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Evette Davis: Okay, I think it's the top of the hour. So, for those of you just joining, welcome to today's webinar, Foreign Tax Credit Individuals. We're so glad you're joining us today. My name is Evette Davis, and I'm a Senior Stakeholder Liaison with the Internal Revenue Service. And I will be your moderator for today's webinar, which is slated for 75 minutes. Before we begin, if there's anyone in the audience does with the media, please send an email to the address on the slide. Be sure to include your contact information and the news publication you're with. Our Media Relations and Stakeholder Liaison staff will assist you and answer any questions you may have. So just as a reminder, this webinar will be recorded and posted to the IRS Video Portal in just a few weeks. This portal is located at And please note, Continuing Education credits or Certificates of Completion are not offered if you view any version of our webinars after the live broadcast. Now, we hope you won't experience any technology issues. But if you do, this slide shows helpful tips and reminders. We've posted a Technical Help document you can download from the Materials section on the left side of your screen. It provides the minimum system requirements for viewing this webinar, along with some best practices and quick solutions.

If you complete it and pass the system check, and are still having problems, try one of the following. First, simply close the screen where you're viewing the webinar and relaunch it.

Second, click on the settings on your browser viewing screen and select HLS. You still receive have today's PowerPoint in a reminder email, but if not no worries, you can download it by clicking on the Materials drop down arrow on the left side of your screen as shown on this slide. Closed captioning is available for today's presentation. So, 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 your screen. This feature will be available throughout the webinar. If you have topic specific questions today, please submit them by clicking the Ask Question drop down arrow to reveal the textbox. Type your question in the textbox and click send.

And this is very important, folks. So please, please do not enter any sensitive or taxpayer specific information in that textbox. During the presentation, we'll be taking a few breaks to share knowledge based questions with you. At those time, a polling-style feature will pop-up on your screen with a question and multiple choice answers. Select the response you believe is correct by clicking on the radio button next to your selection and then click submit. Now, some people may not get the polling question. And this may be because you have your pop-up blocker on.

So please take a moment to disable your popup blocker now, so you can answer the question. We've included several technical documents that describe how you can allow pop-up blockers based on your browser that you're using. We have documents for Chrome, Firefox, Microsoft Edge, and Safari. And that's used for Mac computers. You can access them by clicking on the materials button. It's a drop down arrow on the left side of your screen. So, we're going to take some time now and set the polling feature. So, here's your opportunity to ensure your pop-up blocker is not on so you can receive the polling questions throughout the presentation. Now the question is this. How many times have you attended an IRS national webinar like this one. Is it A, your first time. B, your first through the fifth time. C, six through the 10th time. D, 11 through 15th time, or E, you have attended 16 or more time. Take a moment and click on the radio button that corresponds to your answer. How many times have you attended an IRS national webinar? First time, one to five times, six to 10 times, 11 to 15 times, 16 or more times? How many times have you attended a national webinar? Okay, just giving you a few more seconds to make your selection. Okay. And I will go ahead and stop the polling now. Now, let's set the polling and see how often you've attended a national webinar. All right, waiting for the poll to come up. Okay.

Wow. So, we've got 10 who attended for the first time 10% excuse me, 27% who attended one to five of these webinars. Awesome. 7% of you attended six to 10 webinars. 10% of you attended 11 to 15 of these webinars. And this is awesome. 47% of you attended 16 or more of these national webinars. Thank you so very much. We are so excited that you have continued to join us and you are here with us once again. This is awesome, folks. Thank you so very much. Hey, so again, welcome. We are so glad you joined us for today's webinar. Now before we move on with the session. Let me just make sure you are in the right place today. Okay, today's webinar is about the Foreign Tax Credit Individuals. And this webinar is scheduled for approximately 75 minutes.

So let me go ahead and introduce today's speakers. Maria Nickolaou, and Rod Peters are both Senior Revenue Agents in Large Business and International, specifically in its Withholding, Exchange and International Individual Compliance Division in the Foreign Tax Credit Practice Network. Maria joined the IRS in 2003. And Rod joined in 1988. Both are technical specialists with extensive experience focusing on the Foreign Tax Credit for Individuals. So, we are in for a treat and some great information folks. I'm going to go ahead and turn the mic over to Maria to begin the presentation. Maria, are you there? Maria Nickolaou: Hi, Evette. Thank you, Evette.

Hopefully everyone can hear me. Welcome everyone. Okay, great. Welcome to today's webcast on the Foreign Tax Credit for Individuals. Most of you probably know that the IRS and today's society loves some acronyms. Evette even had one earlier ICYMI - In Case You Missed It. So, today's topic is no exception. So, we will use the acronym FTC when referring to the Foreign Tax Credit.

Before we get into the presentation, today, I'd like to look at a few of our agenda topics.

