1 is amended:
■ 1. By revising paragraphs (c)(2)
introductory text and (c)(2)(iii).
■ 2. By adding paragraph (c)(2)(iv).
■ 3. By revising paragraph (d)(3).
■ 4. By removing and reserving
paragraph (d)(4).
■ 5. By adding paragraphs (d)(8)
through (11).

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6. By revising paragraph (e).
The revisions and additions read as
follows:

■

§ 1.903–1

Taxes in lieu of income taxes.

*

*
*
*
*
(c) * * *
(2) Covered withholding tax. A tested
foreign tax is a covered withholding tax
if, based on the foreign tax law (except
as provided in paragraph (c)(2)(iii)(B) of
this section), the requirements in
paragraphs (c)(1)(i) and (c)(2)(i) through
(iii) of this section are met with respect
to the tested foreign tax. See also
§ 1.901–2(d)(1)(iii) for rules treating
withholding taxes as separate levies
with respect to each class of income
subject to the tax, with respect to each
subset of a class of income that is
subject to different income attribution
rules, or with respect to withholding tax
that is imposed on a payment giving rise
to gross royalty income of a nonresident
that is made pursuant to a singlecountry license (as determined under
paragraph (c)(2)(iv) of this section).
*
*
*
*
*
(iii) Source-based attribution
requirement. The income subject to the
tested foreign tax satisfies the
requirements in paragraph (c)(2)(iii)(A)
or (B) of this section.
(A) The income subject to the tested
foreign tax satisfies the attribution
requirement described in § 1.901–
2(b)(5)(i)(B).
(B) The income subject to the tested
foreign tax is characterized as royalty
income and the payment giving rise to
such income is made pursuant to a
single-country license as determined
under paragraph (c)(2)(iv) of this
section. For purposes of this paragraph
(c)(2)(iii)(B) and paragraph (c)(2)(iv) of
this section, whether the income is
characterized as royalty income is
determined under the foreign tax law,
except that income from the sale of a
copyrighted article (as determined
under rules similar to § 1.861–18) is not
characterized as royalty income
regardless of the characterization of the
income under the foreign tax law.
(iv) Single-country license—(A) In
general. Except as otherwise provided
in this paragraph (c)(2)(iv), for purposes
of paragraph (c)(2)(iii)(B) of this section,
a payment is made pursuant to a singlecountry license if the terms of the
license agreement pursuant to which the
payment is made characterize the
payment as a royalty and limit the
territory of the license to the foreign
country imposing the tested foreign tax.
(B) Separately stated portions. If a
written agreement that is not described
in paragraph (c)(2)(iv)(A) of this section
separately states a portion (whether as a

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71283

specified amount or as a formula) of the
payment subject to the tested foreign tax
and such portion is both characterized
as a royalty under the terms of the
agreement and is attributable to the part
of the territory of the license that is
solely within the foreign country
imposing the tested foreign tax, then
that portion of the payment is treated as
made pursuant to a single-country
license.
(C) Validity of agreement. A payment
is considered not made pursuant to a
single-country license if the taxpayer
knows, or has reason to know, that the
terms of the agreement pursuant to
which the payment is made misstate the
territory in which the relevant
intangible property is used or overstate
the amount of the royalty with respect
to the part of the territory of the license
that is solely within the foreign country
imposing the tested foreign tax. A
taxpayer is considered to have reason to
know if its knowledge of relevant of
facts or circumstances is such that a
reasonably prudent person in the
position of the taxpayer would question
whether the terms of the agreement
misstate the territory in which the
relevant intangible property is used or
overstate the amount of a royalty. For
purposes of this section, the principles
of sections 482 and 861 apply to
determine whether the terms of the
agreement misstate the territory in
which the relevant intangible property
is used or overstate the amount of a
royalty. See paragraph (d)(11) of this
section (Example 11).
(D) Documentation. A taxpayer must
provide the agreement described in
paragraph (c)(2)(iv)(A) or (B) of this
section, as applicable (the ‘‘required
agreement’’), within 30 days of a request
by the Commissioner or another period
as agreed between the Commissioner
and the taxpayer. Except as provided in
the next sentence, the required
agreement pursuant to which the royalty
is paid must be executed no later than
the date of payment that gives rise to the
gross royalty income that is subject to
the tested foreign tax. In the case of a
royalty that is paid before the date on
which the required agreement is
executed, in order to meet the
requirement of this paragraph
(c)(2)(iv)(D), the required agreement
must be executed no later than May 17,
2023, and the agreement must state that
royalties paid on or before the date of
execution of the agreement are, for
purposes of this paragraph (c)(2)(iv),
considered paid pursuant to the terms of
the agreement.
(d) * * *

