How Does A Foreign Tax Credit Help America?

Filing for a foreign tax credit allows a business or individual to avoid paying taxes in two countries for the same income, or profits. When a U.S. citizen earns money overseas, the individual may be taxed in the country where the money was made. Instead of additionally paying taxes on the funds in the U.S., the person can request a foreign tax credit. This only happens if the other country and the U.S. have a double-taxation agreement. If the person is taxed at a lower rate abroad, then he or she will pay the difference here in the U.S.

Many people think that the U.S. loses tax dollars by offering the foreign tax credit program. However, if the U.S. did not extend this option, many businesses would go overseas completely to work in a less expensive environment. With the current model, businesses can outsource a portion of their business if it is less expensive overseas. They can keep their U.S. address and continue to pay taxes here because they are assured they will not have to pay taxes twice. The main purpose of the foreign tax credit is to keep industry from entirely moving offshore. The U.S. makes more in tax dollars with the credit than it would if all industry left the country.