First, we're going to provide you with an overview of some FTC concepts. Next, we're going to discuss credibility requirements of foreign taxes, with a focus on the treaty versus statutory withholding right. Next, we'll define a foreign tax redetermination and discuss their applicability. And finally, we're going to review the impact of foreign fiscal tax years. Now, it's always a good idea to first do a quick refresher on some foreign tax credit concepts. And this might be old hat for some of you it may be new for others. We all know that a U.S. person and a U.S. person is a U.S. citizen or resident alien. So, a U.S. person is subject to tax on worldwide income. So, U.S. persons who pay foreign income tax are subject to U.S. tax on that foreign source income may be able to take a foreign tax credit. And this is predicated. The FTC is predicated on three basic principles. First, it's only fair that the same income should not be taxed more than once. Second, the country in which the income is earned has the primary right to tax that income. And third, the taxpayer's country of residence has a secondary or residual right to tax the income earned in a foreign country. So, the FTC was created to relieve all or part of the double taxation burden. Now, specifically, the FTC reduces a U.S. taxpayer tax liability with respect to its foreign source income, by part or all of the foreign taxes paid or accrued during a tax year subject to a limitation. And what is this limitation? The limitation is the U.S. tax liability on the foreign source income. The credit is generally limited to the lesser of the foreign tax paid or accrued or the limitation. Another important and basic FTC related concept is that the income must be properly sourced as either a U.S. source or foreign source income.

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 or applicable treaty to be earned outside the U.S. So why do we stress sourcing? Why is it so important? Although all worldwide income is generally taxable, the source of that income is important because the FTC is limited to that part of the current year U.S. tax on foreign source income. The amount of allowable foreign tax credit, or the FTC limitation is ultimately computed-based on the percentage of worldwide income that is foreign source. So, if U.S. source income is erroneously included in the foreign tax credit computation, there is potential, a very likely potential to overstate the foreign tax credit. And that could reduce the U.S. tax on U.S. source income. And we don't want that.

Sourcing rules can be very complicated, and they are subject to many exceptions. Many income tax treaties to which the U.S. is a party vary the sourcing rules contained in the original, in the Internal Revenue Code, or what we call the Code by express agreement of the contracting states.

So, if you encounter any sourcing issues, you're going to want to refer to the specific country's treaty with the U.S. Now we're going to move on to FTC Credibility Requirements.

Taxpayers may claim an FTC for eligible foreign taxes paid. In general, a foreign levy is a tax, and creditable, if it requires payment pursuant to the authority of a foreign country to levy those taxes. Whether a foreign levy requires a compulsory payment pursuant to a foreign country's authority to levy taxes is determined by principles of U.S. law and not by principles of law of the foreign country. Therefore, the foreign country's authority to levy taxes is really not determinative. And the question every tax professional needs to ask is, what foreign taxes qualify as a creditable foreign tax. So, for a foreign tax or levy to be creditable, all four of the following test or criteria you see here, listed on this slide must be met. First, the foreign tax must be an income tax or a tax in lieu of an income tax. This does not include any foreign levies such as gasoline taxes, penalties, fines, inheritance taxes, certain social security taxes or value-added taxes known as VAT taxes. These are not income taxes because they do not substantially conform to U.S. tax law. So, they are not creditable for FTC. The second requirement that must be met is the foreign tax must be the legal and actual tax liability. And sometimes this is referred to as the compulsory amount. An amount of tax paid is non-compulsory if the taxpayer paid more tax than what was legally required under foreign tax law. So, for example, if it's reasonably certain to be refunded, credited, abated or forgiven, they are not creditable, they are not compulsory. The tax is also non-compulsory, if the taxpayer failed to claim a reduced treaty rate on their foreign return. And this concept is very important, and we'll cover it more in a few minutes on subsequent slides, because it's the taxpayer's duty to mitigate and reduce their foreign tax liability by exhausting remedies to do so. The third requirement is the foreign tax must be imposed on the taxpayer. The person by whom the tax is considered paid is the person on who, tax is considered paid is the person on whom the foreign law imposes that legal liability, even if somebody else remits the tax. So, for example, a withholding agent. A tax that is withheld from the taxpayer's wages is considered imposed on a taxpayer, not the employer. Likewise, any withholding tax on foreign portfolio income, such as dividend or interest income is considered imposed on the taxpayer, not on the withholding agent.

Generally, it's the taxpayer who's responsible for paying the foreign tax that can claim the FTC.

And the fourth and final requirement is an FTC can be claimed for qualified foreign taxes in the tax year they were paid or accrued. The taxpayer could claim a credit only if they paid or accrued the foreign tax to a foreign country or U.S. possession. And the word, the term Tax Year refers to the tax year for which the U.S. tax return was filed, not the year the foreign tax return was filed. And we want to point out that Publication 514, FTC for individuals, provides ample information on exceptions for foreign taxes that are not allowed as a credit. So, what we see here next is just a snapshot of the top portion of the first page of the Form 1116 for those of you who have had experience with them, and as you can see at the top, we talked about that there are components, which are the sourcing categories and down below it, you start populating the foreign source income items and expense items. So, I think here, this is a good time for our first polling question, Evette. Evette Davis: It sounds like a plan Maria. Okay audience. Maria just shared some great information with you. So, I hope you are ready. Here's our first polling question. Which of the following is not a requirement for FTC creditability? A, the Foreign Tax must be a tax assessed on income; B, the foreign country must be European; C, the Foreign Tax must be imposed on the taxpayer or D, the Foreign Tax must either be paid or approved. Now think about what you just heard Maria say. Knock off the cobweb. Look at the question again. Which of the following is not a requirement for FTC creditability? Take a moment look at the answers or responses. Click the radio button that best answers the question. I just want to make sure everyone has a chance to see the question and put in your response. Okay. All right. Okay, let's go ahead. And let's stop the polling now. And we will share the correct answer on the next slide.

And the correct response is B, the foreign country must be European. All right. Now let's see what percentage of you responded correctly. All right, 94% of you responded B, the foreign country must be European. Maria, you've got their attention. Thank you so very much, everyone.

