Foreign Tax Credit System

Summary of Foreign Tax Credit System

A taxing scheme which permits a firm to offset income tax liabilities in its home country by applying sums paid to foreign tax authorities as credits against the domestic tax burden. For example, if an American firm doing business in Canada paid one million dollars in income taxes to the Canadian government, the firm might be permitted to apply an equivalent amount as a credit against its U.S. tax liability. Normally, only income taxes are creditable; other taxes, such as payroll taxes or value added taxes, cannot be used as the basis for a tax credit, unless such taxes were levied in lieu of income taxes.

See Overspill.

(Main Author: William J. Miller)