4.61.10 Foreign Tax Credit

Manual Transmittal

March 26, 2020

Purpose

(1) This transmits revised IRM 4.61.10, International Examination Guidelines, Foreign Tax Credit.

Material Changes

(1) Added IRM 4.61.10.1, Program Scope and Objectives, in accordance with the requirements described in IRM 1.11.2, Internal Management Documents System, IRM Process, and renumbered subsequent subsections accordingly.

(2) Revised to reflect updated tax law per the enactment of the Tax Cuts and Jobs Act (TCJA) (P.L.115-97). The following sections were updated or added for TCJA changes.

IRM Section Title
4.61.10.2 Foreign Tax Credit Examination Guidelines
4.61.10.2.1 2017 Law Changes
4.61.10.3 Other Statutory Provisions Addressing Eligibility for FTC
4.61.10.3.2 Other Taxpayers
4.61.10.4.2 Tax Must Be Based on "Income"
4.61.10.4.4 Denial of FTC for Certain Countries
4.61.10.4.5 Denial of FTC Associated with Covered Asset Acquisitions
4.61.10.4.7 Deemed Paid Credit
4.61.10.4.7.1 Requirements
4.61.10.4.7.2 Source of Credit
4.61.10.4.7.3 Indirect Credit Examination Techniques
4.61.10.4.8 Deemed Paid Credit Computation
4.61.10.4.8.2 Deemed Paid Credit Computation
4.61.10.6 Election of FTC
4.61.10.7 Calculating Creditable Tax
4.61.10.7.2 Accrual Basis Taxpayers
4.61.10.8.1 Foreign Tax Redetermination Defined
4.61.10.8.2 Effects of Exchange Fluctuations
4.61.10.9.1 Computing E&P
4.61.10.10.1 Classifying Income into Categories
4.61.10.10.2 Carryback and Carryover of Excess Credits
4.61.10.10.4 Special Sourcing Rules
4.61.10.11 Taxable Income and FTC
4.61.10.11.1 Expenses Related to Foreign Source Income
4.61.10.12 General Examination Guidelines
4.61.10.14 Alternative Minimum Tax Considerations for Pre-2018 Tax Years
Exhibit 4.61.10-1 Direct Taxes Examination Techniques
Exhibit 4.61.10-3 Comparison of Indirect Credit Computations for Pre-2018 Taxable Years
Exhibit 4.61.10-4 Internal Revenue Code Sections Dealing with Foreign Taxes

(3) Updated to reflect organizational and editorial changes.

Effect on Other Documents

IRM 4.61.10 dated May 1, 2006 is superseded.

Audience

Large Business and International (LB&I) and Small Business/Self Employed (SB/SE) personnel

Effective Date

(03-26-2020)

John E. Hinding
Director, Cross Border Activities (CBA)
Large Business & International Division

Program Scope and Objectives

  1. Purpose: This IRM section provides guidance and technical information in international examination techniques.

  2. Audience: LB&I and SB/SE personnel

  3. Policy Owner: Director, Cross Border Activities (CBA), LB&I

  4. Program Owner: CBA practice network

  5. Primary Stakeholders: LB&I and SB/SE personnel

Background

  1. Guidance in this IRM was updated to reflect new tax law per the enactment of the Tax Cuts and Jobs Act (P.L. 115-97).

Authority

  1. See IRM 4.46.1.1.2, LB&I Examination Process, General Information and Definitions, Authority.

Responsibilities

  1. LB&I and SB/SE personnel are responsible for following the guidance contained in this IRM section.

Acronyms

  1. Commonly used acronyms are listed below.

    Acronym Definition
    AMT Alternative Minimum Tax
    CBA Cross Border Activities
    CFC Controlled Foreign Corporation
    E&P Earnings and Profits
    FSI Foreign Source Income
    FTC Foreign Tax Credit
    FTR Foreign Tax Redetermination
    GAAP Generally Accepted Accounting Principles
    GSA Goods and Services Taxes
    GILTI Global Intangible Low Taxed Income
    IMD Internal Management Documents
    IRB Internal Revenue Bulletin
    LB&I Large Business & International
    PFIC Passive Foreign Investment Company
    PTEP Previously Taxed Earnings and Profits
    PTI Previously Taxed Income
    SB/SE Small Business/Self Employed
    TCJA Tax Cuts and Jobs Act
    VAT Value Added Taxes

Foreign Tax Credit Examination Guidelines

  1. The purpose of the Foreign Tax Credit (FTC) is to provide relief from double taxation. A U.S. person is subject to double taxation when income from foreign sources is taxed both by the United Sates and by the foreign country in which the income is earned. The credit for foreign income taxes may not exceed the U.S. tax (before the credit) on income from foreign sources. The United States does not impose additional tax on foreign source income when the foreign tax rate is higher than the U.S. tax rate. Conversely, if the tax rate on the foreign source income is lower than the U.S. tax rate, the FTC causes the overall tax on the foreign income to approximate the U.S. tax rate.

  2. This table summarizes the Code sections that authorize and limit the FTC:

    Code Section Description
    245A(d) Disallows any claim for FTCs with respect to any dividend for which a deduction is allowed under IRC 245A.
    245A(e) Disallows any claim for FTCs with respect to hybrid dividends for which a deduction is not allowed under IRC 245A by IRC 245A(e).
    901 Allows direct credit for taxes paid to a foreign country by a U.S. taxpayer based on realized net income.
    902 Allows deemed paid or indirect credit for foreign taxes based on the proportion of taxes paid by a corporation on its distributed earnings and profits. IRC 902 was repealed by the TCJA for tax years beginning after 2017, but is still effective for pre-2018 distributions to U.S. shareholders with 10% or greater voting interests in the distributor foreign corporation.
    903 Allows direct credit for taxes (typically foreign withholding taxes based on gross receipts) paid in lieu of the generally imposed net income tax.
    904 Limits the amount of credit available in each year, including carryback and carryover of credit.
    905 Provides guidelines on foreign tax adjustments, redeterminations and proof of credits.
    906 Allows the foreign tax credit for nonresident alien individuals and foreign corporations engaged in a trade or business in the United States.
    907 Contains credit limitation for foreign oil and gas income.
    908 Reduces the FTC for participation in international boycotts.
    909 Defers the creditability of foreign taxes that are paid in connection with a foreign tax credit splitting event until the taxpayer takes the related income into account.
    960 Allows an indirect credit for taxes deemed paid with respect to inclusions under IRC 951 or IRC 951A, and certain taxes deemed paid with respect to previously taxed income distributions.
  3. There are two types of FTCs:

    1. Direct credits are foreign taxes paid or accrued by the U.S. taxpayer on foreign branch income, withholding taxes paid on Fixed, Determinable, Annual or Periodic (FDAP) income received, and payments made to a foreign country in the taxpayer’s capacity as a partner in a foreign partnership.

