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LEY MILLS: I see it's the top of the hour.

For those who just joined, welcome for today's webinar, "Foreign Tax Credit Credibility Around the Globe. " We're glad you're joining us today.

My name is Ley Mills.

And I am a stakeholder liaison with the Internal Revenue Service, and I will be your moderator for today's webinar, which is slated for 100 minutes.

Before we begin, if there's anyone in the audience that is in or with the media, please send an e-mail to the address on the slide.

Be sure to include your contact information and the news publication that you're with.

Our Media Relations and Stakeholder Liaison staff will assist you and answer any questions you may have.

As a reminder, this webinar will be recorded and posted to the IRS Video Portal.

And this will be done in a few weeks.

This portal is located at

And please note, continuing education credit or certificates of completion, they are not offered if you viewed any versions of our webinar after the live broadcast.

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The second option is to click on "settings " on your browser viewing screen and select "HLS. " You should have received today's PowerPoint in a reminder e-mail.

But if not, no worries.

You can download it by clicking on the "Materials " drop-down arrow on the left side of the screen, as shown on the screen.

Closed captioning is available for today's presentation.

If you're having trouble hearing the audio through your computer speakers, please click the "Closed captioning " drop-down arrow located on the left side of the screen.

This feature will be available throughout the webinar.

During the presentation, we'll take a few breaks to share knowledge-based questions with you.

At those times, a polling-style feature will pop up on your screen with a question and multiple-choice answers.

Select the response you believe is the correct by clicking on the radio button next to your selection and then clicking the "Submit. " Some people may not get the polling question.

This may be because you may have your pop-up blocker on.

So please take a moment to disable your pop-up blocker now so you can answer the questions.

If you have a topic-specific question now, please submit it by clicking the "Ask question " drop-down arrow to reveal the text box.

Type your questions in the text box and then click "Send. " Very important, please do not enter any sensitive or taxpayer-specific information.

Again, welcome, and thank you for joining us for today's webinar.

Before we move along for our session, let me make sure you're in the right place.

Today our Large Business and International Division will share information relating to the Foreign Tax Credit Credibility Around the Globe.

Last week they shared information on the Foreign Tax Credit Common Issues.

Welcome back to those who joined us last week.

Like last week, today's webinar is scheduled for approximately 100 minutes.

So let me introduce today's speakers.

Sandy Lyons and Maria Nickolaou are Senior Revenue Agents in our Large Business and International Divisions.

Maria has a Master's in Taxation, and both have extensive experience working in the Foreign Tax Credit Group.

Next up, we have Jim Wu and Rod Peters.

Jim and Rod are Senior Revenue Agents in our Large Business and International Division.

Jim has a Master's in Taxation, and both have extensive experience working on the Foreign Tax Credit Group.

So I am now going to turn this over to Sandy.

I believe you are the first speaker.

All yours.

SANDY LYONS: Thank you, Ley. And hello, everyone.

Our presentation will...

will cover the creditability of foreign taxes.

We will start with a quick review of some basic foreign tax credit concepts.

We will also review the impact that tax treaties and totalization agreements have on foreign taxes.

We will do some globetrotting and we will review the credibility of foreign taxes in Europe, Asia, and the Americas.

In order to wrap our head around what we are talking about today, it's important not to lose sight of the big picture.

Even though we are going to be talking about a lot of different foreign taxes, we want to look at these taxes from the perspective of the foreign tax credit, specifically, the creditability of these foreign taxes.

The general purpose of the foreign tax credit is to mitigate the effects of double taxation on foreign-source income.

The foreign tax credit is a credit that reduces a U.S. taxpayer's tax liability by all or part of the foreign taxes paid or accrued during a tax year.

Although individual taxpayers are generally on a cash basis, they can elect to claim foreign tax credits on the accrual basis and this election is made on a timely filed original return.

Once the election is made to account for foreign taxes on the accrual method, it is binding on all future years.

And the Form 1116 is the form that is used to compute and report foreign tax credit for individuals.

Another basic yet key -- Another basic -- Okay.

Sorry about that.

I seem to have an echo.

Another basic yet key foreign tax credit-related concept is that income must be properly sourced as either U.S. or foreign.

U.S.-source income is income that is determined by tax law to have originated from within the U.S., and foreign-source income is income determined by tax law to have originated from within the U.S.

And foreign-source income is income determined by tax law or applicable treaty to be earned outside of the U.S.

The idea of sourcing is very important because the allowable foreign tax credit is ultimately computed on foreign-source income, and if U.S.-source income is mistakenly included as foreign in the foreign tax credit computation, then there is a potential to overstate the credit.

And this is obviously not allowed.

And if foreign-source income is mistakenly included as U.S.-source income, then there is a potential to understate the credit.

It is also important that foreign-source income is included in the appropriate income category.

Please refer to Publication 514, titled "Foreign Tax Credit for Individuals. " This is an excellent resource.

So the question that each tax professional needs to ask is, what foreign taxes qualify as a creditable foreign tax credit?

For a foreign tax or levy to qualify for the foreign tax credit, all four of the following test or criteria that you see listed on this slide must be met.

The first one is the foreign tax must be an income tax or a tax in lieu of an income tax.

Some examples of foreign levies that should not be included are gasoline taxes, penalties, fines, inheritance taxes, certain Social Security taxes paid or accrued, or value-added taxes, also referred to as VAT.

These are not income taxes and do not qualify for the foreign tax credit.

This first criteria will be covered again a bit later.

Second, the foreign tax must be the legal and actual tax liability.

This requirement is very important and has been the subject of a lot of training and resources that we have provided over the past several years.

Third, the foreign tax must be imposed on the taxpayer.

For example, a tax that is withheld from a taxpayer's wages is considered imposed on that taxpayer.

And fourth, the foreign tax must be paid or accrued by the taxpayer.

The taxpayer can claim a credit only if he or she paid or accrued the foreign tax to foreign country or U.S. possession.

We should note here that an individual taxpayer who uses the cash method will, by default, take foreign taxes into account when paid.

However, a cash-method taxpayer may make a special election to account for foreign taxes using the accrual method.

It is important to remember these concepts as we move through our webcast today.

We are now ready for our first polling question.


MILLS: Sandy, I just happen to have a question right here.

Audience, our first polling question is, "All of the following are non-creditable taxes for foreign tax credit purposes except. " Is it A, fines?

Is it B, penalties?

Is it C, income taxes?

Or is it D, value-added taxes?

So take a moment and click the radio button that best answers the question.

And I'll give you a few more seconds to make sure of your selection.

So let me count a little bit.

Okay, we are going to stop the polling now, and let's share the correct answer on the next slide.

And the correct response is C, income taxes.

And, well, it's a pretty good result here.

We ended up with 80%, which is pretty good.

So I tell you what, Sandy, I believe you are still speaking.

So let me turn this back to you again.

LYONS: Thank you, Ley.

Before we move on to our globetrotting, let's review the impact that tax treaties and totalization agreements have on foreign taxes.

As most of you know, the U.S. has negotiated tax treaties with more than 60 countries with the aim of mitigating any double taxation.

Under the terms of these tax treaties, residents or citizens of the United States are taxed at a reduced rate or are sometimes even exempt from foreign taxes altogether on certain items of income they receive from sources within those foreign countries with which the U.S. has tax treaties in place.

The link to the treaties on as shown here on the slide.

The purpose of this webcast is not to talk about tax treaties in detail, but just know that each tax treaty is different and each tax treaty needs to be reviewed and analyzed.

The next consideration must be whether there is a totalization agreement.

The Social Security Act bars a credit or deduction for foreign taxes paid for a period that will be counted in determining the taxpayer's Social Security benefits under a totalization agreement.

