Foreign Tax Credit Research Articles

Asymmetric Double Tax Treaties: Relief Method and Tax Sparing for Foreign Direct Investment in Developing Countries

This paper focuses on asymmetric tax treaties and investigates from an empirical perspective the impact of OECD member states’ double tax relief method and of treaty tax-sparing provisions on investments in developing countries, while considering network effects. Our results suggest that having a treaty between the OECD member state and the developing country, which improves the investor's conditions in terms of tax burden, by changing the unilateral tax relief method, increases FDI to the developing country. The positive effect prevails when investigated within investments made through the direct route from residence to source. Results suggest that OECD member states offer tax-sparing provisions mostly to less-developed economies, which already receive very low FDI. Finally, we extend the investigation to an analysis of the impact of residence countries’ tax relief methods on source countries’ domestic tax policy. Our results suggest that developing countries set higher CIT rates when the OECD member state relieves double taxation through the exemption method, as compared to when it offers a foreign tax credit.

An Overview of Foreign Tax Credit for Profit-Making Enterprises

An Overview of Foreign Tax Credit for Profit-Making Enterprises

Revisiting the Interaction of the Interest Expense Deduction and the Foreign Tax Credit

This Article demonstrates that the most appropriate proxy for allocating and apportioning U.S. interest expense is one that first identifies the incremental U.S. deduction benefit attributable to the inclusion of foreign income. Now that the positive section 163(j) limitation enhancement attributable to the inclusion of foreign income into the section 163(j) computation can be readily determined, the allocation and apportionment regime should allocate that amount of U.S. interest expense (and only that amount) because that methodology actually matches the amount of the allocation and apportionment of U.S. interest expense to the actual interest deduction benefit derived from the inclusion of foreign income. The Article sets forth the manner in which this reform proposal would harmonize the section 163(j) disallowance regime with the allocation and apportioinment regime of section 861 and also discusses the advantages that the Article’s reform proposal has over competing paradigms.

Personal Tax Planning: Foreign Tax Credits for Taxpayers with Cross-Border Employment Income

Foreign tax credits are an important mechanism to provide relief from double taxation of foreign-source income. With respect to cross-border employment income earned by Canadian taxpayers, there are multiple issues that may create significant complexity and potentially limit the availability of foreign tax credits. In this article, the authors provide an overview of the mechanics of claiming foreign tax credits under the Canadian Income Tax Act and the relevant provisions in certain bilateral income tax treaties. They also review some relevant technical interpretations issued by the Canada Revenue Agency and legislative jurisprudence in Canada with respect to cross-border employment income sourcing and the availability of foreign tax credits on such income.

Withholding Taxes, Compliance Cost, and Foreign Portfolio Investment

ABSTRACT We examine the effect of compliance frictions in reclaiming foreign withholding tax overpayments on foreign portfolio investment (FPI) using data on bilateral FPI around the globe and U.S. institutional investors’ foreign holdings. Exploiting variation in withholding tax overpayments for 36 investor countries and 110 issuer countries, we find that withholding tax overpayments adversely affect FPI because of the high compliance costs to international investors in claiming foreign tax credits. Cross-sectional tests further show that the adverse effect of withholding tax overpayments on FPI is reduced when compliance costs in claiming these overpayments from foreign countries are lower. Our results indicate that eliminating most of the compliance costs in the reclaim process by implementing a relief at the source mechanism could increase FPI by about 7.6 percent. JEL Classifications: D25; G11; G25; H20; H24.

C-705/20 Allowing Foreign Tax Credit against Recovery from an Aid Recipient Does Not Infringe the Commission Decision

C-705/20 Allowing Foreign Tax Credit against Recovery from an Aid Recipient Does Not Infringe the Commission Decision

New Foreign Tax Credit Regulations

New Foreign Tax Credit Regulations

Resolving the Conflicts of Citizenship Taxation

The United States is the only country in the world to exercise taxing jurisdiction over the income of its citizens and long-term permanent residents, even when they reside abroad. This citizenship-based taxation (CBT) is controversial, especially among tax scholars, though there appears to be only limited political appetite for realigning U.S. tax jurisdiction to reach only domestic-source and domestic-resident income, as peer countries do. After reviewing the normative value of CBT and the existing multiple taxation mitigation measures, this Article presents two alternatives to the current U.S. regime. First, I propose the U.S. tax only the incomes of current-year residents and recent expatriates but exempt the foreign-source income of nonresident citizens after a five-year extended residency period in order to more closely correlate tax jurisdiction and nonresidents’ meaningful connections to the American taxing community. Recognizing that this may be politically infeasible, however, I propose that Congress uncap the existing foreign earned income exclusion in IRC § 911 for American expatriates living in high-tax countries, reducing their substantial compliance burdens without sacrificing revenue that would effectively be eliminated by the foreign tax credit or creating new opportunities for tax-motivated expatriations.