Great job. Back to you, Maria. Maria Nickolaou - Thanks. Good job, everybody. So, I want to dive deeper into this compulsory requirement. As I just mentioned, one requirement for the foreign tax to qualify for the FTC is that it must be the legal and actual foreign tax liability, or in other words, it must be compulsory. In other words, the foreign country can legally enforce the payment from the taxpayer. Now, compulsory payments are based on a reasonable interpretation and application of the substantive and provisional and procedural provisions of the foreign tax law and the applicable treaty provision. A payment is also compulsory if the taxpayer has exhausted all effective and practical remedies, including relief through Competent Authority.

Now, if you haven't involved yourself with Competent Authority, it is an approach and a process that a taxpayer can use to remedy an overpayment of tax. The taxpayer should make a reasonable interpretation of the foreign law provision to establish credibility. Now this can include reliance on advice in good faith from a competent foreign tax advisor and disclosing all the relevant facts to those advisors. It is not considered to be a reasonable interpretation if there happen to be adverse interpretations, such as court cases, or court decisions. Now, taxpayers' exhaustion of these remedies should be practical and cost efficient in relationship to the amount of issue and they need to have a reasonable likelihood of success. And taxpayers are not required to utilize all the remedies. As I said, they must be practical and cost efficient, but an effort has to be made. Now foreign central governments may issue refunds per the treaty and overrule and overturn rulings by local authorities. Now, where there are conflicts between the U.S. and foreign tax law, taxpayers must use Competent Authority to try and resolve that dispute and the cost for this approach must be reasonable. And I wanted to give everyone the Revenue Procedure that Competent Authority deals with and that is Rev. Proc. 2006-54. Unless there are specific treaty provisions that differ from those of Competent Authority, so again, that Rev. Proc. is 2006-54, everything you want to know about Competent Authority. Now, this is the part we're going to move deeper into the treaty versus statutory withholding rate. Let me first briefly talk about income tax treaties. And we will provide you with a list of resources of those at the end of the event. Now, the U.S. has treaties with I think more than 60 countries and the goal of that is to mitigate the effects of double taxation. So, under the terms of these tax treaties, residents or citizens of the U.S. are taxed at a reduced rate. Sometimes they're even totally exempt from foreign taxes altogether, but only on certain types of income they receive and from certain countries. So, you need to look to see if the treaties have been modified through other protocols, which are akin to amendments or consular agreements. So often negotiated into the terms of these income tax treaties are specified tax rates for certain types of income. So, like I mentioned, dividends, interest, so many countries, the treaty rate on these types of income can be stipulated at 5%, 10% or even zero. What's important and the takeaway here is that for foreign tax credit purposes, a lower treaty rate very often applies to passive and portfolio type income. And when I say a lower treaty rate, it means the tax rate assessed on certain types of income is lower than the regular tax rate outside of the tax treaty.

And that's what we refer to as the statutory rate. Essentially, what these treaties are designed to do is reduce the amount of taxes that U.S. citizens or residents pay to these treaty countries on certain types of income. And of course, these treaties are reciprocal. So foreign nationals earning the same kind of income in the U.S. enjoy the lower treaty tax rate as well. This is why it's important when computing FTC, especially when there's portfolio or passive income involved, to see first if the tax treaty exists between the U.S. and the foreign country. Second, if a treaty does exist, determine if a treaty rate is applicable to that certain type of income earned in that country. website houses the latest tax treaties with foreign countries.

And you can access treaty documents simply by going to and typing in the search box, tax treaties. And there is a very comprehensive tax publication, Publication 901 titled, Tax Treaties. So, we've talked about tax treaty. Now I want to talk about the statutory withholding rate. What exactly is that? The statutory rate is the legal rate that the tax country is required to withhold. This rate is based on the internal tax laws of that particular country. So, for instance, let's say a U.S. person receives dividend income from a foreign country, and it's on a foreign company, that company was paying dividends, the withholding agent in that country is very likely going to withhold taxes on their dividend income at the rate established by the internal laws of that foreign country. Again, what we call the statutory rate unless the withholding agent is informed of another rate for the tax treaty. So practically speaking, when a taxpayer receives income from a foreign country, the taxpayer should find out if there's a tax treaty with that foreign country, that reduces the statutory rate. If there is a tax treaty, it is the taxpayer's responsibility to notify the withholding agent to have the reduced treaty rate applied. And you do this by providing a withholding statement for the withholding agent. Otherwise, the tax is very likely going to be withheld at the higher statutory withholding rate. So, you probably want cause, how does this effect the computation of FTC. Well, earlier I said the amount of foreign tax that is eligible for the foreign tax credit, one of the requirements was it was the legal and the actual tax liability. So, if there's a treaty in place between the U.S. and a foreign country, so legal and actual tax liability is the treaty rate, not the statutory withholding rate. So, when a taxpayer receives income from a foreign country, where there's withholding it's the taxpayer's responsibility to determine one, if there's a treaty in place, and two, whether the tax is withheld at the statutory rate or the reduced rate. If the taxpayer is claiming the foreign tax credit, the amount of foreign taxes claimed must be based on the treaty rate, even if that is less than the amount of tax withheld at the statutory rate. So now we have some excess tax. So. the excess tax withheld at this statutory rate over the treaty rate is not eligible for FTC because it is considered non-compulsory, meaning the taxpayer wasn't legally required to pay it. And if that excess amount is withheld, it's the taxpayer's responsibility to seek relief, by filing for a refund, with the foreign country for this excess tax. If they don't do that, if they fail to file for a refund, they very well could be subject to double taxation. Now later on, we're going to provide a list of resources for today's events, including one item that specifically addresses this topic. Did you know the IRS has YouTube videos? We had one made especially for this topic, and we'll let you know how to access it later on. Evette, how about a polling question? Evette Davis: All right, Maria, I just happen to have another one. Okay, audience here's our second polling question. When a tax free rate is lower than the statutory rate of a foreign country, the foreign tax credit must be based on A, the tax treaty rate, B, the statutory rate of the foreign country, C, whichever is the highest, D, whichever will render the highest credit. Okay, so think about what you just heard Maria say. Think about perhaps what you already know. Take a moment, review the question once again, look at the potential responses.