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(3) Example 3: Withholding tax on
royalties; attribution requirement—(i) Facts.
YCo, a resident of Country Y, is a controlled
foreign corporation wholly owned by USP, a
domestic corporation. In Year 1, YCo enters
into a written license agreement (the
‘‘Agreement’’) with XCo, a resident of
Country X unrelated to YCo or USP, for the
right to use YCo’s intangible property (‘‘IP’’)
in a territory defined by the Agreement as the
entire world, including Country X, in
exchange for payments that the terms of the
Agreement characterize as royalties. The
payments made by XCo to YCo under the
Agreement are also characterized as royalties
under the laws of Country X. Under Country
X’s tax law, all gross royalty payments made
by a Country X resident to a nonresident are
treated as giving rise to Country X source
income and are subject to a 20 percent
withholding tax, regardless of whether the
nonresident payee has a taxable presence in
Country X. Country X has a generallyimposed net income tax within the meaning
of paragraph (c)(1)(i) of this section, and
nonresidents subject to the withholding tax
on royalties are not also subject to a Country
X net income tax on their royalty income. In
Year 1, XCo withholds 20u (units of Country
X currency) of tax on a 100u royalty paid to
YCo under the Agreement.
(ii) Analysis—(A) Separate levy. Under
§ 1.901–2(d)(1)(iii)(B)(1), Country X’s
withholding tax imposed on gross royalty
income of nonresidents is treated as a
separate levy. Under § 1.901–
2(d)(1)(iii)(B)(3), the 20u of Country X
withholding tax imposed on the 100u of
royalties paid by XCo to YCo is treated as a
separate levy from the Country X
withholding tax on royalties if the Agreement
pursuant to which the royalties are paid is a
single-country license under paragraph
(c)(2)(iv) of this section. The Agreement does
not meet the requirements of paragraph
(c)(2)(iv) of this section because it neither
limits the territory of the license to Country
X nor separately states the portion of the
payment that is with respect to the part of the
territory of the license that is solely within
Country X. Thus, the 20u of Country X
withholding tax paid by YCo is not treated
as a separate levy under § 1.901–
2(d)(1)(iii)(B)(3).
(B) Covered withholding tax. Under
paragraph (c)(2) of this section, a tested
foreign tax is a covered withholding tax if
paragraphs (c)(1)(i) and (c)(2)(i) through (iii)
of this section are met. Country X’s
withholding tax on royalties meets the
requirements of paragraphs (c)(1)(i) and
(c)(2)(i) and (ii) of this section because
Country X has a generally-imposed net
income tax, Country X’s withholding tax on
the royalties paid pursuant to the Agreement
is imposed on the gross royalty income of
persons who are nonresidents of Country X,
and nonresidents subject to the withholding
tax on royalties are not also subject to the
Country X generally-imposed net income tax
on their royalty income. However, the
Country X withholding tax on royalties paid
pursuant to the Agreement does not meet the
requirements of § 1.901–2(b)(5)(i)(B) and
paragraph (c)(2)(iii)(A) of this section because
Country X’s sourcing rule for royalties (based

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on residence of the payor) is not based on the
place of use of, or the right to use, the
intangible property. Additionally, the
payment that is subject to Country X’s
withholding tax is not made pursuant to a
single-country license under paragraph
(c)(2)(iv) of this section for the reasons
described in paragraph (d)(3)(ii)(A) of this
section (the separate levy analysis of this
paragraph (d)(3) (Example 3)). Therefore, the
requirement in paragraph (c)(2)(iii)(B) of this
section is not met. Accordingly, the Country
X withholding tax paid by YCo is not a
covered withholding tax, and none of the 20u
Country X withholding tax paid by YCo with
respect to the 100u royalty payment made to
XCo is a foreign income tax.