International Comity and the Foreign Tax Credit: Crediting Nonconforming Taxes

The combination of expanding international trade and climbing corporate income tax rates in the early part of this century required nations to evolve methods for reducing the level of international double taxation. While most countries came to rely upon a variety of techniques, two general approaches emerged to the taxation of the income of residents derived from foreign economic activity. Some countries adopted a territorial based system in which foreign source income is normally exempted from domestic tax. That system generally leaves the taxation of foreign income to the government within whose territory the activity occurs and thus avoids double taxation entirely. Other countries, including the United States, chose to impose their tax on the world-wide income of their individual citizens and residents and domestic corporations. That approach necessitated the development of specific mechanisms to reduce double taxation when the country within whose borders the income had been derived also imposed a tax on that income.The prevailing solution to this source of double taxation is for the residence country to allow its taxpayers to credit taxes paid to foreign jurisdictions against their domestic income tax liability. The extent to which such a foreign tax credit effectively relieves double taxation, however, depends in part upon the adequacy of the description of the foreign taxes that may be credited against the domestic tax liability. If the description is overinclusive, allowing too broad a range of foreign taxes to be credited, the foreign income will be taxed too lightly. Conversely, if the description is under-inclusive, double taxation will not be fully relieved and the foreign source income will be taxed more heavily than domestic income.

International Corporate Income Tax Reform: Issues and Proposals

While details have changed from time to time, the basic treatment of foreign source income in the United States tax code has remained essentially the same as that in 1918, when the foreign tax credit was introduced. All worldwide income is currently taxed, with a credit for foreign taxes paid, but income of subsidiaries incorporated in foreign jurisdictions is not considered part of that worldwide income until it is repatriated. As a result of a revision in 1962, certain passive income of foreign subsidiaries is subject to current taxation under Subpart F of the Internal Revenue Code. This system produces a number of economic distortions as well as opportunities for tax avoidance. Those continuing issues, along with the increasing integration of the global economy, have led to proposals for reform. These proposals fall roughly into four categories: narrow proposals aimed at tax avoidance concerns, proposals to move the system towards a pure territorial (or source-based) system, proposals to move the system in the opposite direction towards a current world-wide tax system, or proposals to retain the current system but lower the corporate tax rate with revenue offsets.In evaluating these proposed tax changes, two issues, which are related but nevertheless not identical, should be considered. The first is the real effects of current law and of a revision on economic activity. When investment responds to tax differentials, it affects the allocation of capital which in turn has implications for efficiency and income distribution (the extent to which the tax burden falls on capital versus labor incomes). In a closed economy with a fixed capital stock, the burden of the corporate tax falls on capital income in general. If the U.S. corporate tax does not apply in the foreign jurisdiction, capital can flow abroad with the result that some of the burden on the tax falls on labor (depending on the mobility of capital).3 Thus, the international tax system has implications for the overall welfare of the United States, and the world, and for the division of that welfare between those with primarily labor income, who tend to have lower incomes, and those with primarily capital income, who tend to have higher incomes.

An Equity-Based, Multilateral Approach for Sourcing Income Among Nations

The source of income rules used in the United States and elsewhere in large part establish the contours of income tax jurisdiction that is exercised by countries. Source rules do this by allocating a taxpayer's income for purposes of assigning countries their rights to tax such income. Thus, source rules are of critical importance in the functioning of the income tax rules that apply to cross-border business and investment activities.The source rules play a vital role in the foreign tax credit system applicable to U.S. persons with foreign investment or business activities. This is because a U.S. taxpayer is subject to an annual foreign tax credit limitation, which is generally equal to the taxpayer's average U.S. tax rate multiplied by the taxpayer's foreign source income as determined under the source rules. The source rules also play a central role in the United States' exercise of taxation over foreign persons with U.S. businesses or investments. For the most part, only U.S. source income is subject to tax under the U.S. tax regimes that apply to foreign persons. Moreover, if the United States were to move to a full or partial territorial system for taxing U.S. persons, the source rules would assume even greater importance given that they would determine whether the United States would impose any tax (as opposed to a residual tax) on the income of U.S. persons from crossborder activities. Other countries likewise use source rules or their equivalent in applying foreign tax credit or territorial systems to their residents and exercising source taxation over nonresidents.