And click the radio button that best answers the question. Give you just a few more seconds to make your selection. When a tax treaty rate is lower than the statutory rate of a foreign country, the foreign tax credit must be based on what A, B, C or D. Okay, making sure you have enough time to answer the question. So, let's go ahead, and we're going to stop the polling now.

And we'll see the correct answer on the next slide. And the correct response is A, the tax treaty rate. Now, let's see what percentage of you responded correctly. Okay, Maria, we still got a great grade, it's less than the first one it is 82% of you responded, A, the tax treaty rate. So, we're still looking at three. All right, Maria. I think I'll let you continue with some examples. Is that what we're doing there? Maria Nickolaou: Yes, thanks, Evette. And thanks for the giggle. I think you've kind of gave one of them away. Evette Davis: I did. Maria Nickolaou: I know. It is what it is. If we're in first but anyway all right. Evette Davis: Exactly, that's what I was thinking really. Maria Nickolaou: All right, let's look at this first example. We have taxpayer A, who is a U.S. citizen. And they were sent to work for two weeks abroad in Country X by a U.S. employer and earns $2,500 while there. So now we look at the tax law of this Country.

And we find out it states a non-resident is not taxed on personal services income earned there, if they work for a non-Country X employer. We said this is a U.S. employer. They earn less than $3,000 and are there for less than 30 days. So that seems to fit our story. However, to leave Country X, Taxpayer A must first pay tax on the $2,500. Taxpayer A is eligible to get it back by filing for a refund with Country X. So, do we have a creditable foreign tax? I want to go over the four requirements here. Was it an income tax, check. Was it imposed on the taxpayer, check, and was it the liability the taxpayer had to pay, check, the legal liability, but was it paid?

Now, this kind of confuses people but while they actually paid it, recall I said an amount paid is not Compulsory, and thus not an amount of tax paid to the extent the amount paid exceeds the amount of liability under foreign law. And in this scenario, Taxpayer A had the option to remedy this by filing for a refund from Country X. If they chose not to do so our U.S. tax policy does not subsidize a taxpayer for a tax, they're not required to pay. So hopefully everyone understands that. So if you are able to get your money back, that is on you. We're not going to give it to you. Let's look at example two. And we've talked about exhaustion of remedies on this one. So, we have a taxpayer who filed a refund claim for taxes paid to Country Z. He never got the refund. It was not practical nor cost efficient to make a judicial appeal, relative the amount, the amount issue here. So. the taxpayer speaks and invokes Competent Authority. Here, he has exhausted all remedies, and believes they have a reasonable likelihood of success with Competent Authority. So, it is allowed for FTC. And this is an example shown here on the screen, I think it's time for number three, question number three. Evette Davis: Yes, ma'am. I think you are correct. All right. So, here's our third polling question. Taxpayer A earned $1,000 of passive income in Country X, with which the U.S. has tax treaty. The tax treaty stipulates a 10% withholding rate on passive income. What is the maximum amount of Country X tax Taxpayer A can claim for the FTC purposes? Is it A, $100, B, $200, C, $300 or D, the actual amount withheld by country A. Now Maria just went through a couple of examples that speak directly to this question. Hopefully, you understood, and we're going to get a 100% answered correctly on this polling question. Again, Taxpayer A earned $1,000 in passive income in Country X with which the U.S. has a tax treaty, the tax treaty stipulates a 10% withholding rate on passive income. What is the maximum amount of Country X tax Taxpayer A can claim for FTC purposes, this is A, B, C, or D. Take a moment. Click the radio button that best answers the question. I want to make sure everyone sees that and you have a chance to respond. Okay, let's go ahead and stop the polling now. And we will share the correct answer on the next slide. And the correct response folks, is A, $100. Now let's see what percentage of you responded correctly. Okay, we have 75% that responded correctly, Maria. So, can you kind of discuss this for us a little bit and tell us why the correct response is A versus the other responses? Can you help us out Maria? Maria Nickolaou: Yes, remember I said there were two rates. There was the treaty rate and the statutory withholding rate. Now, we didn't give you a statutory withholding rate here, which would have been whatever the actual country withheld. But to calculate FTC, if there is a treaty, and if that treaty was with Country X, which we have, and that treaty stipulated 10% withholding, the maximum you could take is that $1,000 times 10%. So, it will always be the lower treaty rate, even though more might have been withheld. Evette Davis: All right. Thank you, Maria. Great explanation. Great, first part of the session. Folks, we were getting a lot of information here.