*

*

*

*

*

(8) Example 8: Withholding tax on
royalties; single-country license—(i) Facts.
The facts are the same as in paragraph
(d)(3)(i) of this section (the facts of Example
3) except that in Year 1, YCo enters into a
written license agreement (the ‘‘Agreement’’)
with XCo for the right to use YCo’s IP in a
territory defined by the Agreement as
Country X, in exchange for payments that the
terms of the Agreement characterize as
royalties, and XCo in fact only uses the IP in
Country X. In Year 1, XCo withholds 20u of
tax from 100u of royalties paid to YCo under
the Agreement.
(ii) Analysis—(A) Separate levy. Under
§ 1.901–2(d)(1)(iii)(B)(1), Country X’s
withholding tax imposed on gross royalty
income of nonresidents is treated as a
separate levy. Under § 1.901–
2(d)(1)(iii)(B)(3), the 20u of Country X
withholding tax imposed on the 100u of
royalties paid by XCo to YCo is treated as a
separate levy from the Country X
withholding tax on royalties if the Agreement
pursuant to which the royalties are paid is a
single-country license under paragraph
(c)(2)(iv) of this section. The Agreement
meets the requirements of paragraph
(c)(2)(iv)(A) of this section because it is a
written license agreement that characterizes
the payment as a royalty and limits the
territory of the license to Country X. Thus,
the 20u Country X withholding tax paid by
YCo is treated as a separate levy under
§ 1.901–2(d)(1)(iii)(B)(3).
(B) Covered withholding tax. Under
paragraph (c)(2) of this section, a tested
foreign tax is a covered withholding tax if
paragraphs (c)(1)(i) and (c)(2)(i) through (iii)
of this section are met. Country X has a
generally-imposed net income tax, Country
X’s withholding tax on the royalties paid
pursuant to the Agreement is a withholding
tax that is imposed on the gross income of
persons who are nonresidents of Country X,
and nonresidents subject to the withholding
tax on royalties paid pursuant to the
Agreement are not also subject to a net
income tax on their royalty income. Thus, the
requirements of paragraphs (c)(1)(i) and
(c)(2)(i) and (ii) of this section are met. The
withholding tax paid by YCo does not meet
the requirements of § 1.901–2(b)(5)(i)(B) and
paragraph (c)(2)(iii)(A) of this section because
Country X’s source rule for royalties (based
on residence of the payor) is not based on the
place of use of, or the right to use, the
intangible property. However, the payment

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that is subject to Country X’s withholding tax
is made pursuant to a single-country license
under paragraph (c)(2)(iv) of this section for
the reasons described in paragraph
(d)(8)(ii)(A) of this section (the separate levy
analysis of this Example 8). Therefore, the
requirement in paragraph (c)(2)(iii)(B) of this
section is met. Accordingly, the Country X
withholding tax on the payment made by
XCo to YCo pursuant to the Agreement is a
covered withholding tax and all of the 20u
of Country X withholding tax paid by YCo
with respect to the 100u of royalties under
the Agreement is a foreign income tax.
(9) Example 9: Withholding tax on
royalties; separately stated portion—(i) Facts.
The facts are the same as in paragraph
(d)(3)(i) of this section (the facts of Example
3) except that in Year 1, YCo enters into a
written agreement (the ‘‘Agreement’’) with
XCo for the right to use YCo’s IP in a territory
defined by the Agreement as the entire
world, as well as for YCo to provide certain
services to XCo in Country Y, in exchange for
a payment equal to 10 percent of XCo’s
annual revenue. The Agreement provides a
formula for determining the amount of the
payment that is characterized as a royalty
and that is with respect to the part of the
territory that is within Country X (the
‘‘separately stated formula’’). The separately
stated formula provides that the first 30u of
the payment represents payment for services
provided by YCo, and that 40 percent of the
remainder of the payment represents
payment of a royalty with respect to the part
of the territory of the license that is solely
within Country X. The portion of the
payment by XCo to YCo that is characterized
as services income under the Agreement is
also characterized as services income under
the laws of Country X. Additionally, all
payments by a resident of Country X for
services provided by a nonresident are
treated as giving rise to Country X source
income, regardless of where the services are
performed, and gross income from services is
subject to the same 20 percent withholding
tax as gross royalty income. In Year 1, XCo
earns gross income of 1,800u and pays YCo
180u under the Agreement. XCo withholds
12u of tax from the 60u of royalties
attributable to the part of the territory of the
license that is solely within Country X that
are paid to YCo under the separately stated
formula in the Agreement. The portion of the
payment by XCo to YCo that is characterized
as a royalty with respect to the part of the
territory of the license that is solely within
Country X under the separately stated
formula in the Agreement is also
characterized as a royalty under the laws of
Country X. XCo withholds 24u of tax from
the remaining 120u payment paid to YCo
under the Agreement, consisting of 6u of tax
on the 30u payment for services and 18u of
tax on 90u of royalties. YCo does not know,
or have reason to know, that the terms of the
Agreement misstate the territory in which
YCo’s IP is used or overstate the amount of
the royalty with respect to the part of the
territory of the license that is solely within
Country X.
(ii) Analysis—(A) Separately stated
portion. The analysis is the same as in
paragraph (d)(8)(ii) of this section (the