    2. Indirect or deemed paid credits are for taxes paid by controlled foreign corporations with 10 percent U.S. shareholders for pre-2018 tax years. For post-2017 tax years, indirect or deemed paid credits are for taxes paid by foreign corporations with U.S. shareholders.

2017 Law Changes

  1. The FTC regime changed in 2017. For tax years beginning after December 31, 2017, modifications to FTC were made under the Tax Cut and Jobs Act (TCJA).

    1. With respect to domestic corporations, the deemed paid credit under IRC 960(a) is based on current-year foreign income taxes properly attributable to subpart F inclusions.

    2. The deemed paid credit under IRC 960(d) for foreign income taxes properly attributable to tested income included under IRC 951 for GILTI is limited to 80 percent of the inclusion percentage of the aggregate tested foreign income taxes. Deemed paid tax credits on GILTI are not allowed to be carried back or forward to other tax years.

    3. Deemed paid tax credits associated with the subpart F inclusion under IRC 965(a) are allowed. Note that IRC 902 and IRC 960, prior to amendment by TCJA, apply. Foreign tax credits disallowed under IRC 965(g) may not be taken as a deduction. The pooling regime and indirect credits with respect to dividends from eligible foreign corporations under IRC 902 has been repealed for tax years of foreign corporations beginning after 12/31/2017 and tax years of U.S. shareholders within which such taxable years of foreign corporations end.

    4. Income is categorized into six possible categories, each with a separate limitation.

    5. A foreign tax credit or deduction for foreign taxes paid or accrued is not allowed by a corporate U.S. shareholder with respect to any dividend, for which a 100 percent Dividends Received Deduction (DRD) is allowed under IRC 245A.

    6. New IRC 904(g)(5) permits a taxpayer with a pre-2018 unused overall domestic loss to elect to re-characterize more than 50 percent (up to 100 percent) of its U.S. source income as foreign source income in taxable years beginning in 2018 through 2027. Previously, a taxpayer could re-characterize only up to 50 percent of its U.S. source income as foreign source income eligible to be sheltered from U.S. tax with foreign tax credits in any given year.

    7. New IRC 904(b)(5) affects the FTC limitation with respect to expenses allocable to certain stock or dividends for which a dividends received deduction is allowed under IRC 245A.

    8. IRC 864(e) was modified to repeal the use of the fair market value method for apportioning interest expense.

    9. Revised IRC 863(b) sourcing rule for certain income from the sale of inventory produced in whole or in part by the taxpayer in one country and sold or exchanged in another country. Gross income from the sale of mixed source inventory will now be based on the place of production activities. Pre-TCJA rules allowed a taxpayer to source the gross income between the place of production and place of sale.

  2. The foreign source income categories are:

    1. IRC 951A Inclusion (GILTI)

      Note:

      IRC 951A income category apples for tax years of foreign corporations beginning after 12/31/2017 and tax years of U.S. shareholders within which such taxable years of foreign corporations end.

    2. Foreign Branch Income

      Note:

      Foreign branch income category apples for tax years of foreign corporations beginning after 12/31/2017 and tax years of U.S. shareholders within which such taxable years of foreign corporations end. A branch with foreign source income and foreign tax expense that does not meet the definition of "foreign branch" will be reported in either the general limitation or passive categories.

    3. Passive Income

    4. General Limitation Income

    5. IRC 901(j) Income, and

    6. Income Re-sourced by Treaty

    Note:

    Additional categories of income may apply (see Treas. Reg. 1.904-4(m)). The taxpayer may have multiple categories of income re-sourced by treaty for different treaties, or for different categories of income, such as General Limitation and Passive Income, under each treaty.

  3. IRC 904(d) provides that the FTC limitation of IRC section 904(a)–(c) applies separately to the income in each category.

Other Statutory Provisions Addressing Eligibility for FTC

  1. The first step in an FTC examination is to assess the taxpayer’s eligibility for the credit. Taxpayers subject to U.S. taxation on foreign source income are generally entitled to the FTC.

  2. U.S. citizens and domestic corporations may generally claim a credit for the eligible foreign taxes they pay or accrue. Foreign taxes paid on the following types of income, which are generally exempt from U.S. taxation in the hand of U.S. citizens, are not eligible for a FTC:

    1. Income from sources within possessions of the United States by certain bona fide residents of the possession (see IRC 931, IRC 932, and IRC 933)

    2. All excluded foreign earned income (see IRC 911(d)(6))

  3. Foreign corporations and individuals that are not otherwise citizens and not residents of the United States, and corporations residing in a U.S. possession (except Puerto Rico) are generally not subject to tax on non-US source income and so are not entitled to the FTC.

Resident Aliens

  1. Resident aliens in the United States are subject to U.S. taxation and are, therefore, eligible for the FTC. The following limitations apply:

    1. The general rules applicable to U.S. citizens apply to this category of taxpayers.

    2. Only those foreign taxes on income earned while in the status of a resident are eligible for credit (consult the specific treaty involved, if there is one).

    3. Aliens residing in U.S. possessions (excluding those in Puerto Rico for the entire year) do not get the benefit of the FTC, since they are not generally subject to U.S. taxation on non-U.S. source income.

Other Taxpayers

  1. Nonresident aliens and foreign corporations are generally eligible for FTC relating to creditable foreign taxes paid on income effectively connected with a U.S. trade or business (IRC 906).

  2. Taxes paid to U.S. possessions by U.S. citizens and resident aliens are eligible for credit. "U.S. possessions" include Puerto Rico, Guam, the Northern Mariana Islands, American Samoa and the Virgin Islands for the purposes of the foreign tax credit. A credit under IRC 30A is available to certain corporations that claimed the credit for certain Puerto Rico economic activity after 1995 but before tax years beginning after 2017.

  3. Other taxpayers eligible for the FTC are:

    • Exempt organizations with unrelated business taxable income (IRC 515)

    • Estates and Trusts (IRC 642(a)(2))

    • Domestic Insurance Companies (IRC 841)

    • Partners in partnerships (IRC 901(b)(5) and IRC 702)

    • Shareholders of Regulated Investment Companies (IRC 853)

    • Domestic Corporate U.S. Shareholders of Controlled Foreign Corporations, Noncontrolled Foreign Corporations and Passive Foreign Investment Companies (see IRM 4.61.7, Controlled Foreign Corporations, for special rules)

    • Shareholders of S Corporations (IRC 1373(a))

  4. For income tax liability and return filing requirements pertaining to specific possessions, see IRC 931, IRC 932, IRC 933, and IRC 935.

