Publication 514
taxmap/pubs/p514-004.htm#en_us_publink1000224432This part discusses the foreign taxes for which you cannot take
a credit. These are:
- Taxes on excluded income,
- Taxes for which you can only take an itemized deduction,
- Taxes on foreign mineral income,
- Taxes from international boycott operations,
- A portion of taxes on combined foreign oil and gas income,
and
- Taxes of U.S. persons controlling foreign corporations and
partnerships who fail to file required information returns.
You cannot take a credit for foreign taxes paid or accrued on
certain income that is excluded from U.S. gross income.
taxmap/pubs/p514-004.htm#en_us_publink1000224434You must reduce your foreign taxes available for the credit by
the amount of those taxes paid or accrued on income that is excluded from U.S.
income under the foreign earned income exclusion or the foreign housing
exclusion. See Publication 54 for more information on the foreign earned income
and housing exclusions.
taxmap/pubs/p514-004.htm#en_us_publink1000224435If your wages are completely excluded, you cannot take a credit
for any of the foreign taxes paid or accrued on these wages.
taxmap/pubs/p514-004.htm#en_us_publink1000224436If only part of your wages is excluded, you cannot take a credit
for the foreign income taxes allocable to the excluded part. You find the amount
allocable to your excluded wages by multiplying the foreign tax paid or accrued
on foreign earned income received or accrued during the tax year by a fraction.
The numerator of the fraction is your foreign earned income and
housing amounts excluded under the foreign earned income and housing exclusions
for the tax year minus otherwise deductible expenses definitely related and
properly apportioned to that income. Deductible expenses do not include the
foreign housing deduction.
The denominator is your total foreign earned income received
or accrued during the tax year minus all deductible expenses allocable to that
income (including the foreign housing deduction). If the foreign law taxes
foreign earned income and some other income (for example, earned income from
U.S. sources or a type of income not subject to U.S. tax), and the taxes on the
other income cannot be segregated, the denominator of the fraction is the total
amount of income subject to the foreign tax minus deductible expenses allocable
to that income.
taxmap/pubs/p514-004.htm#en_us_publink1000224437You are a U.S. citizen and a cash basis taxpayer, employed by
Company X and living in Country A. Your records show the following:
| Foreign earned income received | $125,000 |
| Unreimbursed business travel expenses | 20,000 |
| Income tax paid to Country A | 30,000 |
Exclusion of foreign earned
income and housing allowance
| 91,500 |
| | |
Because you can exclude part of your wages, you cannot claim
a credit for part of the foreign taxes. To find that part, do the following.
First, find the amount of business expenses allocable to excluded
wages and therefore not deductible. To do this, multiply the otherwise
deductible expenses by a fraction. That fraction is the excluded wages over your
foreign earned income.
| | $20,000 | × | $91,500
$125,000
| = | $14,640 |
| | | | | | |
Next, find the numerator of the fraction by which you will multiply
the foreign taxes paid. To do this, subtract business expenses allocable to
excluded wages ($14,640) from excluded wages ($91,500). The result is $76,860.
Then, find the denominator of the fraction by subtracting all
your deductible expenses from all your foreign earned income ($125,000 −
$20,000 = $105,000).
Finally, multiply the foreign tax you paid by the resulting fraction.
| | $30,000 | × | $76,860
$105,000
| = | $21,960 |
The amount of Country A tax you cannot take a credit for is
$21,960.
If you have income from Puerto Rican sources that is not taxable,
you must reduce your foreign taxes paid or accrued by the taxes allocable to the
exempt income. For information on figuring the reduction, see Publication 570.
taxmap/pubs/p514-004.htm#en_us_publink1000224442If you are a bona fide resident of American Samoa and exclude
income from sources in American Samoa, you cannot take a credit for the taxes
you pay or accrue on the excluded income. For more information on this
exclusion, see Publication 570.
taxmap/pubs/p514-004.htm#en_us_publink1000242783You cannot take a credit for taxes you pay on qualifying foreign
trade income excluded on Form 8873, Extraterritorial Income Exclusion. However,
see Internal Revenue Code section 943(d) for an exception for certain
withholding taxes.
taxmap/pubs/p514-004.htm#en_us_publink1000224443You cannot claim a foreign tax credit for foreign income taxes
paid or accrued under the following circumstances. However, you can claim an
itemized deduction for these taxes. See
Choosing To Take Credit or Deduction, earlier.