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analysis of Example 8), except that the
portion of the payment that is a royalty with
respect to the part of the territory of the
license that is solely within Country X under
the separately stated formula in the
Agreement is treated as made pursuant to a
single-country license under paragraph
(c)(2)(iv) of this section because the
Agreement is a written agreement that
separately states the portion of the payment
that is characterized as a royalty and that is
with respect to the part of the territory of the
license that is solely within Country X. Thus,
the Country X withholding tax on the portion
of the payment from XCo to YCo that is a
payment of a royalty with respect to the part
of the territory of the license that is solely
within Country X under the separately stated
formula under the Agreement is a separate
levy and a covered withholding tax.
Accordingly, the 12u Country X withholding
tax paid by YCo from the 60u of royalties
with respect to the part of the territory of the
license that is solely within Country X is a
foreign income tax.
(B) Remaining portion of royalties. The
analysis is the same as paragraph (d)(3)(ii) of
this section (the analysis of Example 3).
Specifically, the 18u Country X withholding
tax on the 90u royalty payment that is not
with respect to the part of the territory that
is within Country X is neither a separate levy
nor a covered withholding tax. Accordingly,
none of the 18u Country X withholding tax
paid by YCo with respect to the remaining
90u royalty payment under the Agreement is
a payment of foreign income tax.
(C) Services portion. Under § 1.901–
2(d)(1)(iii)(B)(1), Country X’s withholding tax
imposed on gross services income of
nonresidents is a separate levy. The Country
X withholding tax of 6u on the 30u payment
for services made by XCo to YCo under the
Agreement is not a covered withholding tax.
The withholding tax paid by YCo does not
meet the requirements of § 1.901–2(b)(5)(i)(B)
and paragraph (c)(2)(iii)(A) of this section
because Country X’s sourcing rule for
services (based on residence of the payor) is
not reasonably similar to the sourcing rule
that applies under the Internal Revenue Code
(based on where the services are performed).
The special separate levy and covered
withholding tax rules for single-country
licenses under § 1.901–2(d)(1)(iii)(B)(3) and
paragraph (c)(2)(iii)(B) of this section do not
apply to withholding taxes on payments for
services. Accordingly, none of the 6u of
Country X withholding tax paid by YCo with
respect to the 30u payment for services under
the Agreement is a payment of foreign
income tax.
(10) Example 10: Characterization of
payment—(i) Facts. The facts are the same as
in paragraph (d)(3)(i) of this section (the facts
of Example 3), except that in Year 1, YCo
enters into a written license agreement (the
‘‘Agreement’’) with XCo for the right to use
YCo’s IP in a territory defined by the
Agreement as Country X, in exchange for a
payment that the terms of the Agreement
characterize as a royalty, but that is
characterized as a payment for services under
the laws of Country X, and all payments of
services paid by a resident of Country X to
a nonresident are treated as giving rise to

