Different countries offer foreign tax credits to foreigners in keeping with the global tax system. The foreign tax credit can also be provided to individuals who are taxed in a different country. Therefore, non-citizens of a given country could be the recipients of a tax credit since they will be taxed in another jurisdiction. However, the foreign tax credit may be restricted to the amount of levy provided by foreign earnings (Reilly & Brown, 2008, p. 143). Various regulations affect the tax systems such as the rules required to deduct foreign income. The objective of this paper is to describe foreign tax credit and explain the reasons why countries give a tax credit to non-citizens. To achieve this goal, the paper shall first endeavor to describe foreign tax credit (Mishkin & Eakins, 2001, p. 89). In addition, the research paper shall also explore the reasons why countries give credit for taxes paid on foreign source income. Finally, the last section will be a summary review of the entire research paper.
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Description of foreign tax credit
Foreign tax credits are sums of money paid to gratify the obligations of people within a foreign country. When an individual is given tax credit, this means that he/she is exempted from paying tax in a given jurisdiction on the understanding that they must pay tax to their country of origin. There are two available alternatives to a taxpayer in a foreign country (Revsine, 2008, p.108). To start with, an individual in a foreign country may choose to claim a foreign tax credit. Alternatively, such an individual may prefer to be exempted from paying tax on an item purchased. A person doesn’t need to stay or live in a country to be entitled to these benefits. Thus, an individual can equally benefit from these credits even if they do not live in foreign countries (Eiteman, Stoneville & Moffett, 2007, p.101). This especially applies to individuals who are privileged to acquire joint funds. These benefits can be claimed separately meaning that a person may choose to get a tax credit in a given year and the tax deduction the following year. One does not have to claim for both tax credit and deduction in one instance. Foreign tax credits are essential because they form a substantial part of an individual’s income. Unfortunately, the United States does not refund any money in case the foreign income tax outweighs the tax (Jordan & Miller, 2008, p.74).
Reasons why countries give credit for taxes paid on foreign source income
Countries normally give credits for taxes paid on foreign sources of income as a way of avoiding double taxation on an individual. This means that governments offer the credits as a way of preventing people from paying tax more than once. Unlike the rest of the world, the United States applies a global tax system that taxes its citizens living and working. Other countries also offer credit for taxes paid on foreign sources of income to ensure that individuals benefit from the deduction on items purchased. International finance involves that portion of the foreign investment that is deemed as a contribution to a country’s revenue. Taxation is very essential to an economy but this does not mean that people should be manipulated into paying double the amount of income (Eiteman, Stonehill & Moffett, 2007, p.101).
Foreign individuals are privileged because they can benefit from foreign tax credits and item deductions even if they do not live and stay in another country. Foreign tax credits are important because they prevent foreign individuals from paying tax twice. Credits can be restricted only for the taxes paid on any income that has been excluded from U.S taxation (Schilit, 2002, p.118).
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Jordan, B., & Miller, T. (2008).Fundamentals of Investments Valuation and management. Lexington: McGraw-Hill/Irwin.
Mishkin, F. S., & Eakins, S. G. (2001). Financial Markets and Institutions. Reading, Mass: Addison Wesley
Reilly, F., & Brown, K (2008). Investment Analysis and Portfolio Management (9th Ed.). Stamford, Mass: Cengage Learning.
Revsine, L. (2004). Financial Reporting and Analysis. Toronto: Prentice Hall.
Schilit, H. (2002). Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports. (2nd Ed.). New York: McGraw-Hill.