The U.S. has, through a combination of treaties and totalization agreements, addressed these areas in various ways.

What you often come to realize is that you have a group of overlapping and potentially dueling agreements that may raise interpretational issues and create uncertainty and complications for Americans who work overseas for part of their careers and during those years they were required to pay taxes into a foreign government's social security system.

Totalization agreements will address the taxing of Americans who work overseas and have to pay taxes into a foreign government's social security system.

A totalization agreement is initiated by the State Department, negotiated with the Social Security Administration, signed by the president and the foreign government, and effective only after approval by Congress.

We all know that under Internal Revenue Code Section 901, the foreign tax credit can be taken for income taxes paid to a foreign country.

However, a foreign tax will not be eligible for a tax credit if it is paid with respect to a period of employment covered under the social security system of a foreign country and in accordance with the terms of a totalization agreement.

Here you will see the links for the totalization agreement.

Again, when reviewing foreign taxes, you have to consider whether a totalization agreement exists and the interpretation of that agreement.

I am now going to pass the presentation to Maria.

MARIA NICKOLAOU: Thank you, Sandy.

In this webinar, we will touch on some geographic areas and just a couple of countries within each.

I'll start by discussing Europe.

Then Jim will go through some Asian countries, and Rod will finish with the Americas.

But before we go globetrotting, let's go to Ley, and I think it's time for our second polling question.

MILLS: Sorry for the delay. Always comes with mute here.

So here is the second polling question.

And the second polling question is, "How many countries do you think Europe has? " Is it A, 50?

Is it B, 30?

Is it C, 20?

Or is it D, 10?

Take a moment and click on the radio button that best answers the question.

I'll give you a few more seconds to make your selection.

Okay, we are going to stop the polling now, and I'll share the correct answer.

And the correct answer is A, 50.

Now, ooh, let me see.

Oh, well, we have a little slight lower percentages here, and this ended up with 37% correct.

Maria, you know, I think you wanted to put in a few comments on something?

-Yeah, this was everyone's guess.

We didn't expect, you know, everyone to understand how many countries.

This isn't geography.

But it is kind of a trick question because although the continent of Europe is divided into 50 countries, did you know there are several countries that have territory both in Europe and Asia?

These are called Eurasia, and they are transcontinental, and those include Turkey, Georgia, Azerbaijan, Kazakhstan, and Russia.


it is a question.

All you had to do was answer.

Didn't matter if it was right or wrong.

But another thing on this page, slide 26, we have a link down here.

Now, it's hard enough to know U.S. taxation.

We all agree there's plenty there for us to know.

Sometimes you just need a good starting point for taxation administrations and the different tax sites in various countries.

This is a website that we, you know, sometimes start when we don't know anything about a country.

So there's lots of resources out there.

You can Google about the tax administration sites of foreign countries, but this is a good one to start for Europe.

So we've got that on your slides that you can go back and refer to.

Alright, so now we're moving on.

France is the most taxed country in Europe, according to many news sources.

Let's do a slight overview.

I will try and use the terms from these countries.

So I apologize in advance if my accent or pronunciation is a bit off.

Taxes are made up of taxes in the narrow meaning of the word plus social security contributions.

There's a distinction to be made between taxes, which are referred to as impôt, and those which apply to production, importations, wealth and income, and social contributions -- cotisations sociales.

And these are part of the total wages paid by an employer to an employee.

The taxes and contributions together are called in French prélèvements obligatoires, which translated is "compulsory deductions. " This slide shows some of the French taxes individuals may encounter.

While in no particular order and by no means inclusive, I've listed a few and saved a couple for subsequent slides for future discussion.

We have the personal income tax, PIT.

And it generally applies on worldwide income to individuals who have their tax domicile in France, unless excluded by a tax treaty.

Individuals who are residents of France are taxed on their worldwide assets.

Individuals not living in France are taxed only on their incomes from French sources.

We have a capital gains tax, impôt sur les plus values.

I'm sorry. I crack myself up.


It is a tax payable on the sale or exchange of land or buildings on shares and certain other personal property subject to any exemptions, allowances, or deductions that are available.

Both individuals and businesses are liable for capital gain tax, although there are different rules that apply to each.

Properties that are gifted are not liable, although they may be subject to gift tax.

And property that's inherited is similarly exempt, although it is subject to inheritance tax rules.

VAT -- V-A-T -- value-added tax, is a principle that is a broad-based tax on household consumption.

Well, what that means is VAT should only be applied to supplies to private individuals as distinguished from businesses because only private individuals engage in the consumption.

And this is what the VAT is directed at.

It is assessed on goods sold and services rendered in France.

These taxes are not based on income and therefore not creditable.

Then we have the IFI, which is also known as the wealth tax.

In 2017 -- Up until 2017, there was a solidarity tax on wealth on any net assets above a certain threshold.

From 2018 onwards, it has been replaced by a wealth tax on real estate, exonerating all financial assets.

Starting with tax year 2018, IFI tax is only due if net taxable wealth exceeds 1.3 million euros, which is approximately 1.474 million US dollars or 1.475 million US dollars, on that January 1st.

Not all countries in Europe have this kind of tax.

Some countries that have abolished it are Austria, Denmark, Germany, Sweden, Spain, Finland, Iceland, and Luxembourg.

Now, some that still have it are Portugal, Spain, and Switzerland.

These are based on wealth and not income, and therefore they are not creditable.

Now I'd like to talk a little bit about the social charges that I mentioned earlier.

These are the CSG, the general social contributions, and the CRDS, contributions to the repayment of social debt.

We need to understand some of the history which plays a part in the conclusion of this issue.

Because this issue has been a discussion that's been going on for many years and recently came to a conclusion.

As Sandy mentioned earlier, and you're going to hear this throughout the presentation, the Social Security Act bars a credit or deduction for foreign taxes paid with respect to any period of employment that's covered by the social security system of that foreign country in accordance with the terms of the totalization agreement.

So the application of this social charges rule for CSG and CRDS came to a head in 2008 and 2009.

-[ Sneezes ] -Bless you.

When taxpayers Ory and Linda Eshel, who are husband and wife and dual citizens of both the U.S. and France, they paid various taxes to France, and those included income tax, unemployment tax, CSG, and CRDS social taxes.

The IRS denied foreign tax credit claimed for the taxpayers' CSG and CRDS payments.

And the taxpayers filed a petition with the tax court.

So the issue for the court to decide, as we've been mentioning, the decision was whether the taxpayers paid the CSG, CRDS taxes to France in accordance with terms of the U.S.-France totalization agreement, and that was enacted in 1987.

Or put another way, does the totalization agreement apply to these two social taxes?

If it was determined to be applicable, foreign tax credit would be not denied under the Social Security Act.

The agreement -- The totalization agreement applies to any laws listed in the agreement or any laws that amend or supplement the laws initially listed.

So the CSG, CRDS taxes were not listed in the agreement.

And so the tax court only had to determine if the taxes were considered to amend or supplement the French laws listed in the totalization agreement.

In 2014, the tax court agreed with the IRS that these two taxes, the CSG and CRDS taxes, amend or supplement the enumerated French laws, and it held that these social taxes were not creditable for FTC.

But like in most litigation, this was not the final word.

We know what the taxpayers did. They appealed.

And in 2016, the district court overturned the tax court's decision, holding that the lower court erred in relying on American dictionaries to determine the meaning of the word "amends or supplements " language in the agreement.

This is why it's important to really understand the totalization agreements.

According to the district court, the tax court should have first looked to the French tax law and, to the extent there was still ambiguity, to look to any evidence of the shared understanding of the parties, which here is the U.S. and France.