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Country X source income, regardless of
where the services are performed, and are
subject to a 20 percent withholding tax.
(ii) Analysis. Under § 1.901–
2(d)(1)(iii)(B)(1), Country X’s withholding tax
imposed on gross services income of
nonresidents is a separate levy. The Country
X withholding tax of 20u on the 100u
payment for services made by XCo to YCo
under the Agreement is not a covered
withholding tax. The withholding tax paid by
YCo does not meet the requirements of
§ 1.901–2(b)(5)(i)(B) and paragraph
(c)(2)(iii)(A) of this section because Country
X’s sourcing rule for services (based on
residence of the payor) is not reasonably
similar to the sourcing rule that applies
under the Internal Revenue Code (based on
where the services are performed). The
special separate levy and covered
withholding tax rules for single-country
licenses under § 1.901–2(d)(1)(iii)(B)(3) and
paragraph (c)(2)(iii)(B) of this section do not
apply to withholding taxes on income that is
not characterized as royalty income under
the foreign tax law. Accordingly, none of the
20u Country X withholding tax paid by YCo
with respect to the 100u paid under the
Agreement is a payment of foreign income
tax.
(11) Example 11: Withholding tax on
royalties, validity of agreement—(i) Facts.
The facts are the same as in paragraph
(d)(3)(i) of this section (the facts of Example
3), except that XCo is a controlled foreign
corporation wholly owned by USP.
Additionally, in Year 2, XCo and YCo cancel
the written license agreement entered into in
Year 1 and YCo enters into two new written
license agreements with XCo, one agreement
which grants XCo the right to use certain YCo
IP in a territory defined as Country X (the
‘‘Country X Agreement’’), and one of which
grants XCo the right to use the same YCo IP
in a territory defined as the entire world
except for Country X (the ‘‘Rest of World
Agreement’’). Both agreements characterize
the payments under the agreements as
royalties, and the payments are also
characterized as royalties under the laws of
Country X. In Year 2, XCo withholds a total
of 20u of tax from a total of 100u of royalties
paid to YCo under the Country X Agreement
and the Rest of World Agreement. Based on
the terms of each agreement, 18u of tax was
withheld from 90u of royalties paid to YCo
under the Country X Agreement, and 2u of
tax from 10u of royalties paid to YCo under
the Rest of World Agreement. YCo knew or
had reason to know that under the principles
of sections 482 and 861, with respect to the
100u of royalties paid by XCo to YCo, 40u
is attributable to XCo’s use of YCo IP in
Country X and 60u is attributable to use of
YCo IP outside Country X.
(ii) Analysis—(A) Rest of World
Agreement. The analysis is the same as
paragraph (d)(3)(ii) of this section (the
analysis of Example 3). Specifically, the 2u
Country X withholding tax on the 10u royalty
payment under the Rest of World Agreement
is neither a separate levy nor a covered
withholding tax. Accordingly, none of the 2u
Country X withholding tax paid by YCo with
respect to the 10u royalty payment under the
Rest of World Agreement is a payment of
foreign income tax.

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71285

(B) Country X Agreement. The analysis is
the same as paragraph (d)(3)(ii) of this section
(the analysis of Example 3), except that the
reason that the Country X Agreement does
not meet the requirements of paragraph
(c)(2)(iv) of this section is that YCo knew or
had reason to know that the terms of the
Country X Agreement overstate the amount
of the royalty with respect to Country X.
Thus, the 18u Country X withholding tax on
the 90u royalty payment under the Country
X Agreement is neither a separate levy nor
a covered withholding tax. Accordingly,
none of the 18u Country X withholding tax
paid by YCo with respect to the 90u royalty
payment under the Country X Agreement is
a payment of foreign income tax.