Creditable Foreign Taxes

  1. Only foreign source income, war profits, and excess profits taxes qualify for FTC (IRC 901(b)).

  2. To be creditable, a foreign tax must be:

    • A compulsory payment to a foreign government, and

    • An income tax, or a tax in lieu of an income tax

  3. Tax on income in the U.S. sense is a tax on net gain. A tax is likely to reach net gain if it meets three criteria:

    • Realization test (imposed generally when income is "realized" under the Internal Revenue Code)

    • Gross receipts test (based on the fair market value of amount realized)

    • Net income test (gross income is reduced by expenses)

Credit Applicable Only to Taxes

  1. The following are examples of payments not creditable as taxes:

    • Penalties, interest, fines and custom duties

    • Compulsory loans

    • Amounts reasonably certain to be refunded, credited, rebated, abated, or forgiven

  2. Principles of U.S. law determine whether a payment is a tax. A payment to a foreign country is not a tax if the payor receives, or will receive, a specific economic benefit in exchange for the payment.

  3. Soak-up taxes are not creditable. A soak-up tax means that the U.S. taxpayer is liable for the tax only to the extent that the tax is creditable.

Tax Must Be Based on "Income"

  1. A tax not based on income might be a sale, turnover, transaction, output, production, franchise, social security tax on employee wages, asset or property tax not qualifying for credit. Value Added Taxes (VATs) and Goods and Services Taxes (GST's) do not qualify for credit.

  2. The Service does not generally issue creditability determinations. However, the Internal Revenue Bulletin (IRB) may occasionally include a Notice pertaining to certain discreet creditability issues.

Taxes "In Lieu of" Income Taxes

  1. A tax "in lieu of" an otherwise generally imposed tax on income must be a tax within the meaning of Treas. Reg. 1.901–2(a)(2) and meet the substitution requirements of Treas. Reg. 1.903–1(b).

Denial of FTC for Certain Countries

  1. The FTC is denied for taxes paid to countries with which the United States has severed diplomatic relations or which are designated as supporting international terrorism (see IRC 901(j)).

  2. Taxes paid to certain countries specified in IRC 901(j) are generally not creditable for years beginning after December 31, 1986 (see Rev. Rul. 2005-3 and IRC 901(j)).

Denial of FTC Associated with Covered Asset Acquisitions

  1. FTC is denied for foreign taxes attributable to foreign source income not subject to U.S. taxation by reason of covered asset acquisitions (see IRC 901(m)).

Payment or Accrual of the Foreign Tax

  1. A U.S. taxpayer that pays tax to a foreign country may claim a direct credit on either the cash basis or the accrual basis, subject to the limitations described below.

  2. The term "direct tax credit" applies to foreign taxes paid outright by a U.S. taxpayer. Either the person claiming the credit or a withholding agent may make the actual payment. The foreign tax must be the liability of the person claiming the credit.

  3. Examination techniques applicable to the review of direct taxes are presented at Exhibit 4.61.10–1.

Deemed Paid Credit

  1. For pre-2018 tax years, indirect credit is a computed amount of credit related to an actual or deemed distribution to an eligible corporate shareholder. The amount of the credit is proportionate to the amount of foreign income taxes the corporation making the distribution paid on its Earnings and Profits (E&P). For post-2017 tax years, indirect credit is a computed amount of credit properly attributable to an inclusion by an eligible corporate shareholder under IRC 951 , or IRC 951A , or a distribution under IRC 959 S (see also IRC 960) . Indirect (or deemed paid) credit is attributable to the foreign income tax paid by the foreign corporation.

Requirements
  1. There are several prerequisites to claiming an indirect credit from a first tier foreign corporation:

    1. The U.S. shareholder must elect to claim the FTC. A U.S. shareholder with respect to a foreign corporation is defined under IRC 951(b) as owning at least 10 percent of the voting stock or 10 percent of the value of all classes of stock.

    2. The U.S. shareholder must have an actual distribution or deemed inclusion (IRC 951) pre-2018, or an actual distribution of previously taxed E&P post-2017.

    3. The foreign corporation must have paid an income tax that is properly attributable to such distribution or income inclusion.

    4. The U.S. shareholder must include the deemed paid taxes (IRC 78 gross-up) in income.

Source of Credit
  1. Indirect credits result from:

    1. Dividends received (cash or property) or inclusions from a foreign affiliate per IRC 902 , IRC 951 or IRC 959 in a pre-2018 tax year.

    2. Inclusions reported under IRC 951 or IRC 951A and distributions of previously taxed earnings and profits (PTEP) under IRC 959 per IRC 960 in a post-2017 tax year.

    3. Mandatory income inclusion under IRC 965(a) for a specified foreign corporation.

  2. For pre-2018 tax years, as long as the U.S. shareholder meets the ownership requirements of IRC 902(b), it may claim deemed paid credits for taxes paid by second-, third-, fourth-, fifth-, or sixth-tier corporations that are controlled foreign corporations. In order to claim the FTC from a lower tier, a U.S. shareholder must meet all of the following conditions:

    1. The first-tier foreign corporation must own at least 10 percent of the voting stock of the second-tier foreign corporation.

    2. The U.S. shareholder must own indirectly at least 5 percent of the voting stock of the lower tier corporation.

    3. The lower tier corporation may not be below the sixth tier (or, for post-1997 years, the sixth tier).

  3. For post-2017 tax years, as long as the U.S. shareholder qualifies under IRC 960(a), it may claim deemed paid credits for taxes paid from any lower tier controlled foreign corporation, regardless of tier level. For post-2017 tax years, the repeal of IRC 902 means that there are no longer tier limits.

  4. For pre-2018 tax years, to compute an indirect credit from a lower tier, use the same formula that is used to compute an indirect credit from a first-tier subsidiary (see IRC 902(b) ).

  5. An indirect credit from a lower tier for inclusions under IRC 951(a)(1) for post-2017 tax years is the foreign taxes attributable to such inclusion.

Indirect Credit Examination Techniques
  1. Many of the problems encountered in verifying indirect taxes are similar to those met in verifying direct taxes. For suggested examination techniques, see those applicable to direct taxes at Exhibit 4.61.10–1. Exhibit 4.61.10–2 contains techniques for examining deemed paid credits.

  2. Examiners verifying deemed paid credits must be alert for the following issues:

    1. Credits based on accrued taxes as opposed to actual tax payments

    2. Credits based on gross income taxes, without reduction for credits and rebates

    3. Credits based on non-income taxes (e.g., taxes similar to our FICA tax if based on beneficiary's age, life expectancy, or similar factors)

    4. Claims based on lower-tier credits for pre-2018 tax years, even though there have been no dividends paid by the lower tier, or the shareholder fails the 5 percent indirect ownership requirement

    5. Claims for appropriate foreign tax credit based on distributions excluded from income under IRC 959 (amounts previously taxed under subpart F and GILTI) and IRC 951A income

    6. Omission of the IRC 78 gross-up for the indirect credit claimed

    7. Verify that any IRC 960 deemed paid taxes being claimed relate to a foreign income liability which accrued in the controlled foreign corporation’s (CFC’s) current US tax year, regardless of whether or not that related foreign income is recognized by the US shareholder in the current tax year for US income tax purposes.

