Topic 11: Foreign Tax Credits

Question 1

What is the importance of 865 Source Rules and how does it connect to foreign tax credits?

Answer 1

864 defines source rules for determining whether income is sourced within the US or outside the US, which is crucial for calculating the foreign tax exemption

Question 2

What factors are considered when determining whether a NRA/foreign corp is engage in a U.S trade/business?

Answer 2

Factors includes:
(a) Performance of personal services in the U.S
(b) presence of an office or fixed place of business in the U.S
(c) the nature and extent of trading activities in stocks, securities, and commodities conducted within the U.S.

Question 3

What is “effectively connected income” ad what are some examples?

Answer 3

ECI applies to NRA’s and foreign corp’s engaged in a U.S trade or business.
Examples include:
– income derived from assets used in the U.S business
–income where U.S business activities were a material factor in its realization

Question 4

Is income from sources outside the U.S. ever considered effectively connected to a U.S trade or business?

Answer 4

Yes, there are exceptions.
For instance, income attributable to a U.S office and meeting specific criteria, such as sales through that office, can be considered effectively connected.

Question 5

How is gain or loss form the sale or exchange of partnership interest treated under sourcing rules?

Answer 5

It is considered effectively connected to a U.S t/b the extent it does not exceed a specific amount, as determined under relevant regulations

Question 6

Who does FTC’s apply to?

Answer 6

US citizens, resident individuals, and domestic corporations

Question 7

What types of taxes are eligible for the FTC under 901?

Answer 7

foreign income, war profits, and excess profits taxes

Question 8

How does 903 expand the definition of creditable taxes?

Answer 8

By including taxes paid instead of a generally imposed foreign income tax

Question 9

what key req must a foreign tax satisfy to be creditable in the U.S.?

Answer 9

Must qualify ask an income tax in the U.S sense

Question 10

What did Rev Ruling 2011-19 determine regarding the UK’s remittance basis charge (RBC)?

Answer 10

The RBC is creditable income tax bc it meets the req’s outlined in §1.901-2

Question 11

What temporary relief does Notice 2023-55 provide regarding FTC regulations?

Answer 11

It allows TPs to apply prior rules for tax years beginning on or after 12/28/2021 and ending on or before 12/31/2023

Question 12

How is the FTC calculated?

Answer 12

As the proportion of U.S tax liability correseponding to the ratio of foreign source taxable income to total taxable income

Question 13

What are FTC baskets and why are they used?

Answer 13

Baskets are separate categories of income to which the FTC limitation is applied individually. This prevents high taxes foreign income in one basket from offsetting U.S taxes on low taxed foreign income in another basket.

To ensure high-taxed foreign income in one basket does not offset U.S taxes on low taxed foreign income in another basket

Question 14

What are the main foreign tax credit baskets?

Answer 14

GILTI, Foreign Branch Income, Passive Category Income, and General Category Income

Question 15

What specific areas fo the sourcing rules address (864)?

Answer 15

Trading activities in stocks, securities or commodities, income connected with the U.S. business, income from foreign sources, and gains from partnership interests

Question 16

What principle did Biddle V Com’r establish regarding FTC’s?

Answer 16

Foreign tax is creditable only if the U.S TP legally bears the tax’s economic burden of the tax. Even if a foreign country considers someone as paying a tax the U.S may not recognize that conception for credit purposes

Question 17

What does Revenue Ruling 2011-19 clarify about creditable foreign taxes?

Answer 17

Analyzes the UK’s remittance basis charge (RBC) levied on certain unremitted foreign income of UK residents who are not domiciled in the UK. It concludes that the RBC is a creditable income tax under U.S law bc it meets the reqs of 1.901-2

Question 18

what is the significance of Notice 2023-55 for the FTC?

Answer 18

stresses the importance of the 2022 regulations as a major shift in how “income tax” is defined for FTC purposes. It advises caution when interpreting the new regulations and determining the continued validity of guidance issued under the older rules.

The notice provides temporary relief from some of the strict req’s of the 2022 Final Regulations which limited the scope of creditable foreign taxes. TPs can elect to apply the previous more lenient rules for tax year 2022-2023. This relief helps prevent double taxation while the Treasury considers change to the regulations.

Question 19

Are digital service taxes (DSTs) creditable under Notice 2023-55?

Answer 19

No. The notice specifically excludes gross basis taxes, such as DSTs, from being creditable even under the temporary relief provisions.

Question 20

What is the purpose of the FTC limitation in 904?

Answer 20

To prevent TPs from using foreign tax credits to offset their U.S tax liability on U.S source income. The limit ensures the FTCs can only offset U.S tax on foreign source income.

