Notice 2011-29 states that the Excise

Tax raises novel issues that require further study and that, pending the resolution of those issues, the IRS will not challenge a taxpayer’s position that the Excise Tax is a tax paid in lieu of an income tax under section 903. Notice 2011-29 further provides that any change in the foreign tax credit treatment of the Excise Tax will apply to Excise Tax paid or accrued after the date that further guidance is issued.

On December 28, 2021, final regulations were filed with the Federal Register, including regulations under Treas. Reg. §§1.901-2(b)(5) and 1.903-1(c)(1) (iv). These final regulations provide that a foreign tax imposed on a nonresident is a foreign income tax within the meaning of Treas. Reg. §1.901-2(a)(2) for which a credit is allowable only if the tax is based on (1) the nonresident’s activities in the taxing jurisdiction, (2) income properly sourced to the taxing jurisdiction, or (3) the sale or exchange of certain property located in the taxing jurisdiction. T.D. 9959 (87 FR 276, 339-340, 357-358). Under the final regulations, the Modified ECI Tax and the Excise Tax do not constitute foreign income taxes. Therefore, a credit would not be allowed for those taxes under section 901. The final regulations under Treas. Regs. §§1.901-2 and 1.903-1 apply to any Modified ECI Tax and Excise Tax paid or accrued (depending on the taxpayer’s method of accounting for foreign income taxes) in taxable years beginning on or after January 1, 2023. Treas. Reg. §§1.901-2(h) and 1.903-1(e).

On June 30, 2022, Act 52-2022 was enacted into law in Puerto Rico. Act 52-2022 allows taxpayers to amend their existing tax decrees to replace the existing income tax and royalty withholding tax framework with a new income tax and royalty withholding tax framework. If a taxpayer elects to amend an existing tax decree, the remaining term of the amended

tax decree is extended by 15 years. Taxpayers that opt to amend their existing tax decrees pursuant to Act 52-2022 are no longer subject to the Modified ECI Tax and the Excise Tax. In certain cases, the decision to amend an existing tax decree pursuant to Act 52-2022 may result in a U.S. taxpayer and/or one or more of its affiliates owing a greater total amount of tax to Puerto Rico than would be owed absent the amendment. However, the terms of the amended tax decrees are expected to result in taxes imposed at rates lower than those under the generally applicable Puerto Rico income tax laws absent any decree.

Treas. Reg. §1.901-2(e)(5)(i) provides that an amount remitted to a foreign country is not a compulsory payment, and thus is not an amount of foreign income tax paid, to the extent that the amount remitted exceeds the amount of the taxpayer’s liability for foreign income tax under the foreign tax law (the “noncompulsory payment regulations”).

Treas. Reg. §1.901-2(e)(5)(iii)(A) provides that where foreign tax law provides a taxpayer with options or elections in computing its liability for foreign income tax whereby a taxpayer’s foreign income tax liability may be permanently decreased in the aggregate over time, the taxpayer’s failure to use such options or elections results in a foreign payment in excess of the taxpayer’s liability for foreign income tax.