A study on the reform of foreign tax credit system
Asian Tax Journal Vol. 6 No. 2 (2005), pp. 7-38
Abstract
In 1971, the foreign tax credit was enacted to alleviate double taxation on the foreign income of residents. Afterwards, the foreign tax credit has been revised but it still has some problems as follows: First, the current foreign tax credit system stands on capital-export neutrality which economists usually regard as essential for worldwide economic efficiency, because the location of investments would be unaffected by capital income taxes, but it has some inconsistencies when it applies. Second, although the foreign tax credit system has been subject to taxpayers' aggressive attempts to reduce income taxes and the taxpayer either effectively purchases foreign tax credits or exploits tax law inconsistencies in arrangements “where the expected economic profit is insubstantial compared to the foreign tax credits generated,” the current foreign tax credit system ignores those attempts. Third, because foreign losses will in turn decrease the overall worldwide taxable income, the unbridled claiming of foreign losses can seriously affect the maximum foreign tax credit to the taxpayer's advantage. Nevertheless, the rules which prevent these attempting don't exist. Lastly, the current foreign tax credit system has other problems when it applies. This paper proposes the comprehensive reform of the current foreign tax credit system to heal these problems.
Keywords
- Foreign tax credit
- Indirect foreign tax credit
- Sparing foreign tax credit
- Tax neutrality
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