Question 21

How is a FTC limit calculated?

Answer 21

Multiply TPs total pre-credit U.S tax liability by the ratio of their foreign source taxable income to their total taxable income

Question 22

What happens to excess FTCs that exceed the limitations?

Answer 22

They can be carried back 1 year& carried forward 10 years to offset future tax liabilities, subject to limits in those years.

Question 23

What principle was established because of Biddle v Cm’r?

Answer 23

Established the principle that a creditable foreign tax must meet U.S. standard of what constitutes incomes tax. U.S later adopted a stricter interpretation, requiring foreign taxes to adhere more closely to U.S. concepts of income taxation.

Question 24

Who is considered the “technical taxpayer” for foreign tax credit purposes?

Answer 24

The “technical taxpayer” is the person who is legally responsible for paying the foreign tax according to the laws of the foreign country.

Question 25

Can a U.S. taxpayer claim a foreign tax credit if someone else pays their foreign taxes?

Answer 25

Yes, a U.S. taxpayer might still be able to claim a foreign tax credit even if another party makes the actual payment. The “technical taxpayer” rule considers who is legally liable for the tax under the foreign country’s laws, regardless of who physically transfers the funds.

Question 26

How is the foreign tax credit handled when a U.S. company owns foreign entities that form a consolidated group for foreign tax purposes?

Answer 26

The U.S. tax regulations strive to align the foreign tax credit with the income generated by the specific foreign entity within the consolidated group. This prevents mismatches between the foreign tax credit rules and the U.S. rules for taxing income earned through foreign subsidiaries.

Question 27

What happens if a foreign government assumes a U.S. taxpayer’s foreign tax liability as part of a business transaction?

Answer 27

If the foreign government’s assumption of tax liability is essentially compensation for services, goods, or property provided by the U.S. taxpayer, the U.S. taxpayer might still be eligible for the foreign tax credit. This recognizes the economic substance of the transaction and aims to prevent double taxation.

Question 28

What are “net contracts” and how do they impact the foreign tax credit?

Answer 28

A “net contract” is an agreement where a foreign government assumes a U.S. taxpayer’s foreign tax liability, essentially incorporating the tax into the contract price for services, goods, or property. The U.S. tax regulations recognize net contracts, and U.S. taxpayers may still be able to claim a foreign tax credit in these situations.

Question 29

What factors should taxpayers consider when determining who can claim the foreign tax credit if someone else paid the foreign taxes?

Answer 29

To determine who can claim the foreign tax credit in these complex scenarios, taxpayers should carefully analyze the:
●Specific wording of the foreign tax laws
●Nature of the relationship between the parties involved
●Terms outlined in any contractual arrangements
●Overall structure of the cross-border transactions This fact-specific analysis is crucial to understanding the true economic substance of the arrangement and applying the foreign tax credit correctly.

Question 30

What determines if a foreign tax is creditable?

Answer 30

A foreign tax can only be credited if it meets certain conditions, including that it is not refundable or linked to a subsidy.

Question 31

What if there are differences in taxable income due to asset basis?

Answer 31

Sometimes, a tax that should be creditable may be disallowed if the taxable income differs between the U.S. and the foreign country due to asset valuation differences.

I.R.C. § 901(m) prevents the crediting of foreign taxes on income not recognized by the foreign country due to differences in asset valuation, especially after certain transactions.

Question 32

Why can’t a taxpayer claim a foreign tax credit if a refund is possible?

Answer 32

If a taxpayer can get a refund on a foreign tax (like a withholding tax), that amount cannot be credited against U.S. taxes.

Question 33

How do subsidies affect the creditability of foreign taxes?

Answer 33

If a part of a tax payment is returned as a subsidy, that portion is not creditable against U.S. taxes.

Question 34

What is the basic rule regarding creditability of foreign taxes under I.R.C. § 901(m), and what is the de minimis exception?

§ 901(m) addresses the creditability of foreign taxes paid on transactions that result in asset valuation differences between U.S. and foreign tax laws, particularly following certain acquisitions

Answer 34

If the total basis difference is less than $10 million or 10% of the total U.S. tax basis, the complex rules of I.R.C. § 901(m) generally don’t apply, simplifying taxpayer obligations.

Question 35

What is the indirect credit in simple terms? (deemed paid credit)

Answer 35

The indirect credit allows U.S. taxpayers to claim a credit for foreign taxes paid by a foreign corporation when they receive dividends from that corporation. This was originally allowed under I.R.C. § 902 but was repealed in 2017.

Question 36

What is the “attribution requirement” introduced by the 2022 Final Foreign Tax Credit Regulations?