(e) Applicability dates—(1) In general.
Except as provided in paragraphs (e)(2)
and (3) of this section, this section
applies to foreign taxes paid (within the
meaning of § 1.901–2(g)) in taxable years
beginning on or after December 28,
2021. For foreign taxes that relate to
(and if creditable are considered to
accrue in) taxable years beginning
before December 28, 2021, and that are
remitted in taxable years beginning on
or after December 28, 2021, by a
taxpayer that accounts for foreign
income taxes on the accrual basis, see
§ 1.903–1 as contained in 26 CFR part 1
revised as of April 1, 2021.
(2) Certain foreign taxes paid to
Puerto Rico. For foreign taxes paid to
Puerto Rico under section 3070.01 of the
Puerto Rico Internal Revenue Code of
2011, as amended (13 L.P.R.A. 31771)
(imposing an excise tax on a controlled
group member’s acquisition from
another group member of certain
personal property manufactured or
produced in Puerto Rico and certain
services performed in Puerto Rico), this
section applies to foreign taxes paid
(within the meaning of § 1.901–2(g)) in
taxable years beginning on or after
January 1, 2023. For foreign taxes
described in the preceding sentence that
are paid in taxable years beginning
before January 1, 2023, see § 1.903–1 as
contained in 26 CFR part 1 revised as of
April 1, 2021.
(3) Modifications to the covered
withholding tax rules. Paragraphs (c)(2)
and (d)(3), (4), and (8) through (11) of
this section apply to foreign taxes paid
(within the meaning of § 1.901–2(g)) in
taxable years ending on or after
November 18, 2022. For foreign taxes
that are paid in taxable years ending
before November 18, 2022, see § 1.903–
1(c)(2) and (d)(3) and (4) as contained in
26 CFR part 1 revised as of July 27,
2022. Taxpayers may choose to apply
the rules in paragraphs (c)(2) and (d)(3),
(4), and (8) through (11) of this section
to foreign taxes paid in taxable years
beginning on or after December 28,
2021, and ending before November 18,

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71286

Federal Register / Vol. 87, No. 224 / Tuesday, November 22, 2022 / Proposed Rules

2022, provided that they consistently
apply those rules and the rules of
§ 1.901–2(b)(5)(i)(B)(2) and (d)(1)(iii) to
such taxable years.
Melanie R. Krause,
Acting Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2022–25337 Filed 11–18–22; 11:15 am]
BILLING CODE 4830–01–P

LIBRARY OF CONGRESS
Copyright Office
37 CFR Part 210
[Docket No. 2022–5]

Termination Rights and the Music
Modernization Act’s Blanket License
U.S. Copyright Office, Library
of Congress.
ACTION: Notice of proposed rulemaking;
extension of comment period.
AGENCY:

The U.S. Copyright Office is
extending the deadline for the
submission of written comments in
response to its October 25, 2022 notice
of proposed rulemaking regarding the
applicability of the derivative works
exception to termination rights under
the Copyright Act to the statutory
mechanical blanket license established
under the Orrin G. Hatch–Bob Goodlatte
Music Modernization Act.
DATES: The comment periods for the
notice of proposed rulemaking
published October 25, 2022, at 87 FR
64405, are extended. Written comments
must be received no later than 11:59
p.m. Eastern Time on December 1, 2022.
Written reply comments must be
received no later than 11:59 p.m.
Eastern Time on January 5, 2023.
ADDRESSES: For reasons of governmental
efficiency, the Copyright Office is using
the regulations.gov system for the
submission and posting of public
comments in this proceeding. All
comments are therefore to be submitted
electronically through regulations.gov.
Specific instructions for submitting
comments are available on the
Copyright Office’s website at https://
copyright.gov/rulemaking/mmatermination. If electronic submission of
comments is not feasible due to lack of
access to a computer or the internet,
please contact the Copyright Office
using the contact information below for
special instructions.
FOR FURTHER INFORMATION CONTACT:
Megan Efthimiadis, Assistant to the
General Counsel, by email at meft@
copyright.gov or telephone at 202–707–
8350.

khammond on DSKJM1Z7X2PROD with PROPOSALS

SUMMARY:

VerDate Sep<11>2014

16:15 Nov 21, 2022

Jkt 259001

On
October 25, 2022 the Office issued a
notice of proposed rulemaking seeking
public comments regarding the
applicability of the derivative works
exception to termination rights under
the Copyright Act to the statutory
mechanical blanket license established
under the Orrin G. Hatch–Bob Goodlatte
Music Modernization Act. 87 FR 64405
(October 25, 2022).
In light of the Thanksgiving and
Christmas holidays, to ensure that
members of the public have sufficient
time to respond, and to ensure that the
Office has the benefit of a complete
record, the Office is extending the
deadline for the submission of written
comments to no later than 11:59 p.m.
Eastern Time on December 1, 2022 and
is extending the deadline for the
submission of written reply comments
to no later than 11:59 p.m. Eastern Time
on January 5, 2023.

