Foreign Tax Credit - USA

Code Section 901:

According to this code section if a U.S Citizen, a resident alien or a domestic corporation pays foreign income taxes it can claim credit for it when filing USA taxes.

Code Section 904 (a):

According to this part of the code section there is a limitation of credit that a taxpayer can take. The total amount of the credit taken under section 901 (a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer’s taxable income from sources without the United States (but not in excess of the taxpayer’s entire taxable income) bears to his entire taxable income for the same taxable year.

Code Section 904 (c):

According to this section of the code foreign income taxes that exceed the limitation can be carried back one year and forward ten years and taken as a credit in a year that the limitation exceeds the amount of creditable foreign taxes.

Usually a taxpayer is in an excess limitation position when the foreign tax rate is lower than the U.S rate and in an excess credit position when the foreign tax rate is higher than the U.S rate.

One way to eliminate excess credit is to increase the limitation by increasing the percentage of the taxpayer’s total taxable income that is classified as foreign source for U.S tax purposes. If U.S companies arrange for the passage of title in the importing country rather than the United States, export sales will generate foreign source income.

Excess credit can also be eliminated by cross crediting. A taxpayer can blend low tax and high tax foreign source income with in a single foreign tax credit limit. By doing this excess limitation on the low tax income will soak up the excess credits on high tax income. This averaging will produce an excess credit only when average foreign tax rate is higher than the U.S rate.

Cross crediting is allowed with respect to active business profits derived from different foreign countries or passive investment income derived from different countries.

Special look through rules apply to Dividends, Interest, Rents and Royalties received by a U.S share holder from a Controlled Foreign Corporation (CFC) and also to dividends received by Domestic Corporation from a non-controlled code section 902 corporation.

Disclaimer:

This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.

References:

www.jct.gov/publications.html

http://www.law.cornell.edu

http://www.irs.gov/publications

U.S Taxation of International Transactions by Robert J. Misey, Michael S. Schadewald

Introduction to United states International Taxation by Paul R. McDaniel, Hugh j. Ault and James R. Repetti

International Taxation by Joseph Isenbergh

International Taxation in a nutshell by Richard L. Doernberg.

International Income Taxation, Code and Regulations by Robert J. Peroni – CCH

Mansoor Suhail (Mani)

Accountant

BSBA – EA – ICIA – RA

Tax for Canada and U.S.A

Web: www.theaccountingandtax.com and www.taxservicesguru.com

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