
Calculating the Foreign Tax Credit and the CFC Netting Rule
By Anthony Diosdi Because the United States taxes U.S. persons on their worldwide income, the foreign tax credit was enacted in 1918 to prevent U.S. taxpayers from being taxed on their foreign-source income by both the foreign country where the income was earned and by the United States. The foreign tax credit is intended to allow a U.S. taxpayer to reduce the U.S. federal tax on its foreign-source income (but not U.S. source income) by the foreign taxes paid on that foreign income.To be allowable under 26 U.S.C. Section 901(b), the foreign tax must be an “income, war profits (or) excess profits tax paid or accrued...to any foreign country or to any possession of the United States.” Credit also is allowed under Section 903 for a “tax paid in lieu…