U.s. Foreign Tax Credit

Taxation is an element of fiscal policy, and we should ensure that the strategies we undertake will minimize the tax burden placed upon the company. Competition is encouraged by trade policy. America's commitment to free trade means that we could potentially face a number of international competitors but more importantly that we are likely to have easy access to any number of foreign countries.

While taxing multinational corporations, the U.S. and other foreign governments have faced many problems. Treaties and laws were set up to avoid double taxation for these multinational corporations but instead of avoiding double taxation it delineated a way for tax avoidance. With the old laws, these multinational corporations were allowed to take a tax advantage. They were allowed to move their business revenues, which permitted them to go into a lower tax bracket and be taxed at a “tax haven”. This allowed them to claim less tax and be more profitable. For example, foreign-owned corporations pay less tax if operating in the U.S. rather than elsewhere and vice versa. This creates a tax advantage for these corporations because these companies try to “transfer” their prices. Their attempt is to shift income away from the U.S. and deduct expenses toward the U.S. This would create a lower taxable income for those companies that are foreign-owned. Though this was not the intention of the IRS. The IRS hoped to avoid double taxation for these multinational corporations, because then they would have to pay tax in the country they are subsiding and the country they are doing business in. However, it is important to note that the IRS has tried to analyze almost every transaction of multinational companies in order to see if these related party transactions are in arm’s length or not. However even with these attempts to analyze every transaction, some were still using the laws to

Governments around the world impose their own taxes, with their own requirements and procedures. International companies, most of these companies have their headquarters established in the United States, but many field offices all over the world; which they have to pay taxes in the country where they reside and in the country of earning foreign- source income.

Business organizations increasingly look to globalization to increase profitability and maintain competitiveness. Income from such operations is taxed differently in the United States (US) dependent upon type of income and the levels of said income. Such foreign corporations that are controlled by US shareholders are considered controlled foreign corporations (CFC) which must comply with tax rules instituted in 1962 (Doupnik & Perera, 2014). Wholly owned subsidiaries of US companies such as Bahamamama, Ltd, the subsidiary of Mama Corporation, are considered a CFC, and as such companies such as Mama Corporation must determine income taxed by the US. Additionally, global organizations seek to reduce tax liabilities through transfer pricing. Transfer pricing is used to determine the price of transactions between subsidiaries and parent companies and is used to reduce tax liabilities of US parent companies. As such, tax authorities intervene to ensure US corporations report correct tax liabilities.

Part II of this paper will discuss the considerations involved in deciding whether a transaction should be a taxable or tax-free

• Def 1:A tax haven is a country or territory where certain taxes are levied at a low rate or not at all. • Def 2: Tax haven or fiscal paradise are terms used to refer to a jurisdiction which enables its foreign residents or companies to reduce their tax liabilities from their homelands.

In the currently highly-integrated world some businesses are successful and big enough to become multinational companies, thus, operate in different countries. Regardless of the country in which the company operates, its government needs money for increasing the well-being of the citizens and developing the country’s economy. One of a government’s

This would require staff and accountants to handle the VAT paperwork. When providing services in both the United States and foreign countries it may be possible that expenses are shared or split between multiple countries (Carpenter & Dunung, 2013). This can cause a problem on properly allocating the profit or loss between jurisdiction and paying taxes to the appropriate government and in some instance result in double taxation (Carpenter & Dunung, 2013). Imported products and services are charged a tariff which can make them more costly than local businesses (Carpenter & Dunung, 2013). Tariffs are a tool used by governments to discourage consumers from purchasing imported products in order to protect their economy and businesses (Carpenter & Dunung, 2013). If we establish a foreign

A potential alternative is CFC rules mentioned by Ruf and Schindler (2012). The rules prevent the application of the tаx-exemption rule as "passive income" is immediately being included in the corporate tаx base of the multinational's headquarters if the income is generated from non-productive activities and the multinational has an ownership of at least 50 percent. Thus, if CFC rules are applicable, passive income will be tаxed at headquarter corporate tаx rate regardless the location of the income is effectively accrued.

Governments and tax authorities face the same problems whilst trying to tax digital or online businesses: “what is the appropriate nexus that permits the application of tax jurisdiction over cross-border sales?”

The standard of living in the recipient country is also improved by higher tax revenue from the company that received the foreign direct investment. However, sometimes countries neutralize that increased revenue by offering tax incentives to attract the FDI in the first place.

(C) - No immediate deduction is allowed for input tax credit where goods and services are acquired principally for a non-taxable purpose.

Under section 6, a resident of the country is taxable for his incomes from all sources from all over the world.

Developing countries attempt to attract foreign investment by providing clear and certain tax rules through tax treaty. Tax treaties will clearly state what the tax obligations will be to the taxpayer/business, which will simplify tax issues for those involved in cross-border activates. Under the domestic laws tax treatment can change frequently where tax treaties are generally valid for at least 15 years therefore they provide more stability and comfort to taxpayers about the tax treatment to the income from their activities or investments in the other country. Tax treaties are also used to get tax administration to agree on how to interpret and apply provision as well as resolve disputes. It is important that tax treaties are interpreted the same way in both countries otherwise income may be taxed twice (double taxation) or not at all (double

The foreign taxes paid are treated as allowable expenses except where a tax treaty applies in which case a tax credit is granted.