SUPPLEMENTARY INFORMATION:

Dated: November 17, 2022.
Suzanne V. Wilson,
General Counsel and Associate Register of
Copyrights.
[FR Doc. 2022–25447 Filed 11–21–22; 8:45 am]
BILLING CODE 1410–30–P

ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 52
[EPA–R04–OAR–2022–0433; FRL–10402–
01–R4]

Air Plan Approval; North Carolina;
Minor Revisions to Nitrogen Oxides
Rule
Environmental Protection
Agency (EPA).
ACTION: Proposed rule.
AGENCY:

The Environmental Protection
Agency (EPA) is proposing to approve a
revision to the North Carolina State
Implementation Plan (SIP) submitted by
the North Carolina Department of
Environmental Quality (NCDEQ),
Division of Air Quality, via a letter
dated April 13, 2021, and received by
EPA on April 14, 2021. This revision
contains minor changes to North
Carolina’s nitrogen oxides (NOX) rule.
EPA is proposing to approve these
changes pursuant to the Clean Air Act
(CAA or Act).
DATES: Comments must be received on
or before December 22, 2022.
ADDRESSES: Submit your comments,
identified by Docket ID No. EPA–R04–
OAR–2022–0433 at
www.regulations.gov. Follow the online
instructions for submitting comments.
SUMMARY:

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Once submitted, comments cannot be
edited or removed from Regulations.gov.
EPA may publish any comment received
to its public docket. Do not submit
electronically any information you
consider to be Confidential Business
Information (CBI) or other information
whose disclosure is restricted by statute.
Multimedia submissions (audio, video,
etc.) must be accompanied by a written
comment. The written comment is
considered the official comment and
should include discussion of all points
you wish to make. EPA will generally
not consider comments or comment
contents located outside of the primary
submission (i.e., on the web, cloud, or
other file sharing system). For
additional submission methods, the full
EPA public comment policy,
information about CBI or multimedia
submissions, and general guidance on
making effective comments, please visit
www2.epa.gov/dockets/commentingepa-dockets.
FOR FURTHER INFORMATION CONTACT:

Steven Scofield, Air Regulatory
Management Section, Air Planning and
Implementation Branch, Air and
Radiation Division, U.S. Environmental
Protection Agency, Region 4, 61 Forsyth
Street SW, Atlanta, Georgia 30303–8960.
The telephone number is (404) 562–
9034. Mr. Scofield can also be reached
via electronic mail at scofield.steve@
epa.gov.
SUPPLEMENTARY INFORMATION:

I. What action is EPA proposing to
take?
EPA is proposing to approve changes
to North Carolina’s SIP that were
provided to EPA through NCDEQ via a
letter dated April 13, 2021.1 EPA is
proposing to approve changes to North
Carolina’s 15A North Carolina
Administrative Code (NCAC)
Subchapter 02D, Section .1400, Nitrogen
Oxides (hereinafter referred to as
Section .1400).2 The April 13, 2021,
revision to the North Carolina SIP
transmits changes that do not alter the
meaning of the regulations, such as
clarifying changes, updated cross1 EPA notes that the submittal was received
through the State Planning Electronic Collaboration
System (SPeCS) on April 14, 2021. For clarity, this
notice will refer to the submittal by the date on the
cover letter, which is April 13, 2021.
2 The State submitted several revisions with the
same April 13, 2021, cover letter following
readoption, including revisions to rules in Section
.1400. These revisions were submitted pursuant to
North Carolina’s 10-year readoption process at
North Carolina General Statute at 150B–21–3A. EPA
will be considering action on other SIP revisions
submitted with the April 13, 2021, cover letter in
separate rulemakings.

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