Foreign Tax Credit §901
•§901 authorizes an elective foreign tax credit (“FTC”)
•If FTC is taken foreign taxes are not deductible under §275.
•FTC can also be taken for other taxes paid in lieu of an income tax.
Foreign Tax Credit §901(j)
•No FTC is available for foreign taxes paid to:
–Governments the US doesn’t recognize
–Governments the US has severed diplomatic relations with or simply
doesn’t have relations
–Governments which the Secretary of State has designated as a foreign
country which repeatedly provides support for acts of international
What is a Creditable Foreign Tax
•Payment must be a tax – voluntary payments are not deductible
–Taxpayers must exhaust all effective and practical means of lowering
foreign taxes. Reg. §1.901-2(e)(5).
–No need to litigate if, in good faith, taxpayer receives an opinion from a
foreign tax advisor that litigation would be unsuccessful. Reg. § 1.901-
–Payment cannot be for specific economic benefit, i.e. the right to extract
oil from the ground. Reg. §1.901-2(a)(2)(i).
What is a Creditable Foreign Tax cont’d
•Whether a tax is creditable is determined based on a broad view of the tax
•Only an income tax is creditable
–Even if enacted by a political subdivision
–Foreign tax is only creditable if “predominant character… is that of
an income tax in the US” or “likely to reach gain” Reg. §§1.901-2(a)(1)(ii)
§960 Deemed Paid Foreign Tax Credit
•§960 – applies §902 to subpart F inclusion as if it were a dividend, when a
United States corporation is charged with subpart F inclusions from a CFC
meeting certain ownership requirements (10% of vote).