So because of this, the case was remanded back to the tax court for further proceedings.

So now our State Department gets involved, and in May of 2019, after working with the taxation departments in France, our U.S. State Department confirmed to the IRS that the U.S. and France had come to a shared understanding that the CSG and CRDS taxes do not amend or supplement within the meaning of the totalization agreement.

The letter further indicated that this shared understanding has been memorialized in diplomatic communications.

So the IRS no longer maintains that these two specific taxes are ineligible for a foreign tax credit under 901 -- Code Section 901.

The last bullet on this slide is a link to that specific directive issued by the IRS stating it will no longer challenge the credibility of these two French social taxes, the CSG and CRDS.

So now we're going to get on the monorail or train and move a little bit east and we're going to go to Germany.

The German tax system is similar to structures in other Western countries.

The German taxation of an individual's income is progressive.

All resident individuals are taxed on their worldwide income.

Non-resident individuals are taxed, usually through withholding, on German-source income only.

I'm not going through all of these, but I wanted to list them so you would be aware of some of the taxes.

Besides the income tax, which is considered the base amount, the most often question we get on Germany is the solidarity surcharge, which is introduced in 1991.

And I am not going to pronounce that.

We'll call it the Soli tax.

It is actually a special levy on income, capital gains, and corporate tax to primarily finance the reunification of Germany.

And, you know, we found it amusing that this was passed almost 28 years ago and it's still on the books.

So that goes to show you, once you have a revenue raiser.

even if it's three decades old, it's still on the books.

It is considered -- This Soli tax is considered to be part of the Einkommensteuer, which is the income tax, and because it's part of that, it is therefore creditable.

But even more to the point, this is addressed in the U.S.-German tax treaty in a catch-all that says it will apply to any identical or substantially similar taxes imposed after the date of the convention, the treaty convention.

Therefore, in Germany, an additional tax imposed as a percentage of the amount of an income tax under the U.S. concept is itself an income tax.

We also have a revenue ruling, and I'll repeat this a couple times 'cause you'll hear it again in the presentation, Revenue Ruling 74-90.

And I'm just going to read what this Revenue Ruling says, which supports what the treaty in Germany and the U.S. says.

Revenue Ruling 74-90 states, "Both the income taxes and surcharges on the income taxes imposed under Federal Republic of German laws on individuals and corporations are creditable taxes for purposes of the foreign tax credit under IRC Section 901 of the Code. " At first glance, you might think, "Okay, this isn't creditable. " But our position that's mirrored in this Revenue Ruling and which can be used sometimes in defense of other countries says as long as the additional tax is imposed on a percentage of the amount of income tax within the U.S. concept, it itself is an income tax.

Therefore this German surcharge is creditable.

Now, another thing we hear a lot about is the church tax.

It's also called a worship tax.

And at first glance, you would think, "Nah, not creditable. " But surprise. It is.

so let me explain.

It's imposed on members of some religious congregations in Germany.

It is not unique.

Other people who have -- Other countries who have church taxes are Austria, Denmark, Finland, Iceland, Italy, Sweden, and some parts of Switzerland.

In Germany, if you are Catholic, Protestant, or Jewish and an official member of the church registered in Germany, you also have to pay a church tax of 8% to 9% of your income, depending on what federal state you live in.

Those who do not want to pay the church tax can make an official declaration they are leaving the faith.

Back during the 19th century, the church tax was introduced by state legislation to replace the state benefits the churches had previously obtained.

And because of this legislative mandate, it is compulsory for those who are part of the church system.

It is also income tax-like.

The money goes to support things like hospitals, schools, daycare, the Vatican, and other social services.

In Germany, on the basis of tax regulations passed by the religious community and limits that are set by state law, communities can either, A, require the taxation authorities to collect the fees from members on the basis of an income-tax assessment.

And, of course, the authorities take a collection fee for that.

Or, B, choose to collect the church tax themselves.

In the first case, the membership in the religious community is stored in a database at the federal tax office, which employers receive excerpts of for the purpose of the proper withholding tax on paid income.

If the employee's tax data indicates membership in a tax-collecting religious community, the employer must withhold -- making it compulsory -- these church tax payments from their income, in addition to any other withholding.

In connection with the final annual income tax assessment, the state revenue authorities also finally assess the church tax owed.

If, however, the religious communities themselves choose to collect that church tax, they may demand that the tax authorities reveal taxation data of their members so that they can calculate the contributions and payments owed.

The effort of collecting itself done by the state is entirely paid for by the churches with part of the tax income.

Some smaller communities -- For example, we read that the Jewish community of Berlin collects the taxes themselves because they don't want to pay the collection fees to the government.

And the tax law in Germany distinguishes between this income tax in general, the Einkommensteuer, and the Lohnsteuer, which is pay-as-you-earn tax, or the withholding tax.

The PAYE system -- P-A-Y-E -- is merely a part of the overall income tax.

Employees pay income taxes throughout the year, usually with the employer deducting from each paycheck, and then adjustments can be made at the end of the year for any under- or overpayment.

So, withholding is required for certain types of income from employment and specific income from capital assets above a certain amount.

Income tax it deducted at source and paid directly to the German tax office at the time of payment to the beneficiary.

A tax assessment only takes place in special cases.

In Germany, there is no special capital gains tax.

Only under certain conditions gains from private disposal may be taxed.

Germany levies a final tax amounting to 25% that may take effect like a capital gains tax for resident persons, for example, on disposals of shares.

This tax is creditable.

All services and products generated in Germany by a business entity are subject to the value-added tax, VAT.

The German tax, like other VATs in Europe, is part of the European Union value-added tax system.

And again, these are not creditable.

And some miscellaneous taxes here are that there is an inheritance and gift tax, but Germany did eliminate the wealth tax about 20 years ago.

So let's talk a little bit employment income from Germany.

It's subject to different insurance contributions shown here.

Employees are subject to a compulsory social security system, and like our system, the employer withholds the employee's share from wage and salary payment, and these cover your standard health and pension, nursing, unemployment insurance, and the employer is obligated to deduct the tax at source from an employee, and they also make an additional employer contribution to their social security regiment.

Unlike France, that was not clear-cut.

These are social taxes and not creditable.

Remember we said earlier, we're going to continue to remind everyone.

The determination of whether a particular social security tax is covered by a totalization agreement and therefore not eligible for FTC requires asking whether there is a totalization agreement in effect with that foreign country and whether that particular tax is covered by the agreement.

Also, our national office consults with the Social Security Administration to make these determinations.

So now we're going to move to the land of wonderful chocolate.


Have we gotten there? Yet.

So we have both direct and indirect taxes in Switzerland, and they are levied by the federal government, and the federal government is referred to as the Swiss Confederation.

They have constituent individual states, and those states are referred to as cantons.

And they have their municipalities.

There are 26 cantons in Switzerland, and each have their own laws and varying income and wealth tax regiment.

The federal government, the confederation's main tax receipts largely come from consumption taxes, and these are indirect, with VAT generating the most receipts.

So the federal government gets a lot from the VAT.

About a third of the federal confederation's taxes come from direct taxes.

All resident individuals are taxed on their worldwide income and wealth.

Non-resident individuals are only taxed on Swiss sources of income and wealth.

The federal taxes are progressive, as are most of the cantons.

Some cantons have recently introduced some flat taxes.

The taxes levied in Switzerland are divided into direct taxes, and those are mostly income and wealth taxes for individuals and mostly profit and capital gain tax for legal business entities, and indirect taxes, like consumption and excise taxes.

The one we're going to focus on because we get the most questions on is the church tax in Switzerland.

