Foreign Tax Credits Archives

09Feb 2023 by Pat Geddie

It is About to Get Much More Difficult to Claim a Foreign Tax Credit A Look at the 2022 Final Foreign Tax Credit Regulations

By Anthony DiosdiU.S. taxpayers are generally subject to U.S. tax on their worldwide income, but may be provided a tax credit for foreign income taxes paid or accrued. The main purpose of the foreign tax credit is to mitigate the double taxation of foreign source income that might occur if such income is taxed by both the United States and a foreign country. An individual U.S. taxpayer may receive a “direct” foreign tax credit for foreign taxes that he or she pays to a foreign government. A U.S. corporation that owns at least 10 percent of stock in a foreign corporation (by vote or value) may receive an “indirect” or “deemed” foreign tax credit for foreign taxes paid by that subsidiary. Internal Revenue Code Section 901 limits the foreign tax…

23Nov 2022 by Pat Geddie

The Separate Basket Limitations for Foreign Tax Credits

Tax Law

By Anthony Diosdi U.S. taxpayers are generally subject to U.S. tax on their worldwide income, but may be provided a tax credit for foreign income taxes paid or accrued. The main purpose of the foreign tax credit is to mitigate the double taxation of foreign source income that might occur if such income is taxed by both the United States and a foreign country. An individual U.S. taxpayer may receive a “direct” foreign tax credit for foreign taxes that he or she pays to a foreign government. A U.S. corporation that owns at least 10 percent of stock in a foreign corporation (by vote or value) may receive an “indirect” or “deemed” foreign tax credit for foreign taxes paid by that subsidiary. Internal Revenue Code Section 901 limits the foreign…

22Jul 2020 by Pat Geddie

Understanding the High-Tax Kickout and its Impact on Foreign Tax Credits

Tax Law

By Anthony Diosdi If you are involved in the preparation of international information returns, you may have noticed on Forms 1116 and 1118 line items for “high-tax kickout.” The instructions promulgated by the Internal Revenue Service (“IRS”) for Forms 1116 and 1118 do a poor job defining the term “high-tax kickout.” This article attempts to clarify the meaning of “high-tax kickout” and its impact on claiming foreign tax credits. By way of background, Internal Revenue Code Section 904 requires that foreign tax credits be calculated separately for each type of foreign-source income included in a particular category or basket. There are currently five baskets for calculating foreign tax credits. They are: 1) passive income; 2) general income; 3) foreign branch income; and 4) GILTI income. The high-tax kickout rule applies…

29Jan 2020 by Pat Geddie

Calculating Foreign Tax Credits Before and After the 2017 Tax Cut and Jobs Act

Tax Law

By Anthony Diosdi The 2017 Tax Cut and Jobs Act significantly changed the way we plan cross-border transactions. Prior to the 2017 Tax Cut and Jobs Act, foreign tax credits were calculated using tax pools. After the enactment of the Tax Cuts and Jobs Act, the pools have been repealed and replaced with a single year indirect credit for the foreign income taxes “attributable to” the item of income under Internal Revenue Code Section 960(a).History of Foreign Tax Credits As a result of the United States taxing U.S. persons on their worldwide income, in 1918, Congress enacted the foreign tax credit system. Foreign tax credits were developed to prevent double taxation of foreign source income. A foreign tax credit is intended to allow a U.S. taxpayer to reduce the U.S.…