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Foreign Tax Credit: General Overview

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US tax residents and citizens are taxed based upon their worldwide income. This can often result in individuals being subject to double taxation. To provide relief from this problem, the Foreign Tax Credit (FTC) provisions were enacted. There are two types of FTC’s, the direct credit and the indirect credit.

Direct Foreign Tax Credit

In general, IRC Section 901 allows for direct credit for foreign taxes paid by US taxpayers. In general, taxpayers must have directly incurred the taxes paid in order to qualify for the credit. US income tax liability is reduced on a dollar-for-dollar basis under this credit.

Indirect Foreign Tax Credit

If a US corporation conducts operations through a foreign subsidiary, the direct FTC is not allowed for foreign taxes paid by the subsidiary. Instead, for US corporate taxpayers with 10% or more US shareholders that receive actual or constructive dividends from foreign corporation that have paid foreign income taxes, an indirect FTC may be taken. The indirect FTC is determined based upon a specified computation. US corporations that elect the FTC for deem- paid for foreign taxes must “gross up”, or add to income, any dividend income by the amount of deem-paid taxes under IRC Section 78.

Contact Sherayzen Law Office NOW for the FTC Legal Help

This article is intended to give a very brief summary of these issues, and should not be construed as legal or tax advice. Reporting foreign-earned income often necessitates an experienced understanding of complex regulations, IRC statutes, and case law, and IRS penalties for failure to comply can be substantial. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your cross-border, international, and other tax needs. Call now at (952) 500-8159 for a consultation today.

IRS Reorganizes Transfer Pricing Compliance Programs and International Coordination

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On July 27, 2011, the IRS announced that it is taking additional steps in its continuing efforts to improve the agency’s international operations. First, the IRS Advance Pricing Agreement (APA) Program, concerned exclusively with reaching pre-filing agreements with taxpayers on transfer pricing, will shift from the office of IRS Chief Counsel to an office under the Transfer Pricing Director in the Large Business &International division’s international operation. In addition, the IRS Mutual Agreement Program (MAP), concerned primarily with the bilateral resolution of transfer pricing disputes with U.S. treaty partners, will shift to the same office.

The resulting “Advance Pricing and Mutual Agreement program” will be under the direction of a single executive and the IRS will increase staffing available to the two program areas. The combined office will allow the IRS to reduce the time needed to complete advance pricing agreements and to resolve transfer pricing disputes with its treaty partners. The Office of Chief Counsel will remain a vital partner in the analysis and resolution of legal issues.

Second, to facilitate IRS coordination with treaty partners in an increasingly global environment, the IRS will adjust its competent authority and international coordination functions under an Assistant Deputy Commissioner (International) who will:

  • coordinate international activities across all IRS operating divisions,
  • oversee the IRS Exchange of Information program and IRS participation in the Joint International Tax Shelter Information Centre (JITSIC),
  • manage the activities of the IRS Tax Attaches in the agency’s foreign posts of duty,
  • coordinate IRS participation at the Organisation for Economic Cooperation and Development (OECD) and other non-governmental organizations,
  • support the Department of the Treasury in its negotiations of tax treaties and tax information exchange agreements, and
  • pursue competent authority agreements with treaty partners on issues other than transfer pricing.

The latest IRS reorganization is meant to improve tax administration in a global economy.