    8. Verify that the foreign income tax liability being claimed as an IRC 960 deemed paid FTC was attributable to one of these three income groups: IRC 951(a)(1) Subpart-F income, IRC 951A GILTI, or a previously taxed E&P (PTEP) income group. If the tax liability is not correctly included in one of these income groups (within any one of the IRC 904 categories of income), then the tax will be considered a non-creditable tax on the CFC’s "residual" income (Treas. Reg. 1.960-1(e)).

  3. Techniques for examining deemed paid taxes include:

    1. Requesting supporting documentation from the taxpayer

    2. Sampling transactions to test the quality of a taxpayer’s record keeping and reporting systems

  4. The following information may be necessary when verifying the E&P and taxes:

    1. A detailed breakdown, by year, of the post-1986 undistributed E&P and tax pools including the dates of payment of the taxes, and the exchange rates used to convert to U.S. dollars. For post-2017 tax years, examiners should verify allocation of current year taxes to income groups for subpart F income, tested income, residual IRC 245A E&P, and PTEP groups (eligible for deferred IRC 960(b) credits on distribution of the previously taxed income (PTI)). Taxes assigned to a group with no inclusion, or to the IRC 245A group, cannot be deemed paid.

    2. The reporting packages regularly sent to the taxpayer by the foreign affiliate, or prepared by the taxpayer for each affiliate. These packages should include: adjustments made by the entity to convert the statements to U.S. GAAP; detailed schedules on reserves, miscellaneous accruals, and accounts payable; subpart F and GILTI schedules; and internal financial statements.

    3. The detailed audited financial statements, including all footnotes, translated into English.

    4. A detailed list of all adjustments to U.S. tax and accounting standards made by the taxpayer (including detailed computations) per Treas. Reg. 1.964-1. This may be part of the tax package, which contains all adjustments made by the taxpayer’s U.S. tax department.

    5. A trial balance for both the beginning and ending of each year is useful in reviewing changes in reserve balances.

      Note:

      A detailed schedule of miscellaneous accruals and/or accounts payable may be an adequate substitute.

    6. The foreign income tax return, with pertinent portions translated into English including: the taxable income line; the tax computation schedule showing credits and payments; and the reconciliation of book to return (similar to the schedule M).

    7. Proof of payment of the income taxes (should tie to the liability in (f) above).

    8. Tax assessment notices showing any adjustments to the return amounts.

    9. Translated copies of reports for exams done by foreign governments.

    10. Detailed schedules showing the taxpayer's computations of CFC net tested income used in determining the inclusion for GILTI under IRC 951A. Examiners would want to ensure only foreign taxes properly attributable to tested taxes are included as deemed paid taxes. This would exclude, for example, foreign taxes from tested loss CFCs and foreign taxes properly attributable to taxpayer's net deemed tangible income return.

Deemed Paid Credit Computation

  1. The TCJA, enacted on December 22, 2017, completely revised the deemed paid foreign tax credit rules. IRC 902 was repealed with respect to distributions for tax years beginning after December 31, 2017. Deemed paid credits are only available under IRC 960.

  2. To transition to the participation exemption system of taxation, the TCJA, provides for a one-time inclusion of accumulated post-1986 E&P under IRC 965(a). The post-1986 foreign income taxes are used to determine deemed paid credits with respect to the IRC 965(a) inclusion. All taxpayers, that are U.S. shareholders, are required to use Worksheet G in Pub 5292 to determine the foreign taxes deemed paid with respect to the IRC 965(a) inclusion. Worksheet H is used for the portion of such deemed paid foreign taxes disallowed under IRC 965(g).

  3. Generally, under IRC 960(d), a domestic corporation is entitled to a deemed paid credit equal to 80 percent of the foreign income taxes attributable to a GILTI inclusion under IRC 951A.

  4. Although TCJA provides for a one-time repatriation recognition of accumulated post-1986 E&P per IRC 965(a), it is still necessary to be aware of the rules applicable to dividends sourced from pre-1987 years for two reasons:

    1. Distributions of pre-1987 E&P or E&P accumulated before there was a 10 percent U.S. shareholder are still characterized under the old rules.

    2. While the general theory of the indirect credit has not changed, the mechanics of the computations are different.

Pre-1987 Credit Computation
  1. The formula for deemed paid FTC for distributions sourced from pre-1987 years is:
    Foreign Tax × (Dividend ÷ Accumulated E&P) = FTC

  2. Under the pre-1987 law, the FTC calculation uses annual accumulated profits.

  3. There are specific rules to follow regarding the years to which the dividends apply and the order of the application:

    1. Dividends reduce the E&P of a specific year on a last-in-first-out basis.

    2. If a dividend is paid out of the accumulated profits of more than one year, separate computations are necessary for each year.

  4. Prior to 1987, taxpayers were able to use the annual computations to cycle their earnings and distributions in order to minimize U.S. tax. Subsidiaries with E&P deficits must carry back deficits and reduce the profits of earlier years per Rev. Rul. 74–550. This may result in the permanent loss of credit for the foreign taxes paid in a carryback year. To eliminate the timing advantages and mitigate the harshness of the NOL carryback rule, the computation for years after 1986 combines all post-1986 earnings and deficits.

Deemed Paid Credit Computation
  1. The formula for deemed paid foreign tax credit (FTC) for distributions or inclusions sourced from the post-1986 pools and related to foreign corporate taxable years beginning before January 1, 2018 is:
    Post-1986 Foreign Tax Pool × (Dividend ÷ Post-1986 Accumulated E&P Pool) = FTC

  2. The deemed paid tax credits (FTC) for inclusions under IRC 951(a) for foreign corporate taxable years beginning after December 31, 2017 are the foreign taxes attributable to such inclusion.

  3. The formula for deemed paid tax credit (FTC) for inclusions under section 951A for foreign corporate taxable years beginning after December 31, 2017 is:

    • 80 percent × inclusion percentage × pro rata share of aggregate tested foreign income taxes paid or accrued by CFCs

    The inclusion percentage is the U.S. shareholder’s GILTI inclusion divided by the aggregate of such shareholder’s pro rata share of the tested income of each CFC.

  4. Deemed paid taxes from a distribution from a CFC that is previously taxed earnings and profits excluded from income under IRC 959 are such foreign corporation's foreign income taxes as are properly attributable to such portion of the distribution and have not been previously deemed paid in the current or prior taxable years.

  5. For both pre-2018 and post-2017 tax years, dividends and inclusions are in functional currency. However, the foreign income taxes must be translated.

Substantiation Requirements

  1. IRC 905(b) requires that a taxpayer substantiates its FTC. Substantiation includes, but is not limited to, the following items:

    • Translated tax returns and payment receipts

    • A copy of relevant foreign tax law

    • Audited financial statements on U.S. tax and GAAP basis

    • Translated examination reports

    • Relevant tax treaties

  2. For guidance on evidence that is acceptable to establish the creditability of foreign taxes, see Treas. Reg. 1.905–2 and Rev. Rul. 67–308, 1967–2 C.B. 254. In order to prove that the taxes claimed are proper, the taxpayer must supply the original, a duplicate original, a duly certified or authenticated copy, or a sworn copy of:

    • Receipts for each claimed tax payment

    • Returns that are the basis of any tax accruals

    Note:

    The regulations require that the taxpayer provide certified translations of receipts and returns.