Designing a U.S. Exemption System for Foreign Income When the Treasury is Empty

The U.S. government faces a well-documented long-term revenue shortage that is unlikely to be cured by government expenditure reductions. Thus, it is curious that there is currently considerable pressure for the United States to adopt some type of territorial or exemption system under which most foreign-source active business income earned by U.S. resident corporations would become substantially free of U.S. income tax.Although we are not fans of territoriality, we recognize that a significant reform of the U.S. international tax system is necessary. In other articles, we have expressed our clear preference for strengthening the U.S. worldwide taxation system by repealing the deferral privilege and instituting a per-country foreign tax credit limitation. However, if such a reform is not politically feasible, we believe that a properly designed exemption or territorial system could be an improvement over the current U.S. international tax regime, which is badly flawed for multiple reasons. In any event, there is a significant likelihood that Congress will sooner or later be considering legislation to create a U.S territorial or exemption system. Accordingly, it is important for academics and policymakers to thoughtfully discuss the structure of such a system. We hope that this article will contribute to that conversation. Our fundamental point is that because of the U.S. fiscal situation, it is particularly important that a U.S. territorial system not forgo more revenue than is necessary to achieve the system’s appropriate ends.

Selected US Tax Developments: Canadian Residents Who Are US Citizens May Be Able To Credit Canadian Taxes Against the US Net Investment Income Tax

The US net investment income tax (NIIT, colloquially referred to as the "Obamacare tax" or "Medicare tax") is a 3.8 percent tax on worldwide investment income of US citizens and residents, and applies to interest, dividends, royalties, and other types of investment income. Although US domestic law does not permit a foreign tax credit to be applied against the NIIT, the US Court of Federal Claims recently held that the US-France tax treaty requires the United States to allow a foreign tax credit against the NIIT. While this case may be helpful for US citizens who are residents of other countries that have tax treaties with the United States that include provisions similar to the provision at issue in the case, residents of Canada who are US citizens may have a harder time making the argument that the US-Canada tax treaty requires the United States to allow a foreign tax credit against the NIIT.

Revisiting the Interest Expense Deduction and the Foreign Tax Credit

Revisiting the Interest Expense Deduction and the Foreign Tax Credit

A Study on Improvement of Tax Credits for Revitalization of Film and Video Industry

COVID 19 팬데믹 상황은 극장에 다수의 사람이 모일 수 없게 하고, 소비자들은 대부분의 영상콘텐츠를 비대면으로 향유하도록 강요받고 있으며, 바야흐로 메타버스 시대의 도래는 영상콘텐츠를 향유하는 매체를 획기적으로 다양화하고 있다. 작금의 여러 가지 대내외 여건의 변화에도 불구하고 그래도 역시 중요한 것은 결국 콘텐츠 그 자체이다. 양질의 콘텐츠를 지속적으로 창작하고 상품화할 수 있는 시장환경이 필요하다. 이를 위해서는 정부의 적극적인 지원과 관심이 필요하다. 산업으로서의 영상콘텐츠는 규제와 진흥 및 성장을 필요로 하는 점에서는 다른 여타의 산업분야와 유사하다고 말할 수 있으나, 일반 제조업에서와는 다른 “Soft Power”로서의 산업 자체의 특성을 고려한 지원과 정책을 마련할 필요가 크다. 2021년 세법개정안에서 국내 OTT사업자에 대해서도 영상콘텐츠 제작비 세액공제 대상으로 포함시킨 것은 이러한 시대상을 반영한 합리적인 선택이었다고 평가할 수 있다. 그러나 세액공제율이 다른 선진국에 비해 상대적으로 낮고 국내제작비에 국한한 지원에 불과하며 그 일몰시한이 내년으로 다가오는 문제점이 지적될 수 있다. 특히 해외와 국내 병행제작이 늘어나고 있는 추세에서 해외에서 납부한 세액을 우리나라의 법인세 등을 신고납부할 때 공제하여 이중과세를 제거함에 있어서도 외국납부세액 전액을 세액공제할 수 있도록 공제한도규제를 개선하고 한도초과액의 이월공제를 실질적으로 보장하여 해외 제작 영상콘텐츠기업의 세부담을 대폭 완화하여 글로벌 경쟁력을 확보할 수 있도록 지원하여야 할 것이다. 그밖에 연구개발비 세액공제를 적용함에 있어서도 기존의 제조업 중심의 물적 시설요건을 배제하고 콘텐츠 기획 개발 활동을 연구개발비 세액공제 대상으로 명시하는 등 소프트 파워로서의 영상콘텐츠기업에 걸맞는 세제로 탈바꿈하도록 하여 본래 의도한 입법취지가 제대로 살아날 수 있도록 영상콘텐츠산업 관련 지원 세제를 개선할 것을 제안한다.This article aims to present the legal improvement of tax credits for Korean Film and Video industry, whch is main stream of media platforms in the era of Metaverse. Since 2017 film industry of Korea receives indepen- dent benefits of tax credit: so called, film and video tax credit. But the rate and subject of the film and video tax credit is ralatively small and poor in comparison to the western countries like USA, Canads, England, France etc. Contents are so called ‘Soft Power’. Film and video industry can not satisfy the conditions of tax credits, wich is made originally for the manufacturing industry. Currently the rate of tax credit for film and video company is 3%(mid-sized company 7%, small business 10%). The deadline of tax credit is 31.12.2022. This article proposes to double the rate: 6%(mid-sized company 14%, small business 20%) and to extend the deadline: 31.12.2025. The author proposes also to include the ‘OTT’ company to the tax credit subject. OTT is getting more competing with traditional film and video companies. Further- more the foreign tax credit must be deregulated: the deduction limit should be eliminated by disallowing of direct and indirect expense deduction. Also R&D tax credit must be allowed without material requirements: and affilli- ated research institute and dedicated departments etc. Through all these suggestions it is highly expected that Korean film and video industry will grow one step further than before.

Study on the effect of digital tax and global minimum tax to the Korean foreign tax credit system - focusing on preventing international double taxation -

Study on the effect of digital tax and global minimum tax to the Korean foreign tax credit system - focusing on preventing international double taxation -

1985 reform of the Australian tax system

After the tumult of the Whitlam government, the Fraser government (1975-1983) saw consolidation with less reform. The 1975 Asprey report remained largely unactioned, despite the fundamental problems that burdened the Australian tax system. The 1983 election of the Hawke government, however, set in train a series of economic reforms, and tax would play a big part in these. This paper tracks those developments, starting with the tax avoidance and evasion issues that plagued the era and the 1981 Campbell Committee financial system review. The main focus, though, is on the 1985 draft white paper and tax summit that delivered the first instalment of the Asprey blueprint. While the broad-based consumption tax didn’t get up, the package reformed Australia’s income tax system, with a capital gains tax, a fringe benefits tax, a foreign tax credit system and a dividend imputation system.

Foreign Tax Credits for Permanent Establishments of Foreign Corporations in Korea- Focusing on the interpretation of tax treaties and domestic law in triangular cases -

Foreign Tax Credits for Permanent Establishments of Foreign Corporations in Korea- Focusing on the interpretation of tax treaties and domestic law in triangular cases -

Post-War Tax Reviews and the Asprey Blueprint

After World War II, international attention turned to economic reconstruction and the transition back to peace-time. As Australia settled into the 1950s and 1960s ‘golden years’ there wasn’t an obvious imperative to tackle basic economic reform and tax design issues. Underlying structural problems were building, though, that would ultimately call for an economic reform agenda and tax would be part of that. This paper tracks these developments, looking at some limited tax reviews along the way but the main focus will be on the 1975 Asprey review which provided a blueprint for reform of the Australian tax system. Its recommendations for a capital gains tax, a fringe benefits tax, a foreign tax credit system, dividend imputation and a value added tax would take 25 years to implement.

Tax Treaties, the Constitution, and the Noncompulsory Payment Rule

US Tax treaties have been regarded as self-executing since the first treaty (with France) was ratified in 1932. Rebecca Kysar has argued this raises a doubt on whether the treaties are constitutional, because tax treaties (like other treaties) are negotiated by the executive branch and ratified by the Senate with no involvement by the House, and all tax-raising measures must originate in the House under the Origination Clause (U.S. Const. Art I, section 7, clause 7). Her preferred solution is to make tax treaties non-self executing, but that would reverse the universal practice since 1932, and is therefore unlikely. Moreover, tax treaties are generally precluded from raising revenue by the Saving Clause (Art. 1(4)). But Kysar’s argument raises another question in regard to the noncompulsory payment rule (Treas. Reg. 1.902-2(e)(5)). Under the noncompulsory payment rule, a US taxpayer who is entitled to a treaty benefit and does not avail itself of the benefit may not get a foreign tax credit for the excess of the withholding tax levied over the treaty rate (Treas. Reg. 1.902-2(e)(5), Example 6). But this means that the treaty raises the taxpayer’s US taxes over the amount it would pay in the absence of a treaty, which in turn raises the constitutional issue invoked by Kysar. The paper concludes by questioning whether the noncompulsory payment rule is worth the complexity it imposes on both taxpayers and the IRS.