Abstract
There has been a seismic shift in the regulatory rules for determining which foreign taxes are eligible to be credited against a taxpayer’s U.S. federal income tax. This Article explains why these regulatory changes have such a big impact, including some non-obvious, indirect results. First, the creditability determination is the necessary first step for claiming a foreign tax credit. Second, even a small disparity between a foreign tax and the section 901 creditability regulations can now make the entire foreign tax non-creditable, even for taxpayers who are not subject to the nonconforming portion of the foreign tax. Third, the section 901 regulations also indirectly impact taxpayers attempting to claim foreign tax credits under section 903. Fourth, tax treaties are not a perfect remedy for all taxpayers, but they may have the indirect effect of allowing some taxpayers to use the standards of the former regulations rather than the revisions, to the extent that treaty characterizations of “income taxes” were based on the former regulatory standards.
However, instead of comparing the foreign tax credit with the detriment of getting no tax benefit for foreign taxes paid, we should be comparing the credit with the effect of a deduction. This Article points out that deductions are generally available for non-creditable foreign taxes paid by U.S. corporations, including foreign taxes that no longer qualify as creditable levies under the revised section 901 regulations. Although the foreign tax credit is often more beneficial than a deduction, the gap between those two benefits may have narrowed due to the many restrictive foreign tax credit rules that have been added over the years. Overall, the revised creditability rules represent a seismic shift in the requirements for qualifying for a foreign tax credit, but the result of failure to qualify as a creditable tax is more of a steep stair step than an all-or-nothing “cliff” effect.
Recommended Citation
Rebecca Rosenberg,
Seismic Shifts and Stair Steps: Revisions to the Creditability Determination in the Foreign Tax Credit Rules,
58 Loy. L.A. L. Rev. 579
().
Available at: https://digitalcommons.lmu.edu/llr/vol58/iss2/5