You cannot claim a foreign tax credit for income taxes paid or
accrued to any country if the income giving rise to the tax is for a period (the
sanction period) during which:
- The Secretary of State has designated the country as one that
repeatedly provides support for acts of international terrorism,
- The United States has severed or does not conduct diplomatic
relations with the country, or
- The United States does not recognize the country's government,
unless that government is eligible to purchase defense articles or services
under the Arms Export Control Act.
The following countries meet this description for 2010. Income
taxes paid or accrued to these countries in 2010 do not qualify for the credit.
- Cuba.
- Iran.
- Libya (but see
Note
later).
- North Korea.
- Sudan.
- Syria.
Income that is paid through one or more entities is treated as
coming from a foreign country listed above if the original source of the income
is from one of the listed countries.
taxmap/pubs/p514-004.htm#en_us_publink1000224445A waiver can be granted to a sanctioned country if the President
of the United States determines that granting the waiver is in the national
interest of the United States and will expand trade and investment opportunities
for U.S. companies in the sanctioned country. The President must report to
Congress his intentions to grant the waiver and his reasons for granting the
waiver not less than 30 days before the date on which the waiver is granted.
Note.Effective December 10, 2004, the president granted a waiver
to Libya. Income taxes arising on or after this date qualify for the credit if
they meet the other requirements in this publication.
taxmap/pubs/p514-004.htm#en_us_publink1000224446In figuring the foreign tax credit limit, discussed later, income
from a sanctioned country is a separate category of foreign income unless a
Presidential waiver is granted. You must fill out a separate Form 1116 for this
income. This will prevent you from claiming a credit for foreign taxes paid or
accrued to the sanctioned country.
taxmap/pubs/p514-004.htm#en_us_publink1000224447You lived and worked in Syria until August, when you were transferred
to Italy. You paid taxes to each country on the income earned in that country.
You cannot claim a foreign tax credit for the foreign taxes paid on the income
earned in Syria. Because the income earned in Syria is a separate category of
foreign income, you must fill out a separate Form 1116 for that income. You
cannot take a credit for taxes paid on the income earned in Syria, but that
income is taxable by the United States.
taxmap/pubs/p514-004.htm#en_us_publink1000224448Table 1 lists the countries for which sanctions have ended or
for which a Presidential waiver has been granted. For any of these countries,
you can claim a foreign tax credit for the taxes paid or accrued to that country
on the income for the period that begins after the end of the sanction period or
the date the Presidential waiver was granted.
taxmap/pubs/p514-004.htm#en_us_publink1000224449The sanctions against Country X ended on July 31. On August 19,
you receive a distribution from a mutual fund of Country X income. The fund paid
Country X income tax for you on the distribution. Because the distribution was
made after the sanction ended, you may include the foreign tax paid on the
distribution to compute your foreign tax credit.
taxmap/pubs/p514-004.htm#en_us_publink1000224450If a sanction period ends (or a Presidential waiver is granted)
during your tax year and you are not able to determine the actual income and
taxes for that period, you can allocate amounts to that period based on the
number of days in the period that fall in your tax year. Multiply the income or
taxes for the year by the following fraction to determine the amounts allocable
to that period.
Number of nonsanctioned days in year
Number of days in year
|
You are a calendar year filer and received $20,000 of income
from Country X in 2010 on which you paid tax of $4,500. Sanctions against
Country X ended on July 11, 2010. You are unable to determine how much of the
income or tax is for the nonsanctioned period. Because your tax year starts on
January 1, and the Country X sanction ended on July 11, 2010, 173 days of your
tax year are in the nonsanctioned period. You would compute the income for the
nonsanctioned period as follows:
You would figure the tax for the nonsanctioned period as follows:
To figure your foreign tax credit, you would use $9,479 as the
income from Country X and $2,133 as the tax.
The rules for figuring the foreign tax credit after a country's
sanction period ends are more fully explained in Revenue Ruling 92-62,
Cumulative Bulletin 1992-2, page 193. This Cumulative Bulletin can be found in
many libraries and IRS offices.
taxmap/pubs/p514-004.htm#en_us_publink1000224456
Table 1.Countries Removed From the
Sanction List or Granted Presidential Waiver
| | Sanction Period |
| Country | Starting Date | Ending Date |
| Iraq | February 1, 1991 | June 27, 2004 |
| Libya | January 1, 1987 | December 9, 2004* |
| *Presidential waiver granted for qualified income taxes arising
after December 9, 2004. |
taxmap/pubs/p514-004.htm#en_us_publink1000224458You cannot claim a foreign tax credit for withholding tax (defined
later) on dividends paid or accrued if either of the following applies to the
dividends.
