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Opportunity Knocks — How to Recoup Previously Paid Foreign Taxes with Hindsight
Recently, the US federal government provided some relief to suffering businesses through the extension of the net operating loss (NOL) carryback. Taxpayers may have the opportunity to re-evaluate decisions made in earlier years with respect to foreign taxes. Taxpayers who have been subject to a foreign tax liability (either directly or indirectly) are provided a mechanism for reducing the effects of double taxation. For this there are two options available. Taxand US analyse the options and impacts for businesses in their latest newsletter.
The two options available are:
1) the deduction of foreign taxes paid and the credit against U.S. income tax
2) while a credit is always more valuable, the U.S. foreign tax credit regime and the complicated application of theory to facts often result in the inability to fully credit foreign taxes. In those instances, a deduction may at least allow a taxpayer to offset some of the double taxation
The interplay of foreign tax credits should be modeled to determine the optimal decision on a year-by-year basis. Remember that crediting or deducting one year's taxes does not impact the ability to make that decision for another year. When assessing the value of a planned net operating loss carryback, make sure to factor in any possible loss or reduction in your foreign tax credits. Make an educated decision to deduct or credit foreign taxes, and assess the opportunity to carry back credits that are "freed up" by the carryback claim. Neglecting this analysis could result in misstated financials or a missed opportunity to maximise your recovery of foreign taxes.
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