In almost all cantons, the parishes of three national churches, the Protestant, Roman Catholic, and, if represented in that canton, the Christian Catholic Church, levy a church tax on their members and some legal entities subject to the tax in the canton.

Like Germany, these taxes are compulsory and based on income.

So for that requirement, they are creditable.

I'm not going to go through everything on the list here, but the remaining ones here are not creditable.

So before we go spinning the globe and leaving this continent, Ley, I think it's time for another polling question, according to my notes.

MILLS: Certainly, Maria.

Audience, here is our third polling question.

"The Eshel court case dealt with what issue? " Is it A, French social taxes?

Is it B, Swiss wealth taxes?

Is it C, German church taxes?

Or is it D, U.S.-French diplomatic relations?

Take a moment and click the radio button that best answers the question.

I'll give you a few more seconds to make your selection.

Okay, we are going to stop the polling now, and let's share the correct answer on the next slide.

And the correct response is A, French social taxes.

Let me get these things together.

Well, little bit better than we did last time.

Ended up with 70%.

I tell you what, Maria, can you just go through a couple more things for clarification?

And I would appreciate that.

NICKOLAOU: Okay, because of this court case, the Eshel court case, the question always is, are the taxes paid part of the totalization agreement?

And what happened was the totalization agreement came into law first, and then these two social taxes were enacted later.

So what the taxpayers were arguing, that this is not part of the totalization agreement.

And therefore you get into this discussion of, well, did it amend or supplement the original totalization agreement?

And this is where, you know, the parties of the two countries have to understand each other.

So because that was a topic of...

you know, misunderstanding, they had to go back, and at the end of the day, France provided enough, I guess, evidence that this was not an amendment to the totalization agreement.

So because these taxes were not part of the totalization agreement and they did not amend or supplement, they are allowed.

Had they amended or supplemented the totalization agreement, they would not be allowed.

You always have to look at the dates of enactment on all of these documents.

MILLS: Well, Maria, thank you very much for clarifying that.

We really appreciate that.

And let me see here.

Jim, it looks like you are up.

And we're going to start off talking about the Japanese consumption tax.

So all yours, Jim.

JIM WU: Thank you, Ley. Hi, everyone.

We will now travel eastward towards the Orient and we will look at three Asian countries and some particular taxes related to these countries, so first, let's look at Japan.

In Japan, a taxpayer pays both the income tax and the consumption task.

The consumption tax is similar to a sales tax or a VAT, which is value-added tax, that's common in Europe.

And these types of taxes normally are collected by the provider of goods and services.

However, there is a reverse consumption tax in Japan that is imposed on foreign entertainers or athletes performing services.

The reverse consumption tax is withheld at stores by the payer or the employer.

The Japanese employer typically will withhold the tax on a performer's earnings and then remit it to the Japanese tax authority.

The Japanese tax authority requires withholding of the consumption tax, in this case the reverse consumption tax... case the performer or the athlete leaves the country without filing a tax return to settle any tax obligation.

As the entertainment profession or athletic profession is oftentimes very transitory, it is important to note that this tax is in addition to the regular Japanese income tax withholding.

We recently saw a case of an American baseball player playing in Japan and claim this tax on the Form 1116, but it was ultimately disallowed as a credible foreign tax.

Okay, moving on.

Consumption taxes are not generally credible for FTC purposes, like we said, even though the reverse consumption tax on foreign performers arguably resembles a gross-based income tax.

However, its purpose is a tax on consumption and is not an income tax in the U.S. sense.

Because Japan already has a regular income tax, it's not a task in lieu of or in place of an income tax, but something in addition to.

So per Code Section 903 and Treasury regulation 1.903-1(b)(1) -- Let me repeat that.

IRC Section 903 and Treasury regulation 1.903-1(b)(1).

Per these two sites, the Japanese reverse consumption tax does not qualify as a foreign tax eligible for the foreign tax credit.

Okay, now let's move on to Hong Kong.

Hong Kong is a unique place.

It has a very interesting history.

Historically and geographically, it is part of China.

Now, Hong Kong was a British colony for over a hundred years and eventually reverted back to China in 1997.

However, because of the huge economic, political, and maybe even cultural differences between the two countries -- or between Hong Kong and China after having been managed by Britain for so long, China agreed to gradually assimilate Hong Kong.

Therefore Hong Kong is referred to as a SAR, or special administrative region, of China.

And as such, Hong Kong is mostly autonomous with respect to its internal policies.

So its tax system stands on its own and is administered by the IRD, or Inland Revenue Department.

Hong Kong is also unique in many respects when it comes to taxation.

It is one of the wealthiest in Asia but one of the smallest in terms of territory.

It is also a financial hub in Asia, with the seventh-largest stock market in the world.

Hong Kong has a progressive income tax rate system and has one of the lowest personal income tax rates in Asia.

So with this background information, I want to highlight just a few interesting parts or aspects of the Hong Kong tax system.

In Hong Kong the tax year is a physical year which runs from April 1st to March 31st, very similar to the British system.

In Hong Kong, the tax return is issued to you or mailed to you by the IRD, the Inland Revenue Department, in May for you to complete.

Individual income tax rates are between 2% to 17%.

As you can see, it's relatively low.

Hong Kong has a territorial system rather than a worldwide taxation system, meaning generally income is taxed only if earned in Hong Kong.

Hong Kong does have a system in place to provide double-taxation relief.

There is no withholding tax on dividends or interest earned in Hong Kong and, for that matter, on salary.

So there's no withholding on salary.

There's a stamp duty tax on a transfer or lease of property, real and certain tangible properties.

The individual who pays the tax receives a stamp on the document, thus it's called a stamp duty tax.

This type of tax obviously is not eligible for the foreign tax credit since it's not an income tax in a U.S. sense.

There's no estate tax, no gift tax or wealth tax in Hong Kong.

There's no tax treaty between the U.S. and Hong Kong because China is in charge of the foreign affairs.

Interestingly, though, Hong Kong is not even mentioned in the U.S.-China tax treaty.

Okay, the fiscal year ending March 31st in Hong Kong becomes interesting when a taxpayer elects the accrued method of claiming the foreign tax credit.

So applying the all-event test, a foreign tax liability accrues when it can be established that the liability has occurred, number one, and, number two, the amount can be determined with reasonable accuracy.

Therefore, the all-event test is not met until the last day of the foreign country's taxable year.

And no portion of the foreign tax for a specific year can be claimed as a credit until the U.S. taxable year in which the foreign country -- in our case Hong Kong -- in the foreign country's taxable year end.

So, let's look at a simple example on the slide.

So here the U.S. tax year obviously is a calendar year, running from January to December.

So when the taxpayer files a 2018 U.S. return to claim the foreign tax credit using the accrued method, the amount of Hong Kong tax the U.S. taxpayer can claim is the tax liability as of March 31, 2018, which falls in the 2018 U.S. calendar tax year.

So it is on that date, March 31, 2018, the all-event test is met, meaning the Hong Kong tax liability has actually occurred and the amount can be determined with reasonable accuracy.

Okay, next we'll look at India, which is the second most populous country in the world.

Like Hong Kong, India's tax year also runs from April 1st to March 31st.

This is not surprising because, like Hong Kong, India was once a colony of the United Kingdom.

So taxpayers electing the accrued method for the FTC will follow the same all-event test that we just discussed.

India has a progressive tax system with a marginal tax rate of 30% on taxable income of 1 million or more INR, or the Indian rupee, for ordinary residence.

Okay, without getting too technical, residents of India are generally subject to their worldwide income, whereas non-residents are taxed only Indian-source income.

There are nuances in defining a resident.

For example, one can be a resident but not an ordinary resident, and there are tax implications depending on how a person's residency status is defined, similar to us here in the United States.

