International Tax

The Foreign Tax Credit Limitation Under Section 904 (Portfolio 6060)

  • This Bloomberg Tax Portfolio discusses one part of the U.S. foreign tax credit mechanism—the foreign tax credit limitation under §904. The basic purpose of the limitation is to ensure that the United States does not allow foreign taxes to be used as a credit against U.S. tax on any U.S.-source income.

Description

Tax Management Portfolio 6060 T.M., The Foreign Tax Credit Limitation Under Section 904, discusses one part of the U.S. foreign tax credit mechanism — the foreign tax credit limitation under §904. The basic purpose of the limitation is to ensure that the United States does not allow foreign taxes to be used as a credit against U.S. tax on U.S.-source income.

This Portfolio discusses in general terms the computation of the taxpayer’s foreign tax credit limitation. This computation involves: (1) determining the taxpayer’s gross income; (2) separating the taxpayer’s gross income into U.S.-source and foreign-source income; (3) separating the taxpayer’s foreign-source gross income into foreign tax credit limitation categories (e.g., passive category income or general category income); (4) determining the expenses allowed to be deducted in determining the taxpayer’s total U.S. taxable income; (5) allocating and apportioning the allowable deductions to the taxpayer’s U.S.-source gross income and foreign-source income; (6) deducting the allocated and apportioned deductions; (7) determining final total taxable income by deducting net operating loss carryovers; (8) offsetting separate limitation gains with separate limitation losses; and (9) determining the taxpayer’s foreign tax credit limitation for each separate limitation category by multiplying the taxpayer’s total U.S. tax by the ratio that the final separate limitation income determined for each category bears to the total taxable income.

This Portfolio also addresses the impact of capital gains and losses on the computation of the foreign tax credit limitation, the special re-sourcing rules in §904(h), and the special rules established to prevent taxpayers from avoiding the foreign tax credit limitation rules through deconsolidation.

This Portfolio may be cited as Suringa, 6060 T.M., The Foreign Tax Credit Limitation Under Section 904.


Table Of Contents

I. Introduction
II. Summary of How to Compute the Limitation
III. Legislative History
IV. Passive Income Category
V. High Withholding Tax Interest Category
VI. Financial Services Income Category
VIII. Dividends from 10-50 Corporations
IX. Dividends from a DISC
X. FSC-Related Separate Limitation Categories
XI. General Category Income
XII. Look-Through Rules
XIII. Allocation and Apportionment of Taxes
XIV. Carryforward and Carryback of Taxes
XV. Transition Rules
XVI. Losses and the Foreign Tax Credit Limitation
XVII. Capital Gains and Losses
XVIII. Re-Sourcing of Income
XIX. Deconsolidation to Avoid the Foreign Tax Credit Limitation
suringa-dirk-2015
Dirk Suringa
Partner
Covington & Burling LLC
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