The Creditability of Foreign Taxes — General Issues (Portfolio 6020)

Tax Management Portfolio, The Creditability of Foreign Taxes — General Issues, provides a detailed discussion of the rules under §901 for determining what is a creditable income tax and the rules under §903 for determining what is a creditable “in-lieu-of” tax.

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The Portfolio also discusses the following: rules relating to who can claim the foreign tax credit (including the §906 allowance of the credit to foreign persons doing business in the United States); rules for determining the amount of creditable foreign tax, including rules relating to refunds, subsidies, offsetting payments, and substantiation requirements; rules for determining when credits can be claimed, including the “anti-splitter” provisions of §909; special penalty provisions that reduce the foreign tax credit in the case of activities conducted in foreign countries with which the United States does not have normal diplomatic relations or in the case of participation in or cooperation with an international boycott; the holding period requirements of §901(k) and §901(l); the special rule of §901(m) relating to taxes in certain covered asset acquisitions; the anti-abuse rule for certain foreign tax credit generator transactions; and the application of the for-profit and economic substance tests to the foreign tax credit.


The Creditability of Foreign Taxes — General Issues was authored by the following experts.
Carolyn M. DuPuy, Esq.

Carolyn M. DuPuy, Esq., Weil, Gotshal & Manges LLP, Washington, D.C. B.A., Mount Holyoke College; J.D. and M.L.T., Georgetown University Law Center; retired partner, Weil, Gotshal & Manges LLP; former Senior Technical Reviewer, Office of the Associate Chief Counsel (International), Internal Revenue Service.

D. Kevin Dolan, Esq.

D. Kevin Dolan, Esq., Shearman & Sterling, LLP, Washington, D.C. B.A., University of Virginia; J.D., University of Michigan; Of Counsel, Shearman & Sterling, LLP; former Senior Vice President for Tax Policy and Product Development, Merrill Lynch & Co.; former partner, Weil, Gotshal & Manges LLP; former Associate Chief Counsel (Technical and International), Internal Revenue Service; former partner, Arthur Young and Co., Washington, D.C.; former Attorney-Advisor, Office of International Tax Counsel, U.S. Treasury Department.

Table of Contents

Detailed Analysis

I. Introduction

Introductory Material

A. Reducing the Burden of Double Taxation

B. Requirement That the Tax Be Imposed by a Foreign Country or a U.S. Possession

C. Persons Eligible to Claim a Foreign Tax Credit

1. Section 901(b)

2. Section 906

3. Other Provisions of the Code

D. Credit vs. Deduction

II. Is the Foreign Levy an Income Tax or an In-Lieu-of Tax?

A. In General

1. Background

2. Issues Presented

3. Effective Date of Regulations

B. What Is the Scope of the Foreign Levy?

C. Is the Foreign Levy a Tax?

1. In General

2. Tax vs. Royalty - the "Dual Capacity" Dilemma

a. Background

b. Regulations

(1) Regulatory History

(2) Application of the Final Regulations

(a) Facts and Circumstances Method

(b) Safe Harbor Method

(i) In General

(ii) Foreign Jurisdiction Has a Generally Imposed Income Tax

(iii) Foreign Jurisdiction Has No Generally Imposed Income Tax

(iv) Multiple Levies

(v) Administrative Rules Governing the Safe Harbor Election

3. Other Industries

D. Is the Foreign Levy an Income Tax Under § 901?

1. In General

2. Realization

a. Background

b. Regulations

3. Gross Receipts

a. Background

b. Regulations

4. Net Income

a. General

(1) Background

(2) Regulations

b. Gross Income Taxes

(1) Background

(2) Regulations

c. Formulary Taxes

(1) Background

(2) Regulations

5. Soak-Up Taxes

6. Excise Tax Requirement Under Prior Rulings

E. Is the Foreign Levy an In-Lieu-of Tax Under § 903?

1. Introduction

a. Background of § 903

b. Regulations

2. Existence of a "Generally Imposed Income Tax"

3. Substitution

4. Character of the In-Lieu-of Tax - Soak-Up Tax Rule

III. Who Is the Taxpayer Subject to the Foreign Tax?

Introductory Material

A. Withholding Taxes

B. Tax Paid on Income of Another

C. Foreign Consolidated and Joint Tax Returns

D. Shifting the Tax by Contractual Agreement

IV. What Is the Amount That Is Paid or Accrued?

A. In General

B. Refunds and Credits

C. Withholding Taxes and Advance Payments

D. Subsidies

1. In General

2. Early Revenue Rulings and Other Administrative Pronouncements

3. Mexican Railroad Cases

4. The Regulations

5. The Brazilian Subsidy Litigation

6. Section 901(i)

7. Post-§ 901(i) Administrative Guidance Relating to Subsidies

E. Multiple Levies - Offsetting Payments

1. Background

2. Case Law and Prior Rulings

3. Regulations

4. Advance Corporate Taxes - Integration Systems

F. Compulsory vs. Voluntary Payments

1. In General

2. Reasonable Interpretation and Application of Foreign Law

3. Exhaustion of All Effective and Practical Remedies

G. Substantiation

V. Translation Rules and § 905(c)

A. Translation of Foreign Taxes

B. Section 905(c) Redeterminations

1. In General

a. Direct Credit

b. Indirect Credit

2. Notification Requirements

3. Interest and Penalties

VI. When Can the Foreign Tax Credit Be Claimed?

A. In General

B. Contested Taxes

C. Carrybacks and Carryovers

1. In General

2. Limitations on the Use of Carrybacks and Carryovers

VII. Denial of Credits for Otherwise Creditable Foreign Taxes

A. Statutory Denials

1. Section 901(j)

2. Section 901(k)

3. Section 901(l)

4. Section 908

5. Other Statutory Disallowances of All or a Portion of the Credit

B. Judicial and Administrative Denials - The For-Profit Test and Business Purpose Requirement

1. Applying the For-Profit Test to Foreign Tax Credit Transactions

a. The Relevance of a For-Profit Test

b. The For-Profit Test as Formulated in Case Law

2. Notice 98-5

a. In General

b. For-Profit Under the Notice

(1) Measuring Anticipated Profit

(2) Treatment of Interest Expense

(3) For-Profit and Broker Dealers

(4) Treatment of Disallowed Foreign Taxes

Working Papers

Working Papers

Table of Worksheets

Other Resources

Worksheet 1 General Explanation of Tax Legislation Enacted in 1997 1999-3 C.B. 89 (Excerpts)

Worksheet 2 Conference Report to Accompany H.R. 3838, 99th Cong. 2d Sess. 1986) (Excerpt)




Treasury Regulations:

Treasury Rulings:



Books and Treatises