  3. Treas. Reg. 1.905–2(b) describes secondary evidence as evidence other than the actual receipt and tax return. Secondary evidence is only admissible if the taxpayer can establish to the satisfaction of the examiner that it is impossible to produce the receipt and or return.

    Note:

    Taxpayers may apply for a prefiling agreement on the adequacy of secondary evidence.

Election of FTC

  1. Taxpayers have an annual choice of electing FTC or deducting foreign taxes. Taxpayers may claim a credit in one year and a deduction the following year, or vice versa.

  2. Attaching a completed Form 1116 or Form 1118 to a U.S. tax return constitutes an election to take the FTC. An election by one member of a consolidated group binds all the corporations joining in the consolidated return. In the absence of an election, taxpayers may deduct foreign taxes meeting the requirements for deductibility under IRC 162 and IRC 164.

  3. Direct U.S. shareholder level foreign taxes not qualifying for credit are deductible in the same year qualifying foreign income taxes are creditable. Foreign taxes of a ten percent foreign corporation not qualifying for a credit are deductible from the foreign corporation's earnings and profits, but are not deductible on the Form 1120 .

  4. Taxpayers electing FTC may not take a deduction for any portion of the qualified foreign taxes for the taxable year. However, a computation of a net operating loss carryback or carryover may properly include a deduction for foreign income taxes.

Changing the Election

  1. Taxpayers may change or make their election at any time during the period that they may file a claim for credit or a refund (see Treas. Reg. 1.901-1(d)). See also IRC 6511(d)(3) for a special rule extending to 10 years the statute of limitations for filing a refund claim attributable to foreign tax credits.

Calculating Creditable Tax

  1. A qualified foreign tax is creditable when paid or accrued depending on the taxpayer’s method of accounting.

  2. IRC 905(a) allows cash basis taxpayers to claim credits for foreign taxes on the accrual basis.

  3. For accrual basis taxpayers, IRC 986 generally calls for the conversion of foreign taxes into U.S. dollars based on the average exchange rate for the year of the actual payment.

  4. Special spot rate conversion rules apply to accrual basis taxpayers where:

    • Taxes are paid more than 2 years after the taxable year to which taxes relate

    • Taxes are paid before the year to which the taxes relate

    • The taxpayer makes a spot rate election

    • Taxes are denominated in inflationary currency

      Note:

      The credit for an accrued tax must be revised if the tax is not paid within two years after the accrual year. If subsequently paid, such a tax will be translated at the rate in effect on the date of payment but may be claimed as a credit for the prior year to which the tax relates.

  5. For cash-basis taxpayers, taxes are converted into U.S. dollars based on the exchange rate on the date of payment.

  6. Refunds are translated at the rate used to translate the original payment (see IRC 986(a) and Treas. Reg. 1.905-3T(b)(2)). Use the last-in-first-out approach for lump sum refunds related to different payments (see Treas. Reg. 1.905-3T(b)(3)).

Cash Basis Taxpayers

  1. A cash basis taxpayer may elect to claim foreign tax credits using the accrual method. Once the accrual method is elected it must be used in all subsequent years.

Accrual Basis Taxpayers

  1. Taxes accrue when all events occur that fix the amount of the tax. Economic performance is not generally required. Reg. section 1.461-4(g)(6)(iii)(B). This rule applies regardless of whether the taxpayer elects to credit such taxes under IRC 901(a).

  2. Dixie Pine Products Company case addressed the issue of when the contested foreign taxes accrue for deduction purposes (44-1 USTC ¶9127, 320 U.S. 516, 64 S. CT. 364). The Court held that a contested tax accrues and is deductible only in the later year when there is a final determination of liability. However, this rule does not apply to the accrual of foreign taxes for FTC purposes. Once accrued, foreign taxes will relate back and may be claimed as credits in the tax year with respect to which the disputed tax is paid (see Rev. Rul. 84-125, 1984-2 C.B. 125; Cuba Railroad Co., 124 F Supp 182 (1954); Albemarle Corp. & Subsidiaries v. United States 797 F.3d 1011, 2015).

    Note:

    If a taxpayer chooses to deduct foreign taxes, an accrual does not relate back to the year a tax is in dispute.

Changes in the Amount of Foreign Taxes Claimed

  1. IRC 905(c) and Treas. Reg. 1.905–3 require taxpayers to notify the Service of changes in taxes paid or accrued.

  2. For cash basis taxpayers and where taxes are paid more than two years after the year to which they relate, the translation of tax payments is performed using the spot rate (i.e., the exchange rate on the date of payment). Conversion of refunds is based on the original payment dates (see IRC 986(a) ).

  3. Taxpayers failing to notify the Secretary of a foreign tax redetermination are subject to penalties under IRC 6689. If there are any previously undisclosed changes identified during the examination, ask the taxpayer to explain. An exception exists for taxpayers who can show that their failure to notify is due to reasonable cause.

  4. There is a ten-year statute of limitations for filing a refund claim when a U.S. taxpayer pays foreign tax relating to an earlier year. There is no statute of limitations for assessment when a foreign tax refund results in a U.S. tax liability and the taxpayer fails to notify the Secretary (see IRC 905(c) , Pacific Metals Corp., 1 TC 1028; and Texas Co. (Caribbean) Ltd., 12 TC 925).

Foreign Tax Redetermination Defined

  1. IRC 905(c) and Treas. Reg. 1.905–3(a) (for Foreign Tax Redeterminations (FTR) occurring in taxable years ending on or after December 17, 2019) define an FTR as a change in a foreign tax liability that may affect a U.S. taxpayer’s foreign tax credit. The term FTR includes:

    • Tax refunds

    • Additional tax assessments

    • If taxes that when paid or later adjusted differ from amounts accrued by the taxpayer

    • For accrual basis taxpayers, including taxpayers making a spot rate election, differences between the dollar value of the accrued foreign tax and the dollar value of the foreign tax actually paid attributable to fluctuations in the value of the foreign currency relative to the dollar between the date of accrual and the date of payment

    • Failure to pay an accrued tax within two years after the year to which the tax relates

    Note:

    The definition of an FTR is the same for direct and indirect credits.

  2. If the original tax is specifically related to a given category of income, then the refund shall be applied to that category of income. If an FTR results in taxes due, the applicable exchange rate is the date paid. If an FTR results in a refund or credit of foreign income taxes, the exchange rate is as of the time the original payment of the foreign taxes.

