Maximizing Foreign Tax Credits: Planning and Compliance after Tax Cuts Jobs Act (Currently Unavailable)

Author: William J. Seeger

The purpose of the Foreign Tax Credit (FTC) is to provide a U.S. person relief from double taxation. This course will provide a practical analysis of the foreign tax credit with helpful tips on how U.S. businesses can use the credit and file Form 1118 to mitigate the effects of double taxation. This material will help in understanding the essential concepts, rules and requirements necessary to properly understand the implications for U.S. taxpayers of taking a foreign tax credit.

The foreign tax credit is intended to relieve corporations of a double tax burden when their foreign source income is taxed by both the United States and the foreign country. A determination is necessary regarding whether income is US Source Income- originating from within the U.S. or Foreign Source Income- originating outside of the U.S. Income must be properly apportioned between US source and Foreign Source. These sourcing rules are governed under IRC §§ 861-865. IRC §1.861-20 provides detailed guidance on how to match foreign income taxes with income.

The Tax Cuts Jobs Act (TCJA) made important changes to U.S. taxation of international income affecting the Foreign Tax Credit calculation. These changes included the introduction of a participation exemption through a dividends received deduction for certain dividends in section 245A. Further, TCJA introduced a new income concept: Global Intangible Low-tax Income (GILTI). GILTI is subject to current U.S. taxation. Under previous law, this type of foreign earnings was deferred.

Several Foreign Tax Credit provisions were changed, including repeal of section 902, which allowed deemed-paid credits in connection with dividend distributions based on foreign subsidiaries' cumulative pools of earnings and foreign taxes. TCJA also added two separate limitation categories for foreign branch income and amounts includible under the GILTI provisions. Additionally, the TCJA changed how taxable income is calculated for purposes of the Foreign Tax Credit limitation by disregarding certain expenses and repealing the use of the fair market value method for allocating interest expense. While section 904 generally allows foreign taxes to be carried back one year and then carried forward ten years, the TCJA does not permit GILTI basket foreign tax credit carrybacks or carryforwards.

Publication Date: September 2021

Designed For
Essential for all practitioners who deal with cross-border tax compliance and planning issues — and is especially important today as the IRS has aggressively increased scrutiny and enforcement activity in the international tax area. Professionals in public practice and in industry will benefit from this program. Business tax and finance executives, directors, managers and staff; CPAs; Enrolled Agents; tax preparers and staff; accountants, attorneys and financial advisors who work with and advise businesses and individuals that have cross-border operations, activities and issues.

Topics Covered

• What is a creditable foreign tax?
• Sourcing rules and how the sourcing rules limit the ability to credit foreign taxes
• Strategies for eliminating excess foreign tax credits
• Substantiation requirements for proof of foreign income taxes paid
• Preparing Form 1118
• The difference between the direct foreign tax credit and the deemed paid foreign tax credit
• Basket limitations for passive limitation income and general limitation income

Learning Objectives

• Identify foreign tax credits and how it works
• Identify opportunities where the foreign tax credit can eliminate double taxation on foreign source income
• Recognize the substantiation and compliance requirements for claiming foreign tax credit with Form 1116 and Form 1118
• Differentiate which foreign tax credit is also referred to as the deemed paid credit
• Recognize and apply the formula for computing the foreign tax credit limitation
• Describe which IRS Form is used to determine the foreign tax credit
• Recognize which formula is used with respect to sourcing manufactured inventory
• Identify special sourcing rules
• Differentiate foreign tax credits and how they correlate to IRC sections
• Describe passive basket income
• Identify the correct number of types of FTCs
• Identify an example of foreign payments that are creditable as taxes
• Recognize which of the following forms is used by Corporations to claim the FTC

Level
Basic

Instructional Method
Self-Study

NASBA Field of Study
Taxes (1 hour)

Program Prerequisites
None

Advance Preparation
None