So, I hope you got your pen and pad ready. All right. So up next, it looks like we've got Rod and looks like he's going to talk about foreign tax redeterminations. Is that correct? Rod Peters: That is correct and I am ready to dive right in. Evette Davis: All right. Rod Peters: So, let's move on. And we'll talk about foreign tax redeterminations or what we sometimes refer to as FTR. Now this is an area where we've seen significant non-compliance and also some confusion.

First, what exactly is a foreign tax redetermination? Well, a foreign tax redetermination occurs when there's a change to taxpayer's foreign tax liability, which in turn affects the taxpayer's FTC. This could result from a foreign tax audit or a subsequent foreign tax refund. When a determination occurs, taxpayers must notify the IRS on an amended return or returns if the change affects multiple years. To summarize, a redetermination occurs when any foreign tax paid is refunded in whole or in part or if the accrued method is used for FTC and either the taxpayer paid a different amount from what was accrued for the FTC or the accrued taxes claimed for FTC remain unpaid after two years. A note of caution, not all changes to foreign taxes result in a redetermination. For example, if a taxpayer uses the paid method for FTC, and their foreign taxes increase in a prior year, the taxpayer could probably claim additional foreign taxes in the year they are paid. Let's further clarify this because we see this frequently. If a taxpayer uses the accrued method for FTC, and the foreign tax changes for that year, the taxpayer can file an amended return to change the FTC for that year, which is a foreign tax redetermination. If a taxpayer uses the cash method, the taxpayer cannot amend the previous year's return. They can only claim the credit in the year the tax was paid. And I'm going to go one step further.

Accounting for foreign taxes on the accrued method is an election. The election must be made on Form 1116 attached to an original filed return. The election cannot be made on an amended return.

When a foreign tax redetermination occurs, what do taxpayers need to do to notify the IRS. Well, this is done by filing an amended tax return, Form 1040X, that includes a revised Form 1116 and a corresponding explanation showing sufficient information for the IRS to re-determine the U.S.

tax liability for every year affected. So maybe something like an excel spreadsheet showing the FTC computation, along with proper documentation showing the correct amount of foreign tax actually assessed and paid by the taxpayer. There are a couple of exceptions to this requirement of filing an amended return. Number one if the redetermination is under a certain threshold amount, which is $300 for individual filers, or $600 for joint filers and taxpayer meets other certain criteria found in Publication 514. And this is referred to as a de-minimis exception.

The other exception is if a foreign tax redetermination results in additional U.S. tax due, but the additional tax is eliminated by a carryback or carryover of unused foreign tax. In that situation, an amended return does not need to be filed for that year. Instead, taxpayers can notify the IRS by attaching a statement to their original tax return for the year in which the redetermination occurred. So, here's an example. Evette Davis: Hey, Rod, I apologize for interrupting you. You sound a little muffled to us is there a way you can maybe adjust your microphone so that you can come through a little bit clearer you just sound a little muffled. Rod Peters: I don't really have anything. I'm sorry. Maria Nickolaou: He sounds find to me, Evette.

Rod Peters: I let me try. Evette Davis: Okay. Awesome. Thank you. Rod Peters: Yes, sorry. Yes, I was set earlier. So, I apologize. I could try speakerphone, if you think that might help. Evette Davis: Yes. Just try that and see. But just want to make sure everybody can hear what you're saying. All right. Rod Peters: Okay, is this any better? Evette Davis: Yes. Okay. So, thank you very much. Rod Peters: Thank you very much. I want to make sure everyone can hear. Okay, we are on. Okay, the example. Okay, so let's say Taxpayer D accrued $50,000 of Country X income tax with respect to the 2018 tax return. However, after filing the Country X tax return for that year, D discovered the amount of taxes owed to Country X is only $25,000. Since D already filed the 2018 U.S. return before the 2018 Country X return, D over-reported foreign taxes for FTC. The reason for this change is not important. What is important is the fact that D only paid $25,000 in foreign taxes but accrued $50,000 in foreign taxes on U.S. return. Since a foreign tax redetermination occurred. D must notify the IRS of the discrepancy. There is no statute of limitation for this assessment. This example is pretty straightforward in illustrating how a redetermination can occur. Now let's look at another example. Let's say Taxpayer E does business in and pays income tax to Country Z on their net business income. Taxpayer E claims a foreign tax credit on their U.S. tax return for the taxes paid to County Z. Pretty straightforward so far.

Now, subsequent to filing the Country Z tax return, Taxpayer E discovered additional deduction that we're not claimed on foreign return. So, what needs to be done? As most savvy taxpayers would do, Taxpayer E files a claim with country Z and got a sizable refund. In this example, E has a foreign tax redetermination due to the refund of foreign taxes from Country Z, and because full amount of foreign taxes for FTC was claimed on the U.S. return. If E does not inform the IRS of this change and is later discovered by the Service, the Service would have an unlimited amount of time to assess. Even if E informed IRS after the normal three year statue has expired, the IRS still would be allowed to make the assessment. Now let's talk a little bit about the Statute of Limitations. When it comes to additional tax assessments IRC Section 6501(c)(5)