  3. An FTR of a direct foreign tax credit requires a correction to the original return. An FTR of a deemed paid tax in post-2017 tax years also requires a correction to the original return. A current year adjustment of an FTR that is solely the result of currency fluctuations is permissible, but only if the adjustment is the lesser of:

    • $10,000, or

    • 2 percent of the total amount of the foreign tax initially accrued with respect to that foreign country for the taxable year

    Note:

    A refund of a direct FTC or a post-2017 foreign tax redetermination that is converted into dollars will create an exchange gain or loss in the year the refund is received, in an amount equal to the difference between the dollar value of the refunded tax when the credit was claimed and the dollar value of the refund.

  4. When there is an FTR to an indirect foreign tax credit, adjust the tax pool and E&P pool in the year of the FTR, in a pre-2018 tax year. If there is an FTR to an indirect credit to a post-2017 tax year, amend the prior year foreign tax credit for the year to which such foreign taxes relate.

    1. When an FTR results in a redetermination of the U.S. tax liability, the taxpayer must comply with the Notice and Redetermination requirements of Treas. Reg. 1.905–4T. An FTR of an indirect FTC that does not require a redetermination of the U.S. tax liability may still be subject to reporting requirements (see Treas. Reg. 1.905–3T(d)(2) and Notice 90–26).

  5. Interest is restricted on a deficiency created by a refund of foreign tax until the date of the refund.

    Exception:

    If the foreign country paid interest on the refund, interest can be collected on the deficiency up to the amount that could otherwise be assessed under IRC 6601 (see Treas. Reg. 1.905-4T(e)).

Effects of Exchange Fluctuations

  1. The U.S. dollar is the base for U.S. income tax while foreign currency is the base for foreign tax. Therefore, the tax credit decreases or increases when the foreign currency depreciates or appreciates.

Earnings and Profits (E&P)

  1. Reserved

Computing E&P

  1. U.S. tax and accounting standards are applied to the foreign financial statements.

  2. IRC 404A limits the amount of the pension accrual that a taxpayer may claim.

  3. IRC 482 adjustments may affect the computation of E&P (see IRM 4.61.3, Development of IRC 482 cases).

FTC Limitation

  1. FTC allows the U.S. taxpayer a dollar for dollar credit against a taxpayer’s U.S. tax liability. The limitation on the amount of credit assures that the U.S. tax liability is reduced only on foreign source income.

  2. IRC 904 categorizes foreign income and limits the FTC to the amount of the U.S. income tax attributable to the foreign source taxable income in each category. The limitation is:
    (Foreign Source Category ÷ Total Taxable Income) × U.S. Income Tax before other credits = FTC Limitation

  3. The relationship between the limitation and the FTC are illustrated in the following table:

    If the IRC 904(a) limitation: Then the taxpayer may use:
    Increases More FTCs
    Decreases Less FTCs

Classifying Income into Categories

  1. The income and foreign taxes from one category cannot be combined with the income and foreign taxes from another category. An explanation of the income to be assigned to each category is at Treas. Reg 1.904–4.

  2. IRC 901(j) denies the FTC for taxes paid to foreign countries with whom the United States has severed diplomatic relations (see IRM 4.61.10.3.4). Income from these countries is put in a separate category to prevent it from being offset by taxes paid to other countries. The income is taxable. The taxes paid are permanently disallowed.

  3. Taxpayers subject to Alternative Minimum Tax (AMT), must compute both a regular foreign tax credit and an AMT foreign tax credit. Separate IRC 904(a) limitations, carryover and carryback apply to the regular FTC and the AMT FTC.

Carryback and Carryover of Excess Credits

  1. Taxpayers unable to fully use all of their available credits due to the FTC limitation may carry unused credit back one year and forward for ten years. The ordering rules mandate that the credits must first carryback to the first preceding tax year and then forward to each successive year (see IRC 904(h)). However, credits in the IRC 951A income category may not be carried back or forward.

  2. There is no credit carryback or carryover to years in which taxes are deducted. Any unused foreign taxes that are eligible for carryback or carryover to a year that foreign taxes are deducted are absorbed as though the taxpayer had elected to take the credit for foreign taxes paid in that year.

  3. Excess credit is not deductible in any year, even if creditable taxes are deducted that year.

Statute of Limitations on Carryback Years

  1. If unused foreign tax credits are carried back, the statute of limitations for the year to which the carryback is utilized will not close until one year after the statute has expired for the year in which the carryback originated (see IRC 6501(i)).

  2. Statutes related to foreign tax changes are detailed in IRM 4.61.10.7.

Special Sourcing Rules

  1. Under the general sourcing rules of IRC 861, dividends and interest received from a foreign corporation are foreign source income. However, when a significant portion of the foreign corporation’s income is from U.S. sources, the normal sourcing rules may not apply (see IRC 904(h)).

  2. The following table summarizes the sourcing rules.

    Income from U.S. owned foreign corporations in the form of: Will be treated as: No sourcing where:
    Deemed:
    • Subpart F income inclusion

    • An electing Passive Foreign Investment Company (PFIC) inclusion

    • GILTI inclusion

    U.S. source income, to the extent of:
    (U.S. Source E&P ÷ Total E&P)
    NO EXCEPTIONS
    Dividend income U.S. source income, to the extent of:
    (U.S. Source E&P ÷ Total E&P)
    The U.S. source E&P is less than 10 percent of total E&P
    Interest paid to either a:
    • U.S. shareholder

    • Related person to the U.S. shareholder

    U.S. source income, to the extent "properly allocable" per IRC section 904(h)(3)(C). The U.S. source E&P is less than 10 percent of total E&P

Taxable Income and FTC

  1. The numerator of the FTC limitation computation is foreign source income subject to U.S. income tax, reduced by expenses and deductions directly or indirectly attributable to the production of such income.

  2. The taxable income computation applies the provisions of IRC 861 (income from sources within the United States) and IRC 862 (income from sources without the United States). IRC 863 contains methods for determining foreign source income when IRC 861 or IRC 862 does not apply. For tax years beginning after 12/31/2017, IRC 863(b) sources income from self-made inventory entirely to the location of the production activities. Income from sales of inventory produced in whole or in part within the U.S. and sold outside the U.S. is U.S. source income. Income from sales of inventory produced without the U.S. and sold within the U.S. is foreign source income. IRC 865 provides rules for sourcing income from sales of personal property. Gross income of inventory purchased (i.e. not produced) in the United States and sold (within the meaning of Treas. Reg. 1.861-7(c)) without the United States is foreign source income per IRC 862(a)(6).

Expenses Related to Foreign Source Income

  1. Treas. Reg. 1.861-8 through 1.861-17 provide rules for allocating and apportioning expenses for determining taxable income from foreign sources for purposes of computing the FTC limitation.

General Examination Guidelines

  1. Form 1116 for individuals and Form 1118 for corporations are an excellent guide for the examiner. These FTC forms must reconcile with other areas of the tax return. The following items on the Form 1118, when present, will tie to other areas on a tax return:

    • Foreign source income (dividends, interest, rents, royalties, subpart F, GILTI, branch etc.)

