TAX 9869 Lecture Notes - Lecture 31: Tax Treaty, Intangible Property, Tax Rate
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Class 5: 6/22/2020
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One has a choice to take credit or deduction
• In the same year you cannot do both!
• Cannot take a credit for some FT and deduction for other FT (foreign
taxes)
• Every year its a choice (credit or deduction)
• Ex: talked about FTC limitation. Can only take FTC against US tax
liab on foreign source income
• Must have FSI
• Lets say not enough FSI (you are limited)- you have excess
credits → carryback 1 yr/fwd 10.
Prof. Formula: FTC limitation: FSI * effective US tax rate (THIS WILL
BE ON EXAM)
(this isnt in IRC)
This is the formula used IRL; actual formula in code is different
Net FSI= foreign source income - deductions
IRC Formula: FSI (net)/Worldwide Income * US Tax you have to pay
EX: Person’s FSI = 1000, Worldwide income = 5000, US tax to pay =
2000
IRC Formula: 1000/5000 * 2,000 = 20% * 2,000 = 400
So limitation will be $400. That's the amount of foreign tax
you can take
40% Tax rate = effective tax rate bc (2000/5000=40%)
Prof Formula: FSI * effective US tax rate = 1000 * 40% = 400
Both formulas = same result
US ETR will be given
• Take your tax liab/ taxable income = ETR (Effective tax rate)
• Any question w/ a corp = 21%
• Individ = 37%
• Highest corp and individual rates
FTC limit is further broken down by baskets
• This means that you have not only to figure out what FSI is but you
also must figure out which basket the FSI goes into
• Baskets further limit amount of foreign taxes you can take