together with Section 905(c) produces an exception to the normal statute under 6501(a) and allows the IRS unlimited time to assess additional tax. What this means is that when the foreign tax redeterminations occur and taxpayers don't notify the IRS, the IRS has an unlimited amount of time to make FTC related adjustments. Now what about refund claims? What if the taxpayer ends up paying more foreign taxes than were originally claimed? Well under IRC Section 6511(d)(3)(A), if an overpayment of tax is attributable to a foreign tax or which a credit is allowed, a refund claim must be filed within 10 years from the original due date of the return for the years in which the foreign taxes were paid or accrued. In other words, if a redetermination results in a U.S. tax refund, an overpayment attributable to a foreign tax for which a credit is allowed, taxpayers are allowed a 10-year period to file a claim for refund. So, for example, let's say we're looking at the 2017 tax year. The original due date of the individual return is April 15, 2018. This means the taxpayer has until April 15, 2028 to file a claim for refund. I want to emphasize that this special 10-year statute of limitation starts from the due date of the original return without regard to any extensions. And this of course is in contrast with a normal refund claim in which a taxpayer has until the later of three years from the date the return was filed or two years from the date the tax was paid. Evette that was a lot of information. I don't know about you, but I'm sure our audience is ready for a break. Do we have time for another polling question. Evette Davis: Yes, Rod a lot of great information, I must say.

So, let's go ahead and jump into it. Give me a drumroll please. Just kidding. Okay, audience.

Our fourth and final polling question is: In 2019 a taxpayer is required to pay additional foreign taxes for tax year 2014. The taxpayer must file an amended return to report a foreign tax redetermination. By what date is the amended return due? Is it A, October 15, 2025; B, April 15, 2021; C, April 15, 2022, or D, April 15, 2025. Again, think about what you heard Rod say there was a lot of information, but he talked specifically about this for a little bit, gave an example and just review the question one more time. In 2019 a taxpayer is required to pay additional foreign taxes for tax year 2014. The taxpayer must file an amended return to report a foreign tax redetermination. By what date is the amended return due? Is it October 15, 2025; April 15, 2021; April 15, 2022 or April 15, 2025. Now I'm trying not to give this one away like I did the last time. All right. Okay, folks, look at the responses, there are potential responses, choose the radio button that best answers the question. Just want to make sure everyone has ample time to make their response. Okay, let's go ahead and stop the polling now.

And we will share the correct response on the next slide. Okay, so the correct response is D, April 15, 2025. Now, let's see what percentage of you responded correctly. Okay, Rod, we have 61% that responded correctly. So, can you just help us out and explain why April 15, 2025 is the correct response? Rod Peters: Sure, Evette. Remember, I mentioned that the taxpayer has 10 years from the original due date of the return to file to excuse me to file a claim for refund. So, in this case, the taxpayer has the redetermination was in 2014. So, the due date of the 2014 tax return is April 15, 2015. So, 10 years from that date, remember this is without regard to any extension of due date for the return. So based on that April 15 of 2015, 10 years will be D, April 15, 2025. Evette Davis: Okay, make sense. Makes sense. Thank you, Rod. I'm just going to turn it back over to you. Rod Peters: All right. Thanks for that. Okay, a fiscal year becomes interesting when the taxpayer elects the paid method of claiming the FTC. Applying All Events Test, a foreign tax liability accrues when it can be established that the liability has occurred, and the amount can be determined with reasonable accuracy. Therefore, the All Events Test is not met until the last day of the foreign country's taxable year. Also, no portion of a foreign tax for a specific year can be claimed as a credit until the U.S. taxable year in which the foreign country's taxable year ends. The U.S. of course, uses a calendar tax year running from January through December. So, when the taxpayer files the U.S. return, for example, 2018 to claim the FTC using the accrual method, the amount of foreign tax the taxpayer can claim is the tax liability as of the foreign country's tax year end. So, we have an example here. India uses a fiscal year ending on March 31, which falls, which falls in the 2018 U.S. tax year. So it is on that date, March 31, 2018, the All Events Test is met. This means the Indian tax liability has actually occurred and the amount can be determined with reasonable accuracy. Okay, here is a list of resources for you that you may find helpful when working with foreign tax credit issues.

Publication 54 contains filing and reporting information for U.S. citizens, and persons residing abroad. Pub 514 is our go-to resource so to speak for FTC, and Pub 901, has detailed information on tax treaties. And of course, Form 1116 and the instructions are also great resources. As I'm sure you know, these publications can be accessed at And last but not least, we have the web address of the YouTube video that was mentioned earlier. You can also go to the YouTube site and in the search box, type the words, Foreign Tax Credit - Statutory Withholding Rate vs. Treaty Rate. And that video should pop right up. The video is only nine minutes long but has some great information about the treaty rate versus the statutory withholding rate issue. Evette, that's all we have over to you. Evette Davis: Okay, thank you, Rod. Thank you, Maria. We just heard a lot of great information about the Foreign Tax Credit. Hello, hello, hello, it's me again, Evette Davis, and I will be moderating the question-and-answer session. But before we start the question-and-answer session, I just want to thank everyone for attending today's presentation, Foreign Tax Credit - Individuals. Now earlier I mentioned we want to know what questions you have for our presenters. And here's your opportunity if you haven't already input your questions.

If you haven't inputted your questions, there's still time. So go ahead and click on the drop down arrow next to ask questions within the field. Type in your question and click, Send. Maria and Rod are staying on with us and answer your questions. Now one thing before we start, we may not have time to answer all the questions submitted. However, let me assure you we will answer as many as time allows. Also, if you're participating, earn a certificate and related continuing education credits, you will qualify for one credit to participating for at least 50 minutes from the official start time of the webinar, which basically means the first few minutes of chatting before the top of the hour does not count towards the 50 minutes. Okay, let's go ahead and get started so that we can get to as many questions as possible. Since Rod just finished speaking.

