January 14, 2022
The Honorable Ron Wyden
The Honorable Mike Crapo
United States Senate
The Honorable Richard Neal
The Honorable Kevin Brady
Ways and Means Committee
House of Representatives
Topic: Department of Treasury, Internal Revenue Service: Guidance Related to the Foreign Tax Credit; Clarification of intangible income from abroad
Pursuant to Section 801(a)(2)(A) of Title 5 of the United States Code, here is our report on a major rule promulgated by the Department of the Treasury, Internal Revenue Service (IRS) titled “Guidance Related to the Foreign Tax Credit; Clarification of intangible income derived from abroad” (RIN: 1545-BP70). We received the rule on December 29, 2021. It was published in the Federal Register as final settlement on January 4, 2022. 87 Fed. Reg. 276. The effective date is March 7, 2022.
The IRS said this final rule contains foreign tax credit regulations, including the denial of a foreign income tax credit or deduction with respect to dividends eligible for a deduction for dividends received; the allocation and distribution of interest expense, foreign income taxes and certain life insurance company deductions; the definition of a foreign income tax and a tax in lieu of income tax; the definition of foreign branch income; and when foreign taxes accrue and can be claimed as a credit. The IRS further stated that the rule contains regulations clarifying the rules relating to foreign source intangible income (FDII). The IRS went on to say that the rule affects taxpayers claiming credits or deductions for foreign income taxes, or claiming a deduction for FDII.
Attached is our assessment of the IRS’ compliance with the procedural steps required by Title 5 Section 801(a)(1)(B)(i) through (iv) with respect to the rule. If you have any questions about this report or would like to contact GAO officials responsible for valuation work relating to the subject matter of the rule, please contact Shari Brewster, Assistant General Counsel, at (202) 512-6398.
Associate Legal Director
CC: Carrie Mudd
Director, Legal Processing Division
REPORT UNDER 5 USC § 801(a)(2)(A) ON A MAJOR RULE
ISSUED BY THE
INTERNAL REVENUE DEPARTMENT
“FOREIGN TAX CREDIT GUIDELINES;
CLARIFICATION OF INTANGIBLE INCOME OF FOREIGN ORIGIN »
(i) Cost-benefit analysis
The Treasury Department, Internal Revenue Service (IRS) conducted an economic analysis of this final rule. The IRS said it assessed the benefits and costs of the final rule against a no-action baseline reflecting expected federal income tax behavior in the absence of those regulations. The IRS went on to say that it expects the rule to have economic effects greater than $100 million per year (in 2021 dollars) relative to the no-action benchmark. The IRS further stated that it had not undertaken quantitative estimates of the economic effects of this rule. The IRS explained that it does not have readily available data or models to estimate with reasonable accuracy (1) the tax positions that taxpayers would likely take in the absence of the final regulations or under approaches alternative regulations; (2) the difference in business decisions that taxpayers might make between final regulation and the baseline without action or alternative regulatory approaches; or (3) how that difference in such business decisions will affect measures of US economic performance. Finally, the IRS said it undertook a qualitative analysis of the economic effects of the rule which included (1) the net gain requirement to determine a creditable foreign tax, (2) jurisdictional nexus, (3) attribution and the distribution of expenses for insurance companies; and (4) the credibility of disputed foreign income taxes.
(ii) Agency Actions Regarding the Regulatory Flexibility Act (RFA), 5 USC §§ 603–605, 607, and 609
The IRS has certified that this final rule will not have a significant economic impact on a substantial number of small entities within the meaning of the FRG.
(iii) Agency Actions Regarding Sections 202-205 of the Unfunded Warrants Reform Act of 1995, 2 USC §§ 1532-1535
The IRS said this final rule does not include any federal mandates that could result in expenditures by state, local or tribal governments, or by the private sector exceeding $100 million in 1995 dollars, updated annually to accommodate inflation account.
(iv) Other relevant information or requirements under laws and decrees
Administrative Procedure Act, 5 USC §§ 551 and following.
On November 12, 2020, the IRS released a proposed rule. 85 Fed. Reg. 72078. The IRS responded to comments in this final rule, but did not respond to comments that did not relate to the proposed rule or were otherwise outside the scope of the rule.
Red Tape Reduction Act (PRA), 44 USC §§ 3501–3520
The IRS has determined that this final rule contains information gathering requirements (ICRs) under the PRA. The KPIs are:
Individual Office of Management and Budget (OMB) control number 1545-0074 (NEW model) represents an estimated total charge time of 2.14 billion hours and an estimated total monetized cost of 37.96 billion dollars (in 2021 dollars),
Trusts and Estates, OMB Control Number 1545-0092 represents an estimated total charge time of 307,844,800 hours and an estimated total monetized cost of $14.077 billion (in 2018 dollars),
Trusts and Estates (NEW Model), OMB Control Number 1545-0121 represents an estimated total charge time of 2,506,600 hours and an estimated total monetized cost of $1.744 billion (in 2018 dollars),
Business (NEW Model), OMB Control Number 1545-0123 represents an estimated total charge time of 1.085 billion hours and an estimated total monetized cost of $44.279 billion (in 2021 dollars), and
Written Statement for Foreign Tax Reviews, OMB Control Number 1545-1056 represents a total estimated burden time of 54,000 hours and a total estimated monetized cost of $2,583,840 (in 2017 dollars).
Legal authorization of the rule
The IRS has promulgated this final rule pursuant to sections 245A and 7805 of title 28 of the United States Code.
Executive Order No. 12866 (Planning and Regulatory Review)
The IRS has stated that this final rule has been designated by the Office of Information and Regulatory Affairs (OIRA) as subject to review under the Order pursuant to the Memorandum of Understanding (April 11, 2018) (MOA) between the Treasury Department and the OMB regarding the revision of tax regulations. The IRS said the OIRA has designated this rule as economically significant under the MOA and therefore the OMB has reviewed the rule.
Executive Order No. 13132 (Federalism)
The IRS said this final rule has no federalism implications and does not impose substantial direct compliance costs on state and local governments or prejudge state law within the meaning of the IRS. ‘order.