For many entities that do business on a global stage, there is the potential for excessive taxation based on the taxation of the foreign income in the country in which the income is generated and then taxation again in the United States. In order to alleviate this burden, the United States has put into place a foreign tax credit program that provides a credit for those taxes that were paid in a foreign jurisdiction. This has a tremendous impact on the profitability of foreign and cross-border transactions.
The foreign tax credit (the FTC) was enacted in 1918 in order to decrease the financial burden on companies that were doing business in other countries. There are two types of credits, those for directly and indirectly paid foreign taxes. Direct payment credits are those provided to United States taxpayers who owned the business entity and paid the foreign income taxes for income earned in the foreign jurisdiction, as well as interest, dividends, and other payments that were received by United States taxpayers. Indirect payment credits arise when there are foreign income taxes that were paid by foreign subsidiaries.
If a taxpayer, which may be a domestic corporation, and United States citizen, or a resident, is eligible for an FTC, he, she or it may take the credit or may choose to instead deduct the amount of foreign taxes that were paid. Foreign corporations conducting business in the United States and non-resident aliens also may be able to take the credit, based on specific circumstances.
One of the most important considerations in determining whether or not a person or entity may take an FTC is the analysis of the foreign payment and if it qualifies as a foreign tax, as this inquiry may not be as straight forward as it seems. At Brunoro Law, the skilled principal attorney works with clients to understand the FTC and how it may apply to their foreign earnings.