International Taxation

Chapter 5U.S. Foreign Tax Credit System

Learning objectives

• Recognize the changes to the substantive and procedural foreign tax credit (FTC) system under the Tax Cuts and Jobs Act (TCJA) and subsequent proposed regulations.
• Recognize the proposed regulations (2018 and 2019) affecting FTC provisions.
• Calculate the limitation on the FTC.
• Recognize the difference between deducting and electing to credit foreign income tax.
• Recognize which foreign taxes are creditable.
• Recognize existing and new FTC baskets.

FTC system post-TCJA overview and status

The U.S. FTC system was always complicated and required the application and coordination between many different sections and regulations, and then was ultimately computed and reported on the Form 1118 for corporate taxpayers or Form 1116 for individual taxpayers.

The TCJA created numerous provisions that required changes to the substantive computation and procedures for determining FTCs. Subsequent to the TCJA, the Treasury and IRS released proposed regulations and notices to explain and detail numerous complex methods of determining FTCs post-TCJA.

For the purposes of this chapter, the TCJA provided the repeal of Section 902 (Deemed Paid Credit); repeal of using FMV of assets for interest expense apportionment; added two new FTC baskets (foreign branch and global intangible low-taxed income or GILTI); added new Section 245A dividends received deduction (DRD); modified the Section 863(b) sourcing rule, and added the Section 250 GILTI ...