The difference in determining the taxpayer's residency status is one of facts and circumstances based on the number of days spent in India in the tax year.

There's also a surcharge on top of the regular income tax for those individuals whose taxable income exceeds 5 million rupees.

Taxpayers with employment income or salary pay tax through a tax-withholding system.

So it's a pay-as-you-earn system, or P-A-Y-E, for salaried individuals.

India does have a wealth or inheritance tax at this time.

What I do want to focus just for a moment here is the Health and Education Cess -- c-e-s-s -- which is a tax assessed on income tax.

I think Maria kind of alluded to this previously for one of the European countries.

Although I couldn't find a Revenue Ruling or court case on point with respect of this tax called Cess particular to India, again a tax assessed on income tax, I think we can rely on principles laid out in the two Revenue Rulings on this slide relating to the German and Austrian surtaxes which Maria alluded to earlier.

In those Revenue Rulings, the government said that a tax on the income tax is creditable.

So quoting from Revenue Ruling 74-90, "An additional tax imposed as a percentage of the amount of an income tax within the United States concept thereof is itself an income tax. " And then it cites Revenue Ruling 70-133.

And Revenue Ruling 71-133 says -- it holds that the Austrian surtaxes levied on the Austrian income tax are creditable under Section 901 of the Internal Revenue Code.

So again, quoting from Revenue Ruling 70-133, "An additional tax with a measure by the amount of another tax is a creditable tax within the United States concept of that term if such other tax upon which the additional tax is imposed is a creditable tax. " So in simple language, what this is saying is that the tax base of the surtax or Cess in India is really income.

So the income assessed is assessed on income tax, and the tax base for the income tax is income.

So therefore the surcharge or surtax is creditable for the FTC.

Although it is indirect.

Alright, Ley, that was quite a bit of information.

And why don't we just pause here for another polling question?


MILLS: Hey, Jim. Sorry. Next time I'll press the mute.

My mistake.

But you, you were exactly right.

That was quite a lot of great information that you just provided.

And, yes, we can pause, despite me keeping my mute on, for a fourth polling question.

"The Japanese reverse consumption tax... " A, is a credible tax for the FTC.

Or, B, is not a credible tax for the FTC.

Or, C, is a tax in lieu of an income tax.

Or, D, is a tax assessed on the manufacturer.

So take a moment and click the radio button that best answers the question.

I'll give you a few more seconds to make your selection.

Okay, we're going to stop the polling now, and let's share the correct answer on the next slide.

And the correct response is B, is not a credible -- try this again -- credible tax for the FTC.

Alright, let me just count.

Well, we're pretty consistent here, but we don't want to have this consistency.

We ended up with 67%.

So, Jim, can you just put in a few more -- some information you just covered just for a little bit of clarification?

WU: Yes, so we talked about the Japanese reverse consumption tax.

It's basically, although it's withheld at stores, similar to a income tax withholding, but the tax really is based on consumption, so it's similar to a sales tax or a value-added tax that we see elsewhere.

So because the purpose of this tax is not really a tax on income, it is not an income tax in the U.S. sense, and therefore it is not credible for the FTC.

MILLS: Jim, thank you very much. We appreciate that.

Let me see.

Rod, it looks like you are up next, so I will turn this over to you.

ROD PETERS: Thanks, Ley.

We're going to start our exploration of the Americas with a brief discussion of Canadian social taxes.

Even though we've already talked about them, Their prevalence, as well as some past confusion, warrant that we talk about them again.

In Canada, pension-plan contributions are assessed on earnings related to their social insurance program.

These programs are similar to the Social Security tax and Social Security program in the U.S.

Pension-plan contributions form a major part of several countries' retirement systems, just as our Social Security system does here.

Most residents over 18 years of age who are employed contribute a portion of their earnings to a federally administered pension plan in many Western countries.

Prior to 2017 and before major reforms took effect, employees generally contributed a portion of their salaries to this program and their respective employers matched, again, very similar to the U.S. Social Security system.

Like the pension-plan contributions, Canada, as well as various European countries, also have employment insurance programs that are administered by the various employment insurance commissions in those countries.

The payments that fund these programs are called employment insurance, or EI, premiums.

The EI premiums that are paid by taxpayers are used to provide temporary financial assistance in cases of illness, pregnancy, the birth or adoption of a child, or caring for ill family members.

Generally employees in these countries automatically deduct these premiums from their employees' wages and then remit them to the proper authority.

Additionally, these premiums are generally based on the net income of the resident of the countries that impose them.

So how do we treat these social taxes for U.S. tax purposes?

In essence, the pension-plan payment and the EI payments are similar to U.S. FICA taxes, as we previously mentioned.

But how do we handle these taxes when taxpayers claim them as a creditable tax for purposes of the foreign tax credit?

Section 317(b) of the Social Security Amendment of 1977 provides that no foreign tax credits will be allowed for social security taxes paid to a foreign government with respect to any period of employment or self-employment which is covered under the social security system of such foreign country in accordance with the terms of the totalization agreement.

I think you've heard that before.

Totalization agreements ensure that taxpayers are not subject to Social Security taxes in both countries at the same time.

Because they assure no double taxation, it's not appropriate to allow foreign tax credit for these taxes covered by these agreements.

The determination of whether a particular Social Security tax is covered by a totalization agreement requires asking several questions.

First, we want to know whether there is a totalization agreement in effect with the foreign country imposing the tax.

Then we need to know whether that particular tax is covered by the agreement.

Our national office may, from time to time, consult with the Social Security Administration in making this determination.

Now, let's assume that country XYZ has a totalization agreement with the United States.

We determine the totalization agreement covers pension premiums but not EI premiums.

Therefore the pension premiums are not creditable for FTC even if they would otherwise pass the four tests to qualify as a creditable tax.

Because the EI premiums are not covered by the totalization agreement, these premiums may be considered creditable for FTC purposes, and again, assuming they otherwise pass the four tests to qualify as a creditable tax.

So in this example, we would not allow the pension premiums, but we would allow the EI premiums for FTC.

Earlier, we discussed the U.S.-Canada totalization agreement and the Social Security Administration has informed -- I'm sorry, ha informally confirmed this agreement does cover pension-plan taxes but not EI premiums.

So to summarize, the IRS position is to not allow an FTC for pension-plan taxes or premiums because they are covered by the totalization agreement and allow an FTC for the EI premiums because they are not covered by the agreement and because Canadian EI premiums pass the four tests to qualify as a creditable tax.

If by some chance they do not pass the four tests, then they would be disallowed.

Or if some of the EI premiums have been refunded, rebated, or credited, then the taxpayer cannot take a credit for that portion.

Doing so would give a taxpayer a double benefit for a tax they didn't actually pay.

In this case, the taxpayer could claim the credit for the amount they actually paid out of pocket for the EI premiums.

Numerous countries in the Americas, particularly Mexico and some Latin American countries, collect value-added tax, or VAT.

We mentioned it earlier that these -- As we mentioned earlier, these taxes are generally applied to the sale of most retail goods and some services in these particular countries.

These taxes are very similar to sales taxes in the U.S.

For example, Mexico collects a value-added tax on the sale of most retail goods and services at a rate of 16% in most of the country and 8% in border areas that meet certain requirements.

Since these taxes are computed on the sale of goods and not an individual's income, these taxes are not creditable for FTC.

Since 2011, the IRS has not challenged Puerto Rican taxpayers for taking a position that an excise tax imposed by the Puerto Rican government is creditable for a foreign tax credit in the U.S.

Their position is that the excise tax is a tax in lieu of an income tax under IRC Section 903.