    • IRC 78 gross-up

    • FTC

  2. Examiners will consider the following exam procedures when verifying taxes:

    1. Review the E&P and tax pools for pre-2018 tax years

    2. Check the exchange rates used in converting E&P and taxes

    3. Verify that E&P is computed using GAAP and U.S. tax standards

    4. Consider Treas. Reg. 1.901–2(e)(5) in cases involving IRC 482 adjustments

    5. Ensure the reporting of the IRC 78 gross-up

    6. Determine that all qualifying foreign taxes are in the FTC computation and that none are treated as deductions (or vice versa if the taxpayer chooses not to take the FTC) for pre-2018 tax years

    7. Review all FTC related elections

    8. Ensure that there is no double counting of taxes resulting from claiming both the accrual and payment of foreign taxes

    9. Determine if the taxpayer has filed a claim for refund or credit when examining years with excess FTC

    10. Ensure only foreign taxes that accrued in the current taxable year are claimed as FTCs

    11. For deemed paid taxes, ensure only foreign taxes properly attributable to subpart F and GILTI inclusions, or distributions of PTEP under IRC 960(b), are included as creditable taxes. Taxes associated with all other income or distributions may not be credited.

  3. Review the substantiation requirements in Treas. Reg. 1.905–2 and Rev Rul. 67–308

  4. Verify that the taxpayer is reporting the gross income with respect to income subject to withholding

  5. Consider that a taxpayer in or near the FTC limitation may try to increase Foreign Source Income (FSI) and decrease the allocation and apportionment of expenses to FSI. The application of IRC 482 has the potential to change FSI.

  6. Ask the taxpayer to provide information on any changes in taxes paid or accrued

  7. Make a reasonable cause determination and consider application of accuracy-related penalties

  8. Technical assistance on the creditability of a tax can be obtained from the Office of Associate Chief Counsel (International), or the technical specialists for this subject.

  9. The following table provides suggested resolutions to examination difficulties:

    If the taxpayer... Then consider...
    Procrastinates in providing documentation to support credits claimed Using Formal Document Requests per IRC 982
    Provides the documentation, but it has not been translated into English Using IRC 905 and Reg. 1.905–2(a)(2) to require taxpayers to translate the returns, or if not disallow the credit
    Claims credits for taxes they were not liable for Carefully analyzing receipts and tax returns to ensure the liability is for the taxpayer under examination per Treas. Reg. 1.901-2(f)
    Claims credit for taxes they paid but were later refunded (or they are refundable) Reviewing treaty for proper tax rates or reviewing tax returns for actual liability
    Claims credits for amounts which are not income taxes or other creditable taxes Making sure receipts and returns are translated and clearly designated as income taxes or other creditable taxes
    Claims credits for accrued taxes Asking for actual tax receipts and returns. Accrued taxes must be paid within 24 months of the end of the year accrued. If not paid, disallow the unpaid accrual.
    Claims credits for payment of branch income taxes based on the end of year exchange rate instead of the dates actually paid or average rate Verifying actual dates paid, method of payment and proper exchange rate(s)
    Claims the gross income tax assessed on branch profits, even though the foreign government allows the branch to offset the gross tax with nonrefundable credits Verifying actual receipts and tax returns (and translations if required)
    Claims credit for payment of branch income taxes Carefully reviewing Form 1118 and branch financial statements to determine if they are properly allocating expenses of the U.S. parent
    Reports the after-tax profit for the branch on form 1120 Grossing up the branch profits by the taxes paid
    Claims credits for taxes based on capital, and not net income Making sure receipts and returns are translated and clearly designated as income taxes, Taxes based on capital are not creditable
    Claims an FTC Reviewing Schedule M for proper handling of credit and that the taxpayer did not also deduct the tax as an expense

Code Sections Affecting Credit for Foreign Taxes

  1. Exhibit 4.61.10–4 details most IRC sections that impact the credit or deduction for foreign taxes.

Alternative Minimum Tax Considerations for Pre-2018 Tax Years

  1. Taxpayers are also entitled to foreign tax credits when calculating alternative minimum tax.

  2. When calculating the AMT 904 limitation, the pre-credit tentative minimum tax is the tax against which such credit is taken for the taxable year and all prior taxable years beginning after December 3, 1986. Additionally, IRC 904 is applied on the basis of alternative minimum taxable income instead of taxable income and the determination of whether any income is high-taxed income is to be made on the basis of the tentative minimum tax rate determined in IRC 55(b)(1) and IRC 59(a)(1).

  3. Alternative Minimum Tax Foreign Tax Credits in excess of the IRC 904 limitation have the same one year carryback and 10 years carryover periods. However, because the amounts used in the IRC 904 limitation formula are different (pre-credit tentative minimum tax vs. regular tax and alternative minimum taxable income vs. regular taxable income), the credit carryback and carryover have to be separately maintained for alternative minimum tax purposes.

  4. In the case of a taxpayer other than a corporation, the pre-credit tentative minimum tax is the amount determined under the first sentence of IRC 55(b)(1)(A)(i). In the case of a corporation, the pre-credit tentative minimum tax is the amount determined under IRC 55(b)(1)(B)(i) and IRC 59(a)(3).

  5. An election under IRC 59(a)(3) can be made for the first taxable year beginning after December 31, 1997 to simplify the IRC 904 limitation for purposes of the Alternative Minimum Tax foreign tax credit. The IRC 904 limitation shall be based on the proportion of the taxpayer’s foreign source taxable income for regular tax purposes (but not greater than the taxpayer’s alternative minimum taxable income) bears to the taxpayer’s alternative minimum taxable income, as per IRC 59(a)(3).

Direct Taxes Examination Techniques

Area to Review Action
Accrued taxes Request receipts and workpapers showing exchange rates to determine the accuracy of the credits claimed. Determine why an accrued tax remains unpaid at the time of the exam. Accrued foreign taxes unpaid 24 months after year accrued are disallowed.

Note:

The foreign government may prohibit the distribution of the income to which accrued tax relates. Consequently, the tax credit based on this accrual should be disallowed until the income is no longer blocked (see IRC 964(b)).

Taxes as a percentage of corresponding income Compare the percentage paid to the treaty rate in the tax treaty tables located at: https://www.irs.gov/individuals/international-taxpayers/tax-treaty-tables:
  • If the rate differs, ask the taxpayer to explain.

  • If you are at all uncertain as to what the tax is for, request that the taxpayer provide a copy of the foreign law translated into English.

Branch income taxes Always request the taxpayer’s detailed schedule or workpapers showing the branch profits computation, and translated copies of the foreign income tax returns. With this information you can:
  • Verify that the taxpayer used the exchange rates for the dates of payment of the tax or the average rate for the years, whichever is applicable.

  • Verify that the tax claimed as a credit is the net tax, after all credits and abatements.

  • Perform a brief functional analysis to determine if some of the U.S. expenses are properly allocable to the branch.