Answer 36

Essentially mandates that the foreign tax base align with US sourcing principles. This req mandates that foreign tax base align with US principles of nexus, or connection bw TP and the income being taxes.

IE: Foreign tax on royalties to be creditable, the sourcing rule of the foreign country must be based on the place of use of the intangible property, similar to U.S rules

Question 37

How does Notice 2023-55 address the attribution requirement?

Answer 37

TP can get temporary relief for attribution req/ they can fill it and get credits for foreign taxes paid by CFCs that would otherwise fail.taxpayers to disregard the attribution requirement when determining the creditability of foreign taxes during the relief period (tax years 2022 and 2023).

For instance, under the 2022 rules, a foreign withholding tax on royalties would typically be non-creditable unless the foreign country sources royalties based on the “place of use” like the U.S. does. However, with the Notice in effect, taxpayers can disregard this rule for 2022 and 2023.

Question 38

What are some examples of foreign taxes that might be impacted by the attribution requirement?

Answer 38

●Withholding taxes on royalties and services imposed by countries that base their rules on the payor’s residence rather than the U.S. sourcing rules.
●Brazil’s corporate income tax (prior to 2024) due to differences in transfer pricing rules compared to the U.S. arm’s length standard.

Question 39

What is the general rule regarding the creditability of gross-based taxes under Notice 2023-55?

Answer 39

Foreign taxes imposed on a gross receipts or gross income basis are generally not creditable, except for taxes on
●Investment income not derived from a trade or business.
●Wage income

Question 40

Why are gross-based taxes generally excluded from the foreign tax credit?

Answer 40

Gross-based taxes often deviate from U.S. principles of net income taxation and may not effectively alleviate double taxation. They may also raise concerns about the creditability of certain taxes, such as digital services taxes (DSTs), which often utilize a gross receipts basis

Question 41

What are some key considerations for taxpayers when applying the relief provided by Notice 2023-55?

Answer 41

Consistent application by all members of a consolidated group.
●
All-or-nothing approach: The relief must be applied to all foreign taxes paid or accrued during the relief year.
●
No double benefit: A taxpayer cannot claim both a credit and a deduction for the same foreign tax

Question 42

What is the “technical taxpayer rule” in the context of foreign tax credits? (based on notice 2023-55)

Answer 42

This rule focuses on who bears the legal liability to pay the tax under the foreign country’s laws, regardless of who physically remits the payment.
For a U.S. TP to claim a FTC, they must be the entity legally obligated to pay the tax in the foreign jdx. This concept is highlighted in our conversation history and is crucial for determining credit eligibility, especially when dealing with complex corporate structures or contractual arrangements where another party might settle the foreign tax liability on behalf of the U.S. taxpayer.

Question 43

List the key rules affected for Notice 2023-55

Answer 43

Attribution Req, Cost recovery req, and net income req

Question 44

How does the Notice affect the cost recovery requirement from the 2022 regulations?

Answer 44

Notice 2023-55 allows taxpayers to revert to the more lenient standards of the 1983 Regulations, suspending the strict cost recovery requirement introduced in the 2022 regulations.

The 2022 regulations have a strict cost recovery requirement, mandating that the foreign tax base allows for deducting significant costs and expenses similar to U.S. tax principles. This caused uncertainty for taxpayers. Notice 2023-55 allows them to revert to the more lenient standards from the 1983 Regulations for the relief period

Question 45

What does the net income requirement state regarding creditability of foreign taxes?

Answer 45

Net income req-for a foreign tax to be creditable under FTC then it must be imposed on net income not GI. Tax must be based on E&P of TP after deducting relevant costs and expenses. only taxes on actual profit will be eligible for credit. Avoids credits for taxes that dont reflect the TPs economic activity or burden. Many gross based taxes won’t qualify for credit under US tax law which can lead to double taxation if the foreign country levies these taxes without providing a credit

The Notice emphasizes that gross-based taxes (what your taxed @ gross income without looking at expenses or deds- dont take into account sales tax, gross receipts tax-total revenue of company, and digital services tax) generally do not qualify for the credit, except for certain taxes on investment income and wage income.

This requirement predates the 2022 regulations but is further emphasized in Notice 2023-55. The Notice reiterates that gross-based taxes (those levied on gross receipts or gross income) generally fail this requirement and are not creditable. Exceptions exist for taxes on investment income not derived from a trade or business and wage income. This exception aims to prevent the creditability of digital services taxes, which are often gross-based.

Question 46

What are the overall effects of Notice 2023-55 on taxpayers?

Answer 46

The Notice reduces compliance burdens by allowing familiar rules, increases potential for foreign tax credits, but leaves some uncertainty as it is a temporary measure pending further guidance from the Treasury and IRS.