FROM THE OFFICE OF PUBLIC AFFAIRS

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Today the Treasury Department and the IRS issued temporary and proposed regulations that address the allocation and apportionment of expenses in determining net U.S. and foreign source income for foreign tax credit purposes.  The temporary and proposed regulations provide an elective alternative approach for measuring assets for purposes of apportioning interest expense between U.S. and foreign sources under the tax book value method of the current regulations. 

In applying the interest allocation rules, taxpayers may measure their assets under either the fair market value method or the tax book value method.  Because the tax book value method requires the use of adjusted tax basis, use of the tax book value method may give rise to disparities in the measurement of foreign and domestic assets due to the differences in depreciation methods applicable to those assets.  To address these disparities, the temporary and proposed regulations allow taxpayers to elect to use the same depreciation rules to determine the tax book value of all depreciable property for purposes of interest expense allocation. 

“These regulations improve the operation of the interest allocation rules” said Acting Assistant Secretary for Tax Policy Greg Jenner.  “The new election will permit taxpayers to determine the tax book value of foreign and domestic assets under one consistent depreciation regime.  This will eliminate distortions that can arise because foreign assets generally are depreciated more slowly than U.S. assets.”

Related Documents:

• Temporary Regulations
• Proposed Regulations