Foreign Tax Credit
A U.S citizen, resident alien or Domestic Corporation may claim a credit for foreign income taxes paid or incurred.
The credit is limited to the portion of the taxpayer’s pre credit U.S Tax.
Foreign income taxes that exceed the limitation can be carried back one year and forward up to ten years.
A taxpayer will be 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.
Using title passage rule in importing country that has lower tax rate in comparison to the U.S tax rate can provide significant opportunity to increase foreign source income that is taxed at a lower rate.
Blending low tax and high tax foreign source income with in a single foreign tax credit limitation can eliminate the excess credits on the high tax income.
Special look through rules apply to dividends, interest, rents and royalties received by a U.S shareholder from a controlled foreign corporation, as well as dividends received by a domestic corporation from a non-controlled section 902 corporation.
Deemed paid foreign tax credit
A domestic corporation cannot claim a dividend received deduction for a dividend from a foreign corporation.
Dividends from foreign subsidiaries are included in a domestic parent corporation’s U.S taxable income.
Domestic Parent Corporation can claim a foreign tax credit for foreign withholding taxes paid on the dividend as well as a deemed paid foreign tax credit for the foreign income taxes paid by a 10% or more owned foreign corporation.
A domestic corporation that operates abroad through multiple tiers of foreign corporations may also be eligible to claim deemed paid credits for taxes paid by second-tier through sixth-tier foreign corporations.
If a domestic parent corporation recognizes a dividend income which is net of any foreign income taxes paid by foreign subsidiary, the domestic corporation is allowed a deduction for those foreign taxes.
The U.S tax consequences of dividend repatriations depends on whether the foreign corporation is operating in a low tax or high tax jurisdiction.
A foreign corporation can usually claim a foreign tax deduction for interest and royalties paid to its U.S parent, whereas dividend distributions are not deductible.
Foreign Currency Transactions
The foreign branches and subsidiaries of domestic corporations often conduct business and maintain their books and records in the currency of the host country.
U.S Parent Corporation must translate the income and earnings remittances of a foreign branch in to U.S dollars.
A domestic corporation may realize currency exchange gains or losses.
Foreign income taxes paid must be translated into U.S dollars.
If a foreign subsidiary corporation pays a dividend in a foreign currency, the domestic corporation must translate it into U.S dollars.
If a domestic parent corporation receives a distribution of previously taxed income, it will recognize a currency gain or a loss equal to the difference between the dollar value of the distribution and taxpayer’s basis in the distribution.
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:
US Taxation of International transactions 9th Edition
Robert J. Misey Jr.
Michael S. Schadewald
Publishers: Wolter Kluwer, CCH Incorporated.