- The dividends are on stock you held for less than 16 days
during the 31-day period that begins 15 days before the ex-dividend date
(defined later).
- The dividends are for a period or periods totaling more than
366 days on preferred stock you held for less than 46 days during the 91-day
period that begins 45 days before the ex-dividend date. If the dividend is not
for more than 366 days, rule (1) applies to the preferred stock.
When figuring how long you held the stock, count the day you
sold it, but do not count the day you acquired it or any days on which you were
protected from risk or loss.
Regardless of how long you held the stock, you cannot claim the
credit to the extent you have an obligation under a short sale or otherwise to
make payments related to the dividend for positions in substantially similar or
related property.
taxmap/pubs/p514-004.htm#en_us_publink1000224459For this purpose, withholding tax includes any tax determined
on a gross basis. It does not include any tax which is in the nature of a
prepayment of a tax imposed on a net basis.
taxmap/pubs/p514-004.htm#en_us_publink1000224460The ex-dividend date is the first date following the declaration
of a dividend on which the purchaser of a stock is not entitled to receive the
next dividend payment.
taxmap/pubs/p514-004.htm#en_us_publink1000224461Example 1.(p9)
You bought common stock from a foreign corporation on November
3. You sold the stock on November 19. You received a dividend on this stock
because you owned it on the ex-dividend date of November 5. To claim the credit,
you must have held the stock for at least 16 days within the 31-day period that
began on October 21 (15 days before the ex-dividend date). Because you held the
stock for 16 days, from November 4 until November 19, you are entitled to the
credit.
taxmap/pubs/p514-004.htm#en_us_publink1000224462Example 2.(p9)
The facts are the same as in
Example 1
except that you sold the stock on November 14. You held the
stock for only 11 days. You are not entitled to the credit.
taxmap/pubs/p514-004.htm#en_us_publink1000224463If you are a securities dealer who actively conducts business
in a foreign country, you may be able to claim a foreign tax credit for
qualified taxes paid on dividends regardless of how long you held the stock or
whether you were obligated to make payments for positions in substantially
similar or related property. See section 901(k)(4) of the Internal Revenue Code
for more information.
taxmap/pubs/p514-004.htm#en_us_publink1000224464For income or gain (other than dividends) paid or accrued on
property, you cannot claim a foreign tax credit for withholding tax (defined
later):
- If you have not held the property for at least 16 days during
the 31-day period that begins 15 days before the date on which the right to
receive the payment arises, or
- To the extent you have to make related payments on positions
in substantially similar or related property.
When figuring how long you held the property, count the day
you sold it, but do not count the day you acquired it or any days on which you
were protected from risk or loss.
For this purpose, withholding tax includes any tax determined
on a gross basis. It does not include any tax which is in the nature of a
prepayment of a tax imposed on a net basis.
taxmap/pubs/p514-004.htm#en_us_publink1000224466If you are a dealer in property who actively conducts business
in a foreign country, you may be able to claim a foreign tax credit for
qualified taxes withheld on income or gain from that property regardless of how
long you held it or whether you have to make related payments on positions in
similar or related property. See section 901(I)(2) of the Internal Revenue Code
for more information.
taxmap/pubs/p514-004.htm#en_us_publink1000224467You cannot claim a foreign tax credit for taxes paid or accrued
to a foreign country in connection with the purchase or sale of oil or gas
extracted in that country if you do not have an economic interest in the oil or
gas, and the purchase price or sales price is different from the fair market
value of the oil or gas at the time of purchase or sale.
taxmap/pubs/p514-004.htm#en_us_publink1000224468You must reduce any taxes paid or accrued to a foreign country
or possession on mineral income from that country or possession if you were
allowed a deduction for percentage depletion for any part of the mineral income.
taxmap/pubs/p514-004.htm#en_us_publink1000224469If you participate in or cooperate with an international boycott
during the tax year, your foreign taxes resulting from boycott activities will
reduce the total taxes available for credit. See the instructions for line 12 in
the Form 1116 instructions to figure this reduction.
This rule generally does not apply to employees with wages who
are working and living in boycotting countries, or to retirees with pensions who
are living in these countries.
taxmap/pubs/p514-004.htm#en_us_publink1000224470A list of the countries which may require participation in or
cooperation with an international boycott is published by the Department of the
Treasury. As of December 2010, the following countries are listed.
- Kuwait.
- Lebanon.
- Libya.
