Local country tax incentives and the foreign tax credit.

AuthorWard, Travis S.

An incentive program offered by a foreign government or jurisdiction often is a major determining factor in where a multinational chooses to expand its footprint. These incentive packages frequently come in a combination of infrastructure investments, subsidies, grants, tax credits, and job training programs. Depending upon its industry and line of business, an incentive program may even be the sole reason that a company invests and operates in a particular jurisdiction. These incentives can create a significant financial buoy to a company starting up in a given market and remain a tremendous competitive advantage far into the future. Although companies reap great benefits from local incentives, many U.S. multinationals operating in foreign jurisdictions via subsidiary corporations may be shortchanging themselves when they account for the effect of local incentives on available foreign tax credits in the United States.

As discussed below, a common technique for distributing the benefit offered through incentive programs is to offset or credit income taxes due in the foreign country offering the incentive. Depending upon the nature of the credit, the way it is calculated, and the manner in which it is provided to the intended beneficiaries, the U.S. taxpayer may not be required to reduce the foreign taxes against which the incentive credit is applied. This can prove to be a major windfall for U.S. taxpayers that would then be able to take a credit for these taxes rather than be forced to reduce the claim for foreign tax credits by the amount of the incentive.

Sec. 901 allows a taxpayer to credit certain income taxes paid to a foreign country or possession of the United States. Also, Sees. 902 and 960 provide that certain domestic corporate shareholders are deemed to have paid a ratable portion of the foreign income taxes of a foreign corporation when that foreign corporation distributes a dividend or, in the case of a controlled foreign corporation, requires an inclusion in gross income under Sec. 951(a). An issue arises when the local tax jurisdiction uses a tax credit as a means to administer the payment of incentives, because the final tax liability is now lessened by the amount of the credit. In effect, the offset forces the taxpayer to reduce the amount of foreign taxes equal to the incentive. However, under the Sec. 901 foreign tax credit rules, not all local tax credits reduce the amount of foreign taxes paid.

While the method of the remittance or delivery of the incentive program benefits varies, a popular manner of payment is an offset of country and/or local income taxes. This method is preferred for many reasons...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT