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

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

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 After the enactment of the Tax Cuts and Jobs Act, the pools have been repealed and replaced with a single year indirect credit for the foreign income taxes “attributable to” the item of income under Internal Revenue Code Section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.…
Read More