- Qatar.
- Saudi Arabia.
- Syria.
- United Arab Emirates.
- Republic of Yemen.
Iraq is not included in this list, but its status with respect
to future lists remains under review by the Department of Treasury.
 | For information concerning changes to the list, write to:
Internal Revenue Service
International Section
Philadelphia, PA 19255-0725
|
taxmap/pubs/p514-004.htm#en_us_publink1000224472You may request a determination from the Internal Revenue Service
as to whether a particular operation constitutes participation in or cooperation
with an international boycott. The procedures for obtaining a determination from
the Service are outlined in Revenue Procedure 77-9 in Cumulative Bulletin
1977-1. Cumulative Bulletins are available in most IRS offices and you are
welcome to read them there.
taxmap/pubs/p514-004.htm#en_us_publink1000224473A determination and any related background file is open to public
inspection. However, your identity and certain other information will remain
confidential.
taxmap/pubs/p514-004.htm#en_us_publink1000224474You must file a report with the IRS if you or any of the following
persons have operations in or related to a boycotting country or with the
government, a company, or a national of a boycotting country.
- A foreign corporation in which you own 10% or more of the
voting power of all voting stock but only if you own the stock of the foreign
corporation directly or through foreign entities.
- A partnership in which you are a partner.
- A trust you are treated as owning.
If you have to file a report, you must use Form 5713, International
Boycott Report, and attach all supporting schedules. See the Instructions for
Form 5713 for information on when and where to file the form.
taxmap/pubs/p514-004.htm#en_us_publink1000224476If you willfully fail to make a report, in addition to other
penalties, you may be fined $25,000 or imprisoned for no more than one year, or
both.
taxmap/pubs/p514-004.htm#en_us_publink1000224477You must reduce your foreign taxes by a portion of any foreign
taxes imposed on combined foreign oil and gas income. The amount of the
reduction is the amount by which your foreign oil and gas taxes exceed the
amount of your combined foreign oil and gas income multiplied by a fraction
equal to your pre-credit U.S. tax liability (Form 1040, line 44) divided by your
worldwide taxable income. You may be entitled to carry over to other years taxes
reduced under this rule. See Internal Revenue Code section 907(f).
Combined foreign oil and gas income means the sum of foreign
oil related income and foreign oil and gas extraction income. Foreign oil and
gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil
related taxes.
taxmap/pubs/p514-004.htm#en_us_publink1000224478If you had control of a foreign corporation or a foreign partnership
for the annual accounting period of that corporation or partnership that ended
with or within your tax year, you may have to file an annual information return.
If you do not file the required information return, you may have to reduce the
foreign taxes that may be used for the foreign tax credit. See
Penalty for not filing Form 5471 or Form 8865, later.
If you are a U.S. citizen or resident who had control of a foreign
corporation for an uninterrupted period of at least 30 days during the annual
accounting period of that corporation, you may have to file an annual
information return on Form 5471, Information Return of U.S. Persons With Respect
To Certain Foreign Corporations. Under this rule, you generally had control of a
foreign corporation if at any time during the corporation's tax year you owned:
- Stock possessing more than 50% of the total combined voting
power of all classes of stock entitled to vote, or
- More than 50% of the total value of shares of all classes
of stock of the foreign corporation.
If you are a U.S. citizen or resident who had control of a foreign
partnership at any time during the partnership's tax year, you may have to file
an annual information return on Form 8865, Return of U.S. Persons With Respect
to Certain Foreign Partnerships. Under this rule, you generally had control of
the partnership if you owned more than 50% of the capital or profits interest,
or an interest to which 50% of the deductions or losses were allocated.
You also may have to file Form 8865 if at any time during the
tax year of the partnership, you owned a 10% or greater interest in the
partnership while the partnership was controlled by U.S. persons owning at least
a 10% interest. See the Instructions for Form 8865 for more information.
taxmap/pubs/p514-004.htm#en_us_publink1000224481Generally, there is a penalty of $10,000 for each annual accounting
period for which you fail to furnish information. Additional penalties apply if
the failure continues for more than 90 days after the day on which notice of the
failure to furnish the information is mailed.
If you fail to file either Form 5471 or Form 8865 when due, you
may also be required to reduce by 10% all foreign taxes that may be used for the
foreign tax credit. This 10% reduction shall not exceed the greater of $10,000
or the income of the foreign corporation or foreign partnership for the
accounting period for which the failure occurs. This foreign tax credit penalty
is also reduced by the amount of the dollar penalty imposed.
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