The Structural Analysis of Foreign Tax Credits - Research Paper Example

Even though foreign tax credit is accessible to people who have foreign source of income, the U.S. companies with subsidiaries overseas always take the greatest share of the foreign tax credits. Most of the U.S. companies make foreign source earnings by operating subsidiaries abroad or through investing in associates incorporated abroad. In order for the foreign associates’ income to be qualified for a foreign tax credit, the U.S. parent company is required to have at least 10 percent of ownership in each of the associates overseas.

If the previous requirement is met and the foreign associate is evidenced to be incorporated overseas, then it is referred to as a foreign subsidiary. A foreign subsidiary pays dividends to the U.S. parent corporation from its income after foreign income taxes. Any income earned through foreign activities but not eligible for the foreign tax credit, i.e. income earned from a subsidiary that is less than 10% owned by US Corporation, is taxed in the same year when it is earned as specified by the U.S. Treasury.

Foreign income taxes that are eligible for the foreign tax credit are given credits, and the same action is extended to other withheld taxes overseas. The foreign tax is only imposed when the subsidiary forwards earnings to its U.S. based parent company. The deductions of losses incurred by a foreign subsidiary can be made out of the parent corporation’s domestic earnings which can help to cut the company’s income tax in the Unites States. However, profits made by the same subsidiary in succeeding years are treated as U.S. source earnings.