Foreign Tax Credits

Foreign Tax Credits

October 15, 2005 | By Keith Martin in Washington, DC

FOREIGN TAX CREDITS cannot be claimed in the United States for taxes that a US company pays voluntarily to another country. 

One US company had to go to unusual lengths to prove that the taxes that one of its offshore subsidiaries paid were not voluntary. The subsidiary was a “dual-resident company.” It claimed it was a tax resident of two different countries outside the United States. The subsidiary paid taxes on interest it earned from bank accounts in one of the countries in which it claimed tax residence, country X. The subsidiary might have avoided taxes on this interest if it claimed benefits under a tax treaty between country X and its other country of residence, country Y.

The IRS said the company had to ask the governments of the two countries for a ruling on whether it could use the tax treaty before the IRS would accept that the taxes on the bank interest were involuntary.

The IRS discussed the case in an internal memorandum that the agency made public in August. The  memorandum is ILM 200532044.