Method of accounting for credits Is the taxpayer using the accrual or cash basis method of accounting? Check for consistency among periods. Once the taxpayer elects the accrual method of accounting, that election is irrevocable.
Creditability of the tax Determine that the tax:
  • Is based on income

  • Does not constitute a subsidy to the taxpayer

  • Meets the realization, the gross receipts, and net income tests

  From the receipts and the foreign law, determine that the taxpayer:
  • Has not received an economic benefit

  • Is not likely to receive a refund or abatement

Withholding Tax
  • Match treaty rate with actual amounts paid.

  • Be alert to withholding on dividends as a matter of policy compared to the actual or final liability. Be aware that there is a minimum holding period for certain withholding taxes (see IRC 901(k) and IRC 901(l)).

    Example:

    A tax paid in excess of a treaty rate is not a compulsory payment and would not be creditable.

Tax in lieu of an income tax Determine if such a tax:
  • Constitutes a compulsory payment

  • Is a substitute for, and not in addition to, an income tax

Tax credit, or categories After you have determined the total allowable IRC 901 tax credits, check categories to see that the taxpayer has properly allocated them to the various categories of income and taxes (e.g., general, passive, etc.).

Indirect Taxes Examination Techniques

Area to Review Action
Computation of E&P Review financial statements to ensure that the presentation conforms to U.S. accounting and tax standards. Consider denial of credit for failure to substantiate. After detail is obtained, closely scrutinize additions to reserves. Unrealized exchange gains and losses are not taken into account in computing E&P unless the foreign subsidiary operates in a hyper-inflationary environment and uses the DASTM method under Reg. 1.985–3.
Obtaining translated foreign government audit reports Review the documents verifying taxes and E&P. Competent authority consideration is a prerequisite to the allowance of most foreign initiated adjustments.

Comparison of Indirect Credit Computations for Pre-2018 Taxable Years

Change Pre-1987 Law Post-1986 Law
Numerator Distributions paid within the first 60 days of the year are sourced from the prior year No 60-day rule
Denominator Annual accumulated profits maintained in functional currency Post-1986 undistributed earnings is a pool of all the undistributed earnings of the foreign corporation for all years beginning after December 31, 1986. The undistributed earnings must be:
  • Computed under IRC 964(a) and IRC 986(b)

  • Reduced for dividends paid in prior years, but not for dividends paid in the current year

  • Maintained in functional currency

Multiplicand Annual foreign income taxes maintained in functional currency Post-1986 foreign income taxes is a pool of all foreign income taxes for the year of the dividend, and all prior years beginning after December 31, 1986. The pool is:
  • Reduced by all prior indirect credits and taxes attributable to earnings distributed to shareholders ineligible for indirect credits (e.g., foreign shareholders)

  • Maintained in U.S. dollars (see Treas. Reg. 1.902–1)

Internal Revenue Code Sections Dealing with Foreign Taxes

Code Section Description
27 Allows a credit for taxes paid to foreign countries and possessions to the extent provided for in IRC 901.
33 Allows a credit for taxes withheld at source paid for non-resident aliens and foreign corporations to the extent provided for in IRC 901.
59(a) Provides for the alternative minimum tax FTC.
78 Provides that a domestic corporation electing the foreign tax credit must gross up (i.e., increase) dividend income by the amount of creditable taxes associated with the dividends received. For post-2017 years, amounts equal to taxes deemed to be paid by such corporation under IRC 960 shall be treated as a dividend received and included in the income of the domestic corporation.
114(d) Disallows credit for foreign tax on excluded extraterritorial income.
164 Allows deduction for foreign income taxes if FTC is not claimed.
275(a)(4) Prevents a taxpayer from deducting taxes and taking the FTC in the same year.
515 Allows the FTC, subject to the modifications, to be used against the tax of certain exempt organizations.
642(a)(1) Provides that, to the extent not allocated to the beneficiaries, an estate or trust shall be allowed the FTC.
691(b) Provides the authority for the allowance of deductions and credits for recipients of income in respect of decedents.
702(a) Provides that each partner shall take into account separately their distributive share of a partnership’s foreign taxes.
841 Allows the FTC, as modified, to be used in computing the tax of domestic insurance companies.
853 Allows the FTC, as modified, for shareholders of regulated investment companies if the company so elects.
861 Defines income from sources within the United States.
862 Defines income from sources without the United States.
863 Discusses sourcing of income not specified in IRC 861 or IRC 862.
865 Provides rules from sourcing income from personal property sales.
874(c) Provides that the FTC is allowable to nonresident individuals only to the extent provided for in IRC 906.
882(c)(3) Provides that the FTC is allowable to foreign corporations only to the extent provided for in IRC 906.
901 Grants a credit against the U.S. tax for taxes paid or accrued to any foreign country or to any possession of the United States and in the case of corporations, taxes deemed to have been paid under IRC 902 (for pre-2018 tax years) and IRC 960 are creditable.
902 Provides the methods for computing deemed paid taxes for pre-2018 tax years.
903 Provides that a credit may also be taken for taxes paid in lieu of the taxes.
904 Provides the method for computing the FTC limitation.
905 Sets forth the rules for the year that FTC is available. IRC 905(c) provides that there is no statute of limitations on an additional U.S. income tax arising from a refund of a foreign tax where the taxpayer did not notify the Secretary. See IRC 6689 for penalty applicable to IRC 905(c).
906 Provides that nonresident aliens or foreign corporations engaged in a trade or business within the United States are entitled to FTC for foreign source income effectively connected with a U.S. trade or business.
907 Provides special rules for taxes on foreign oil and gas income for pre-2018 tax years.
908 Reduces the FTC for participation in international boycotts.
909 Suspends taxes and credits until related income taken into account, also known as FTC "splitter" rules.
911(d)(6) Denies FTC for taxes paid on excluded foreign earned income.
931(b) and
933(1)
Provides that persons entitled to the benefits of IRC 931 and IRC 933 are not allowed FTC for tax on excluded income.
936 and
30A
Allows the possession tax credit.
951(a)(1) and 951A,
960(a) and 960(d)
IRC 960(a) and IRC 960(d) permit deemed paid tax credits properly attributable to with inclusions under IRC 951(a)(1) or IRC 951A for post-2017 tax years.
960(b) IRC 960(b) allows foreign taxes as credits in the year PTEP is distributed if the foreign income taxes properly attributable to the distribution have not been deemed paid for the current taxable year or any prior taxable year.
1291(g) and 1293(f) Permits FTC with respect to PFIC inclusions.
1373(a) An S corporation will be treated as a partnership and its shareholders treated as partners for purposes of IRC 861 to IRC 999.
1503 Prescribes special rules for consolidated returns.
6038(b) Prescribes a reduction in allowable foreign taxes for failure to furnish certain information with respect to certain foreign corporations.
6501(i) Sets forth the statute of limitations for assessment and collection of tax for foreign tax credit carryback (the one year rule).
6511(d)(3) Provides special rules relating to the FTC in regard to limitation on credit or refund (the ten-year rule).