Notice 2011-29 states that the provisions of the excise tax are novel, and the IRS and Treasury are evaluating the legal and factual issues that determine whether it is creditable.

The IRS will not challenge the creditability of the tax while the notice is outstanding and it has not been revoked.

The notice also provides that any change to the credibility of the tax would be prospective and would apply to any tax paid or accrued after the date further guidance is issued.

So since 2011, Puerto Rican excise taxes have been creditable for FTC, which runs contrary to how we generally treat excise taxes for U.S. income tax purposes.

Just a caveat here.

The Treasury secretary has mentioned a potential challenge to notice 2011-29, so the creditability of the excise tax could be repealed.

However, we are unaware of any specific action at this time.

Now it looks like we have another polling question. Ley?

MILLS: We do.

Audience, here's our final polling question.

It's more like a complete the sentence.

"Because the Puerto Rico 4% excise tax is not an income tax... " A, it is not credible for the FTC.

Or, B, is it credible for the FTC?

Or, C, the IRS is currently challenging the credibility of the excise tax.

Or is it D, none of the above?

Take a moment.

Click on the radio button that best answers the question.

I'll give you a few more seconds to make your selection.

Okay, we are going to stop the polling now, and let's share the correct answer in the next slide.

And the correct response is...


It is credible for the FTC.

Okay, let me see what we have.

Rod, I think you're going to have to add a little bit more.

The result is 45%.

And, Rod, I believe you wanted to expand on the answer itself, so I am turning that over to you again.

PETERS: Yes, I do.

The question is a little confusing and a little misleading.

The Puerto Rican excise tax is currently creditable, but, as the question indicates, it's creditable because it's not an income tax, and that's not the reason it's creditable.

Taking the question literally, the correct answer would be B -- D, excuse me. D, none of the above.

So the point I want to make here is that, yes, it is creditable but not because it's not an income tax, because generally these taxes must be an income tax.

It's creditable because special consideration was given to this specific tax by Notice 2011-29.


MILLS: Thank you very much, Rod.

Appreciate that additional information.

Okay, audience, that is the end of the speakers' presentation, but don't go anywhere.

Our Q&A session is next.

Before we start the Q&A session, I want to thank everyone for attending today's presentation, "Foreign Tax Credit Credibility Around the Globe. " Earlier, I mentioned we want to know what questions you have to our presenters.

Here is your opportunity.

If you haven't input your question, there's still time.

Go ahead and click on the drop-down arrow next to "Ask question " field.

Type in your question and click "Send. " Sandy, Marie, Jim, and Rod are staying on with us to answer your questions.

One thing before we start, we may not have time to answer all the questions that have been submitted.

However, let me assure you we will answer as many as time allows.

If you're participating to earn a certificate and related continuing education credit, you'll qualify for one credit by participating for at least 50 minutes from the official start time of the webinar, and you will qualify for two credits by participating for at least 100 minutes from the official start time of the webinar.

Now, what am I talking about?

Oh, the first few minutes of our chatting at the beginning, unfortunately, that does not count.

So, nice to talk, but it does not count.

In other words, doesn't count toward that 50 or 100 minutes.

Okay, let's get started so we can get in as many questions as possible.

Let me see what we have.


Jim, I believe I have one for you.

"You said for taxpayer using the accrued method for the FTC and when the foreign tax year is a fiscal year that all-event test must be applied to establish the amount of foreign tax to be accrued.

What if the taxpayer is using the paid or cash method for the FTC?

How much can the taxpayer include as a foreign tax for the FTC when the foreign tax year is a fiscal year? " WU: Yes, that's a very good question.

It does get tricky when the foreign tax year is not a calendar year, it's a fiscal year.

But for U.S. purposes, we generally file on the calendar year, so that gets a little bit tricky.

So in a case of the taxpayer using the paid method or the cash method, the amount of foreign tax that can be claimed is whatever the actual amount -- or the amount that was actually paid or withheld in the U.S. calendar year running from January to December.

So, for example, you're claiming -- if you're claiming foreign taxes, let's say, paid to Hong Kong, a fiscal tax year, the amount of the Hong Kong tax, foreign tax you can claim for the FTC will be the actual Hong Kong tax you paid or withheld from January 1st -- first of all, from January 1st to March 31st, end of the Hong Kong tax year, then you have to add to that the amount of Hong Kong tax you paid from April 1st to December 31st.

So there's almost like a two-step process.

First, January 1st to March 31st, the actual amount paid, then you got to add to that whatever you paid, the actual amount you paid from April 1st to December 31st, and that part of it falls into the following fiscal year of Hong Kong.

Hopefully that sort of answers the question.

MILLS: Jim, that sounded great to me.

But appreciate that additional information.

Let me see.

Sandy, could you explain what the totalization agreement is again?

LYONS: I'm sorry, Ley. What was the question?

MILLS: My mistake.

It says, "Explain what the totalization agreement is again. " LYONS: Yes, so the United States has entered into agreements, and these are called totalization agreements, with several nations.

And the purpose is to avoid double taxation on income with respect to Social Security taxes.

These agreements consider and it's a way to determine whether an alien is subject to U.S. Social Security and Medicare tax or whether a U.S. citizen or resident alien is subject to social security taxes of a foreign country.

And on slide 23 is the link to the Social Security website and the website.

Those are worth looking at.

It goes through the process.

It explains.

It gives you the options, and there's charts that show, "Okay, does the individual work for a foreign company in a foreign country, or does the individual work for a U.S. company in a foreign country? " And that chart will help you determine where that individual should be paying the taxes on.

Back to you, Ley.

MILLS: Thank you very much, Sandy. Appreciate that.


Maria, here's one for you.

"Please repeat countries with church tax. Thanks. " NICKOLAOU: Okay, well, back when we were looking into putting this presentation together, I would say you always need to recheck.

We all know how tax laws get updated all the time.

Well, we found church taxes for Germany, Austria, Denmark, Finland, Iceland, Italy, Sweden, some parts of Switzerland.

I'm not saying that list is inclusive.

And as long as those taxes are compulsory and they are income tax-like, then they tend to be creditable, but you have to look at the details of that church tax in that foreign country's tax system.

MILLS: Thank you very much.

Jim, here's one for you.

"Based on the foreign tax credit criteria, can taxpayer claim the city or country -- I'm sorry -- county income taxes paid in foreign country in addition to the national income tax paid in that foreign country? " WU: Yes, Ley, the key here is always you got to look at the character of the tax.

Now, if the tax is paid -- if the tax is an income tax, a tax on income, based on U.S. tax principles, most likely that income tax will be creditable.

Now, many countries, you don't just pay a federal tax.

You pay state tax or sub-political-division taxes, like county or local taxes.

I think Maria mentioned there's a canton tax in Switzerland.

So it's not really who is collecting the tax or which political subdivision's paying the tax.

The more important thing is you got to look at the character of the tax.

Is it an income tax in a U.S. sense?

Now, let me quote a regulation I think that would answer directly to this question.

Treasury Reg 1.901-2 G2.

Again, Treasury Reg 1.901-2 G 2.

And there it mentions that the term "foreign country " means any foreign state, any possession of the United States, and any political subdivision of any foreign state or of any possession of the United States.

So it's just not, not only applies to kind of a federal central tax, but it could apply also to any political subdivision.

MILLS: That was great information. WU: Back to you, Ley.

MILLS: Yeah. Thank you.

That was great information.

Sandy, here's one here.

"If the U.S. does not have a tax treaty with a particular country, is income tax paid on income sourced to that country eligible for the FTC? " LYONS: Let me make sure I heard the question.

It has to do with tax treaties?

I mean, I'm sorry.

Income from countries without a treaty, is it eligible for the foreign tax credit?