Maria, I'm going to come over to you to ask our participant's first question. Are you there?

Maria Nickolaou: Yes, yes, I am. Evette Davis: Awesome, awesome, awesome. Okay, so the question is, you stated that income must be properly sourced as either U.S. or foreign source? How can this be determined? Good question. Maria Nickolaou: Okay. Well, before I answer that question, I want to point out Pub 514, FTC for Individuals, is going to answer a lot of the questions from the 8,000 people on this call. So, a lot of those answers are in Pub 514. And for questions about the treaty that is Pub 901, so please refer to those in case we don't have time. But I think your question says, why do you have to determine the sourcing or how do you determine it?

Well, the Internal Revenue Code gives a lot of guidance on the sourcing, and of course our bilateral income tax treaty agreements. So I'm just going to rattle off a few code sections here, that deal with sourcing and 861 provides rules about when things are sourced within the U.S.; 862 Internal Revenue Code 862 is the parallel section providing those same types of income that are sourced outside the U.S.; 863(b) deals with rules as to when specific classes of income are sourced partly in the U.S. and partly out of the U.S.; 863(c), (d) and (e) code sections relate to other specialized sourcing items for income; 864 has rules and definitions and 865 has the rules for sales of personal property. So, 861 through 865 are most of what you need to know for sourcing. Evette Davis: Awesome, Internal Revenue Code 861 through 865. All right. Thank you so much, Maria. I'm going to go ahead and stick with you. If you don't mind, this looks like another question that you addressed. The question is, you said one of the four requirements for a foreign tax to be creditable for the FTC is if the tax is an income tax in the U.S. sense, or a tax in lieu of an income tax? Can you explain what is a tax in lieu of an income tax? Can you answer that question. Maria Nickolaou: Okay, if a foreign country has a tax, it's not like an income tax based on what we know to be U.S. tax principles and that would be a tax on net income.

But let's say that the foreign country has a tax on gross receipts. Now, if the gross receipts tax is not a tax in addition to an income tax, okay, that if the gross receipts tax is not a tax in addition to an income tax that the foreign country already has in its tax authority or regime, it could qualify because it's in lieu of, or in place of an income tax. So, you have to be careful to look at what is in lieu of an income tax, or in place of an income tax and not in addition to and I'm just going to throw out the Tax Reg that deals with a tax in lieu of and that is 1.903-1 and so there is more on in lieu of in 903. Okay. Evette Davis: Awesome, awesome. Okay.

Thank you so much, Maria. And I know you also mentioned before has great resources, this is a lot of information and some again some great information to share on FTC. Thank you, Maria.

Okay, Rod, Rod, Rod, I'm going to come down your lane, if you don't mind. Are you there? Rod Peters: I am, Evette. Evette Davis: All right. Okay, good, good, good. Okay, so this person says, while we know this is not a course on treaties, can you go over in a simple way the treaty process as it applies to today's presentation? Rod Peters: Sure, of course. We focused on a situation where both countries can tax income. Treaties provide rules for allocating taxing rights on items of income, and for providing rules for allowing foreign tax credit when both countries tax the same income. They also have procedures for resolution of disputes and difficulties and / or doubts as to the application of a treaty, I think it is best summarized in a couple of steps. So, we start with whether the taxpayer's income is taxable under the code.

The Internal Revenue Code, this was regular income tax, if not, then there's no treaty issue. If it is taxable under the code, we must ask if it's exempt under some other agreement. If income is exempt under some other agreement, then no need to refer to the treaty. If it is not, now we want to ask, is the taxpayer entitled to treaty benefits. Well, if not, the treaty does not apply and U.S. tax under the code applies. But if the taxpayer is entitled to benefit, it gets a little bit tricky. I don't want to go into too much detail but know that a treaty may permit the U.S. to tax the taxpayer as if the treaty did not exist. And if that is the case, then the U.S.

may tax as provided by the Code, subject to any double taxation relief provided by the Treaty.

If the treaty rate, if the treaty does not permit the U.S. to tax a taxpayer as if the treaty did not exist, then you need to check the requirements of the treaty article that reduces or eliminates the taxpayer's U.S. tax. And again Publication 901, U.S. Tax Treaties, is a wealth of information and can be found on Evette Davis: Okay, all right, great information and another great resource Pub 901. Okay, Rod, let me just stick with you again. And ask this question because I know you referenced this, what happens when a foreign tax is refunded or, if an election is made to use the accrued method and either the taxpayer paid a different amount from what was accrued, or the accrued taxes remain unpaid after two years, this person's client didn't elect the accrued method and wants to know, can we make the election on an amended return? Rod Peters: Okay, I'm glad someone asked this question. The simple answer is no. The law does not allow this method to be made or changed on an amended return. And most individual taxpayers are on the cash basis. Of course, even so they may alert to take a credit for foreign taxes in the year they accrue. Taxpayers make the election by checking the box in Part two of Form 1116. There are two boxes one is paid and the other is accrued, now once the election is made though, they must follow it in all subsequent years and take a credit for foreign taxes in the year they accrue. Now, IRC Section 905 provides the framework for this issue. And I want to make a distinction here. If a taxpayer on the paid method receives a refund of foreign taxes paid in a prior-year, the taxpayer must amend the return for the year to which the refund relates. If a taxpayer on the paid method pays additional tax for a prior-year, the taxpayer can only take the credit for the additional tax in the year it was paid. There's an excellent example of this scenario in Treasury Regulation, it is kind of law, so I will say it slowly it is 1.905-3(b)(1)(ii)(F) example 6. Here they describe a scenario of a taxpayer on paid method and provide an analysis. Bottom line, taxpayers are only allowed to take a credit when the foreign taxes are paid, unless that taxpayer has elected to use the accrued method. I also want to point out there is a very limited exception for cash method taxpayers claiming a foreign tax credit for the first time in Treasury Regulation 1.905-1(e)(2) if the year in which an election is made to claim the foreign tax credit on an accrual basis is made, is the first year for which a taxpayer has ever claimed a foreign tax credit, the election to claim the foreign tax credit on an accrual basis can also be made on an amended return filed within the period permitted. The election is binding in the election year and all subsequent taxable years in which the taxpayer claims a foreign tax credit. I said if this is the first year in which the taxpayer has ever claimed the foreign taxes. So those are key words to that regulation. This is a situation in which a taxpayer never claimed an FTC and filed the original return without claiming the credit.

