US Corporations Foreign Tax
U.S. Corporations do an ever increasing amount of business overseas. This business, however, is usually done in local currency. When this money is to be reported to the IRS it must be converted into US Dollars which can come with a gain or loss on the conversion.
Foreign Tax Deductions
The IRS also allows corporations the ability to avoid double taxation on taxes paid to a foreign government on the income earned in that country. This foreign tax can be claimed as a business deduction or a tax credit. Foreign taxes deemed paid include those paid directly on the foreign income under that country’s income tax laws. Most often the tax credit is taken by corporations. This credit is limited in the amount in order to prevent a corporation for getting a larger credit then they would have been taxed in the U.S. on the same amount of income (12-12).
Foreign Tax Credit Computation
In order to compute the foreign tax credit for corporations first the total amount of foreign taxes actually paid by the corporation must be determined. This is called the direct foreign tax credit. The next step is to determine the foreign taxes deemed paid. This step applies only when actual dividends are paid by a foreign corporation to a U.S. corporation which owns at least 10 percent of the foreign company’s outstanding stock. The equation to determine the foreign taxes deemed paid in this circumstance is as follows:
Foreign Taxes Deemed