FOREIGN TAX CREDIT

US Foreign Tax Credit

US Foreign Tax Credit

Introduction

The US taxation system takes globally functioning corporate entities into account in order to ensure that double taxation does not occur. Since double taxation can be expected to discourage business activity, the US taxation system gives credit to taxes paid in foreign country. This discussion will attempt to highlight the role and relevance of the US Foreign Tax Credit. In order to do so adequately, the discussion will give particular relevance to the mechanism of the US Foreign Tax Credit and the rationale behind it.

Discussion & Analyses

The principle of neutrality, capital export is satisfied when- do the added income tax, applied both by the source country as the residence is equal to the applicable tax in the country of residence on the same amount of income (Marcuse & Paul, 2003; Geen, 2001). Thus, under conditions of neutrality pure export of capital, determining where to make an investment should be taken as the highest return before taxes and without regard to the imposition effective rates action in force in different places, thus investment decisions are not distorted by the tax factor.

The most commonly exercised kind of US Foreign Tax Credit is the corporate foreign tax credit (Edelmann, 2001; Schnepper, 2011). US foreign tax credit gives particular attention to corporate foreign tax credit because it is imperative to realize and integrate the fact that a major part of revenue is earned by globally networked operations. For instance, bank branches functioning beyond borders can be expected to bring in revenue that is derived through functioning with the affiliates abroad. The revenue earned in a particular foreign branch is eligible for taxation in the same year as the one in which the taxable revenue has been generated (Geen, 2001; Marcuse & Paul, 2003). In this regard, the overall scheme of matters is extensively simple since the tentative US tax in such cases is the product of the US tax rate and the branch income.

The credit part comes in when the US taxation system allots credit against foreign income taxes and for the applied with-holding taxes that are levied upon the income when it is transferred to the US based parent organization (Marcuse & Paul, 2003; Geen, 2001). The negative revenue figures that a beyond-borders operation experiences are deductable from the parent organization's domestic income under the regulations of the US income tax system. This allows the parent organization to experience lesser impact from the losses on account of a reduced taxable income (Schnepper, 2011; Edelmann, 2001). However, it merits highlighting that once the branch in question has begun to report a profit, the US treasury is entitled to recover the taxes that were initially foregone as a result of the negative revenue that the branch was initially experiencing.

A major part of the allotment of corporate foreign tax credit in the case of multinational operations is that revenue earned through organizations working with partners across the border are not subjected to any tax other than US ...