MILLS: Sure. Let me -- I'll repeat with the question is.

It says, "If the U.S. does not have a tax treaty with a particular country, is income tax paid on income sourced to that country eligible for the FTC? " LYONS: Yes. The answer is yes.

Under the terms of the tax treaty, residents or citizens of the U.S.

can be taxed at a reduced rate or sometimes even exempt from foreign taxes altogether.

If there is no tax treaty, then there is no reduced rates available to the taxpayer.

If the foreign tax is a credible foreign tax, then whether the tax treaty rates apply or not, it is still creditable.

Tax treaties provide the benefit of having a lower rate.

So it is always good to check the tax treaties.


MILLS: That sounds good. Thank you.

Maria, here's one for you.

"Are foreign taxes on investments included? " NICKOLAOU: As long as they are income taxes and they meet the four requirements for creditability, yes.

MILLS: Thank you very much.

Okay, here's one.

I think -- Let me give one more here to Sandy.

Sorry to be getting on you all the time here.

It says...

... "What's the code for making election of using accrual basis? " LYONS: Yes, the code section, that is Section 905A.

That's where the guidance to make the election on the accrual basis and also a very good resource is the Pub 514, which is "Foreign Tax Credit for Individuals. " And this is for another question, but I think I'm going to bring it up.

Also, another good resource is Pub 901, which is the publication for tax treaties.

And also, we frequently put information on that site relating to foreign tax credits.

So again, that's -- The code section for the accrual method is 905A.

The publications that are excellent resources is 514, and the pub for tax treaties is Pub 901, and always check

MILLS: Thank you, Sandy. That's great.

We're kind of running out of time.

Let's see if we have enough time left.

I think we can squeeze one more in this.

Rod, I have one for you here.

Well, may have a little more time.

Let's see. Rod, here's one.

"Is there any consideration to add a treaty for Hong Kong that we know of currently? " PETERS: At the current time, we don't know of any treaty considerations for Hong Kong.

But what Hong Kong and the U.S. do have is a tax exchange information agreement, which allows for some exchange of information between the two countries, and that, I believe, was signed in 2014.

So it would be effective after the date that it was signed.

So we don't know of a treaty, but we do have a tax information exchange agreement.

Thank you.

MILLS: Thank you very much. Thank you very much.


Jim, I have one for you here.

It says, "One of the tests for a foreign tax to be considered eligible for the FTC is that the tax is an income tax in the U.S. sense or a tax in lieu...

of but not in addition to an income tax.

How is the Indian Cess not something in addition to the regular Indian income tax?

WU: Yes, that's a good question.

And ordinarily you're right.

If the foreign country already has an income tax system in place, then if there's another tax that not an income tax in the U.S. sense, based on U.S. tax principles, usually it's not creditable.

Now, the thing with the Indian Cess, as we mentioned previously on the slides, is it's a little bit different from just in addition to, even though India does already have an income tax system.

Now, the difference between this Indian Cess is that it is a surcharge or surtax.

It's a tax that's assessed on the income tax.

So if you think about it, if the income tax itself is the tax base of the income, net income, in the U.S. sense, then a tax or a surtax on top of or assessed on the income tax really is indirectly -- the tax base is really net income.

So it also qualifies as a creditable tax in the U.S. sense.

So the reason for this, why the Cess is creditable is the tax base.

Although it's indirect, the tax base is still on the net-income basis.

So it qualifies under the principle of U.S. income tax -- or income tax in U.S. sense.

Hopefully that's not more confusing than the question itself.

Back to you.

MILLS: My pleasure.

We love that stuff. Okay.

Rod, we have a question for you.

Is a separate 1116 filed for each country?

Can one be cash and another one accrual for the same taxpayer?

PETERS: Okay, for the Form 1116, there are three columns on it, and we should use one column for each country.

If there are more than three countries, obviously you would need to use more than one form.

But the separate 1116s are based on categories of income.

So if the taxpayer has interest and dividends and also has some wage income, interest and dividends would be on a separate return, a passive category, and the wages would be on a different 1116 in the general category.

So that's how that's done.

As far as one be cash and the other accrued, no, you have to choose.

All the taxes related to that -- Well, the creditable taxes related to that taxpayer have to be either cash or accrued.

And again, I think Jim mentioned or someone mentioned that once the accrual method is chosen, the taxpayer cannot go back to the cash method.

You know, if they choose accrual, it's good for every tax year thereafter.

So that's just -- that's how that works.

But they have to be either one or the other, either all cash are all accrual.

Thank you.

MILLS: Thank you, Rod.


Sandy, I have one for you.

"Please clarify that we cannot take a foreign tax credit if the foreign country is sanctioned but that we can deduct the foreign taxes if we itemize deductions. " LYONS: Yes, that is correct.

You cannot take the foreign tax credit if the country is sanctioned.

This list of countries is regularly updated, generally on a quarterly basis.

And the easiest way to find the list is to do a Google search and enter the phrase "Section 999 U.S. sanctioned countries. " There are currently nine sanctioned countries, and most of them are in the Middle East.

So taxes paid to these countries would not be a creditable tax.

Generally, in most cases, you would be able to claim a deduction by completing Schedule A.

There is an additional reporting requirement, and that's filing Form 5713, International Boycott Report.

There are penalties for willful failure to file Form 5713, and you can refer to Publication 514 and the instructions for Form 5713 for more information.

I want to point out that this rule does not apply to employees with wages who are working and living in boycotting countries or to retirees with pensions who live in these countries, and this information is in Publication 514.

Back to you, Ley.

MILLS: Yeah. Thank you, Sandy.


Rod, here's another one for you.

"Would you repeat the part about pension plan and employment insurance premiums being credible for FTC? " PETERS: Yes, I'd be glad to.

Remember the example -- the example we first illustrated, that we talked about on slides 41 and 42.

That was specific to Canada, but I'll go over the concepts again, as that could also apply to other countries.

Both pension plan and employment insurance premiums are similar to FICA taxes in the U.S., and totalization agreements make sure that taxpayers are not subject to Social Security taxes in two countries at the same time.

And because there's no double taxation, these taxes would not be creditable.

So the first thing we need to know is whether there's a totalization agreement, and then the second thing we need to know is whether that particular tax is covered under the agreement.

So in our example, Canadian pension-plan premiums were covered under the totalization agreement.

And since they were covered, the taxpayer only paid those premiums to one country.

The reason -- And so then those aren't creditable for FTC, and the reason, of course, is because there's no double taxation.

The Canadian EI, or employment insurance, because someone had that question, EI, employment insurance, premiums are not covered, which means they will be taxed by both countries.

So if these EI premiums pass the four tests to qualify for the credit, as Sandy brought up earlier, they are creditable for FTC.

So hopefully that helps clear that up a little bit.

Thank you.

MILLS: Thank you. That was great information.


Maria, I might have addressed this, but let me try this again.

"Can you give some perspective on the relationship of foreign social security as it relates to FTC? " NICKOLAOU: Surely, I'd love to, but before I do, there have been a couple questions.

I was wondering, could you put slide 26 back up?

We had a link to a website that dealt with the European tax countries that was slide 26, and because it was the answer to a poll question, the audience didn't get it.

So if you're still on, thank you. Sorry.

You know, we have hundreds and hundreds of questions.

So I'll say this out loud in case you're not on the presentation.


I hope that link still works.

You know, there's a lot of research that needs to be done on foreign countries.

So we'll make sure that this site works and make sure it's in the regular slide base.

But let me see if I can get back to your question, Ley.

You said talk about the relationship of Social Security and the FTC, right?

MILLS: Yes, I did. That's correct.

NICKOLAOU: Okay. Sure.

