Understanding Section 905(c) and the Foreign Tax Credit

As tax professionals who operate in the increasingly interconnected world of international business, it is incumbent upon us to gain a thorough understanding of key tax provisions that shape the global business environment. The United States (“U.S.”) taxes U.S. taxpayers on their worldwide income. Thus, income earned outside of the U.S. (e.g., foreign source income) may be subject to tax in both the U.S. and in the source country, resulting in double taxation on the same income. The U.S. Foreign Tax Credit (“FTC”) attempts to potentially mitigate double taxation by providing a credit against the U.S. tax on foreign source income. This alert aims to provide a high-level overview of Section 905(c) of the U.S. Internal Revenue Code (“IRC”) and the concept of FTCs.

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