Also, if the taxpayer is later determined to have a foreign tax liability for that year, then they can claim the credit on an amended return. However, and here's another tricky part if the taxpayer claimed an FTC in a subsequent year, before filing an amended return for the current year, this exception would also not apply. Evette Davis: I will go back to my first statement, folks, I hope you had your pen and pad out, because he just gave again, some great information and great detail. Thank you so much, Rod and Maria, you guys are awesome. Okay, Maria, I have time to ask a couple more questions. So, I'm going to come out of your lane. Are you there?

Maria Nickolaou: I am. Evette Davis: Awesome, awesome. Okay, so this person says you didn't cover this. But can you explain how FTC exchange rate rules work? Maria Nickolaou: Okay, yes, we didn't go into this. So, I'll try and be very brief here. When a taxpayer elects the accrued method, they have to use the average exchange rate for the year that those taxes relate. So, if I'm not mistaken, give me one second, Internal Revenue Code 986(a)(1)(A). So that's for taxpayers that elected the accrued method. If taxpayers have elected the paid method, you use the exchange rate on the date of payment and that is the next code Section 986(a)(2)(A). If foreign taxes have been withheld, they are translated to USD using the exchange rate on the date of payment. So withholding is the same as taxpayers who have paid them. And that is the exchange rate on the date of payment. So, accrual method, average change, paid method is withheld on the date of payment. Evette Davis: Excellent, excellent. Thank you. Thank you. Thank you, Maria. I know we kind of threw you a curveball there. So, thank you so much. Okay, so I am so sorry. That is all the time we have for questions. I do want to thank Maria and Rod for sharing their knowledge and expertise and for answering your questions. But before we close the Q and A session, Rod what key points do you want the attendees to remember from today's webinar? Rod Peters: Well, first, the fundamental purpose of the foreign tax credit is to mitigate double taxation on the income. The FTC is limited to the foreign tax paid or accrued or the U.S. tax on the foreign source income, whichever is lower. The statutory withholding rate vs. treaty rate, if a treaty applies, the legal and actual tax liability is the treaty rate. Then we go on, there are four requirements that must be met in order for a foreign tax to be eligible for the FTC. They are it must be in income tax or a tax in lieu of an income tax, it must be a legal and actual foreign tax liability, it must be a tax imposed on the taxpayer and it must be paid or accrued; and one more time, because these are important. It must be in income tax or a tax in lieu of an income tax, it must be a legal and actual foreign tax liability, it must be a tax imposed on the taxpayer and it must be paid or accrued. And finally, anytime there is a foreign tax redetermination, the taxpayer is responsible for notifying the IRS by filing an amended tax return and a revised Form 1116. If the taxpayer does not inform the IRS, and the FTR is later discovered, the IRS has an unlimited amount of time to assess additional tax. If the redetermination results in additional foreign tax paid, the taxpayer has 10 years from the original due date of the return without regard to any extensions to file a claim for refund. Back to you, Evette. Evette Davis: Thank you, Rod. Okay, audience we are planning additional webinars throughout the year. To register for all upcoming webinars, please visit keyword search, Webinars, and select the Webinars for Tax Practitioners or Webinars for Small Businesses. When appropriate, we will be offering certificates and CE credit for upcoming webinars. We invite you to visit our video portal at There you can view archived versions of our webinars and please remember, continuing education credit or certificates of completion are not offered, if you view any version of our webinars after the live broadcast. A big, big thank you to our speakers, Maria Nickolaou and Rod Peters for a great webinar. Thank you for sharing their expertise and for answering your questions. I also want to thank you, our attendees for attending today's webinar, Foreign Tax Credit - Individuals. If you attended today's webinar for at least 50 minutes from the official start time, you qualify for one possible CE credit. Again, the time we spent chatting doesn't count was towards the 50 minutes. If you're eligible for the continuing education from IRS, and you registered with a valid PTIN, then your credits will be posted to your PTIN account. If you qualify and you haven't received your certificate of credit by the 13th of September, please email us at the address listed on the screen. If you're interested in finding out who your local Stakeholder Liaison, you should know that person, then you can send us an email using the same address shown on this slide. And we will send you the name of that person. We would appreciate it if you would take a few minutes to complete a short survey before you exit. If you'd like to have more sessions like this one, let us know. 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