This is kind of like a memory-lane thing.

I'm old but not this old.

Before 1977, if you had somebody from the U.S.

who worked both here and a foreign country -- I know that year because that was the year -- Never mind what year that was.

There was no coordination before 1977 between the U.S. and foreign countries, and this caused two problems.

The wages that you earned might be subject to duplicative social security tax systems, and in light of the fact there was no coordination, there'd be issues about entitlement to the social security or continuity of it, et cetera, et cetera.

So the Social Security Act was enacted in 1977.

I'm sorry. It wasn't enacted.

It was amended -- I take that back -- to enter into totalization agreements with countries.

I don't remember in '77 how many countries.

It doesn't matter, but it was amended to allow for something called a totalization agreement that resolved these issues.

So these agreements provide which country covers the employee for entitlement purposes of social security.

And, you know, remember, we said the four things had to -- the four requirements of being a creditable tax.

Those are always something that you have to look at and then look at the totalization agreement to decide about the, you know, eligibility of those taxes.

And in addition, you know, the totalization agreement, you know, looks at the laws of both countries and the social security laws of both countries.

So you do have to look at that.

And if it is covered by the social security totalization agreement, it is not eligible for the FTC.

So that's kind of how the totalization agreements came to be, and during that process is when it was decided under the Social Security Act, if they are covered by a totalization, they are not creditable.

Ley? MILLS: Yeah, sorry.

I'm messing this up every time today.

Sometimes I'll remember to use my finger and press the mute.

Alright, we have time...

...for about one more here.

Let me do a quick one here with Rod.

This should be quick.

Let me find it. I had it right ready.

Okay, Rod, this should be quick.

"What is Notice 2011-29? " PETERS:Well, quickly, it was just Puerto Rican taxpayers have been the deducting it -- or it was implemented, I should say, and the Puerto Rican government amended their revenue code, and so they started deducting it on their U.S. taxes.

And apparently the IRS wasn't sure what to do about it.

So what I talked about earlier was a lot of the same verbiage that's actually in the notice that it's a novel tax.

They weren't really sure what the implications were.

They weren't really sure how to treat it.

So they created this notice simply to say, "We're going to allow it for now.

We're going to look into it maybe in the future.

But until then, you're allowed to take it as a credit. " So that's in a nutshell really what that's all about.


Ley, back to you.

MILLS: Let me go back to college here.

I need to go to college to get my degree in pressing the mute part of a cellphone.

Oh, well, I'll learn this yet.


Rod, let me just finish up with one more quick one here.

I think we're kind of running out of time.

But let's see if we can squeeze in one more.

"Is the foreign income tax credible at the full amount and value or at a certain percentage? " PETERS: Okay, this is a good question simply because I think we're confusing two issues.

And I remember when I was first learning this, it confused me, too.

But as far as the foreign tax credit taken on your tax return, the full value of the tax is allowed as a foreign tax.

Okay, it's subject to a limitation, of course, because -- And the limitation is -- I can't tell you right now.

But it is subject to a limitation.

But whatever's left over can be carried back or carried forward.

The percentage issue, I believe -- and let me just -- I just want to put it out there because it's kind of confusing.

The withholding tax.

So if you have passive income -- dividends, interest, whatever -- from a foreign country and they withhold taxes, they're going to withhold at their prevailing tax rate.

But we can't necessarily accept that.

What we can accept is we have to look to the tax treaties.

And the tax treaty tells us what the percentage rate the treaty is.

So if the taxpayer, for example, in Switzerland paid a 35% tax on their dividend income, if you look at the tax treaty, the rate is 15%, so the taxpayer can only deduct 15%, not the 35%.

The difference, of course, the taxpayer would need to go to the Swiss government to claim some sort of refund for it.

So I'm glad that question came out, but I think that's the issue, is we don't want to confuse the total tax with withholding tax.

Thank you.

MILLS: Thank you so much for the information.

Audience, that is all the time we have for questions.

I do want to thank our speakers for sharing their knowledge and expertise and for answering your questions.

Before we close the Q&A session, Sandy, why don't you start us off with the key points you want the attendees to remember for today's webinar?

LYONS: Thank you, Ley.

I will start and then I will pass the microphone to the other presenters.

The fundamental purpose of the foreign tax credit is to mitigate double taxation on the same income.

The foreign tax credit is limited to the foreign taxes paid or accrued or the U.S. tax on that foreign-source income, whichever is lower.

And it is important for income to be properly sourced as either U.S. or foreign.

There are four requirements that must all be met in order for a foreign tax to be eligible for the foreign tax credit.

The foreign tax must be an income tax or a tax in lieu of an income tax.

The foreign tax must be the legal and actual tax liability.

The foreign tax must be imposed on the taxpayer.

And the foreign tax must be paid or accrued by the taxpayer.

Finally, both the tax treaty and the totalization agreement, when applicable to a particular foreign country, should be considered.

We had several questions regarding tax treaties, and I just want to emphasize if the foreign tax is a credible foreign tax, than it is creditable.

The tax treaties provide the benefit of a reduced rate or sometimes even exempts income.

Next, Maria will go over additional key points.

NICKOLAOU: Thanks, Sandy.

So in summary, most European countries have a VAT tax, and that is not creditable.

And many European countries have a wealth tax, and that wealth tax, it's based on assets and not income.

So it is not creditable.

And the two specific French social taxes, the CSG and CRDS, are now eligible for the FTC.

I'm now going to pass it over to Jim.

WU: Thanks, Maria.

So we talked about three Asian countries and particulars.

The Japanese consumption tax, we talked about, is not a tax on income, but on consumption, and similar to a sales tax.

Therefore the Japanese consumption tax or reverse consumption tax is not creditable for the FTC.

And again, in Japan, this tax is withheld on either the entertainers or athletes at stores.

Both Hong Kong and India have a fiscal tax year.

So especially for a taxpayer using the accrual method to claim the FTC, it is important that they're not accruing -- that they are accruing the correct amount for the FTC.

So the taxpayer needs to -- in this case needs to apply the all-event test, which means a foreign tax liability accrues when it can be established that the liability has accrued, number one, and, number two, that the amount can be determined with reasonable accuracy.

So the all-event test is not met until the last day of the foreign country's taxable year.

The Indian Cess tax is a tax assessed -- another tax on the income tax, and if it is determined that the ultimate tax base is on income, on net income, it is then allowed for the FTC.

Rod, can you give your key point?

PETERS: Sure. Thanks, Jim.

In the Americas, we often see pension plan premiums and employment insurance premiums.

These taxes, on their face, are similar to U.S. Social Security taxes, or FICA taxes.

However, we have to consult with the totalization agreement to determine whether these are covered by -- whether these taxes are covered by the agreement.

If they are covered by a totalization agreement with a particular country, these types of taxes are not creditable for FTC, again, because there's no double taxation.

If they are not covered by a totalization agreement, then we need to determine creditability by analyzing the character of the tax and the four tests that Sandy mentioned earlier.

VAT is also somewhat prevalent in the Americas, as they are in Europe.

And, of course, VAT taxes are not creditable because they're not income taxes.

Finally, and we talked about this already, but Puerto Rico has a form of excise tax that has been allowed for FTC purposes, per this Notice 2011-29, and while this is sort of an aberration because we don't consider an excise tax as a tax that meets income tax, we have been allowing it.

And as I did mention before, the Treasury secretary has mentioned a potential challenge for this notice.

We'll have to watch to see how that plays out.


MILLS: Well, thanks, everyone, for the key points.

Audience, I want you to know we are planning additional webinars throughout the wor-- throughout the year.

I know I'll get this.

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Great information.

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Thank you so much.

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