Foreign Tax Credits
On November 12, 2021, the U.S. government released an update on how to claim foreign tax credits. Effective with the 2021 tax year, any foreign tax credit can only be claimed on income that meets a jurisdictional nexus test, which means the credits must be claimed on a country-by-country basis. A company looking to claim foreign tax credits is required to:
- Meet the jurisdictional nexus presence.
- Pay a tax to a foreign country.
- Show that they used a reasonable sourcing method acceptable to the foreign country and similar to the sourcing rules followed in the U.S.
The foreign country laws will take priority on how the gross income and/or gross receipt is characterized and whether it is reasonably similar to U.S. tax law. This law was intended to monitor the digital service industry; it will apply to companies doing business in many jurisdictions. This new law also impacts the tax credit on Foreign Dividends Received deduction as well as the rules related to the Foreign-Derived Intangible Income deduction provisions.
Should you have any questions about this new law, please contact your Tonneson + Co representative.
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