Foreign Tax Credit and Its Application to International Taxation:

The Foreign Tax Credit $($FTC$)$ is a provision in the U$.$S$.$ tax code designed to alleviate the burden of double taxation on income earned by U$.$S$.$ taxpayers in foreign countries. Double taxation occurs when the same income is taxed by more than one jurisdiction, such as by both the United States and the foreign country where the income was earned. The FTC allows taxpayers to offset their U$.$S$.$ tax liability by the amount of foreign taxes paid on the same income, thus preventing double taxation and promoting fairness in international taxation.

How the Foreign Tax Credit Works:

When a U$.$S$.$ taxpayer earns income in a foreign country, they are typically subject to taxes imposed by both the foreign country and the United States. To avoid double taxation, the taxpayer can claim a credit for the foreign taxes paid on that income against their U$.$S$.$ tax liability. The FTC is calculated based on the lesser of the foreign taxes paid or the U$.$S$.$ tax attributable to the foreign income.

Key Features of the Foreign Tax Credit:

Types of Income: The FTC can be claimed for taxes paid on various types of foreign income, including wages, salaries, interest, dividends, and capital gains.

Limits on Credit: There are certain limitations on the amount of the FTC that can be claimed. For example, the credit cannot exceed the proportionate share of the taxpayer's U$.$S$.$ tax liability that the foreign income represents.

Carryover and Carryback: Excess foreign tax credits can be carried back one year and carried forward up to ten years to offset U$.$S$.$ tax liability in other years.

Separate Limitation Categories: The FTC is divided into separate limitation categories, which classify income based on its source and determine how much foreign tax can be credited against U$.$S$.$ tax liability within each category.

Application to International Taxation:

The FTC plays a crucial role in international taxation by mitigating the adverse effects of double taxation and promoting cross$-$border trade and investment. It ensures that U$.$S$.$ taxpayers are not unfairly penalized for earning income abroad and encourages economic activity in foreign markets. Additionally, the FTC helps maintain competitiveness for U$.$S$.$ businesses operating globally by reducing their overall tax burden and avoiding the need for complex tax planning strategies to minimize international tax liabilities.

Question:

When a U$.$S$.$ taxpayer earns income in a foreign country, they can claim a credit for the foreign taxes paid on that income against their U$.$S$.$ tax liability. This credit is known as the

A$)$ Foreign Earned Income Exclusion

B$)$ Foreign Tax Credit

C$)$ Foreign Housing Exclusion

D$)$ Foreign Housing Deduction