Do I file Form 1118 even if no tax is owed?
Relief or credit claim obligations of this kind are generally required on the facts rather than on the tax result, so a nil position does not remove one. US corporations with foreign source income or foreign subsidiary earnings brought into the US tax base.
What happens if I have missed Form 1118 for several years?
Missed years are dealt with as a package rather than one at a time, because the route chosen for the first year affects the relief available for the rest. We map the years and the obligations before anything is filed.
Is Form 1118 the same as the other reports I already file?
No. The corporate equivalent of the individual foreign tax credit, claimed by a US corporation for income tax paid abroad by it or deemed paid on foreign earnings. Satisfying a different obligation, even one covering the same accounts or entity, does nothing for this one.
Why is our foreign tax credit lower than the foreign tax we paid?
The credit is capped by a limitation, not by the foreign tax bill. Income from foreign sources is worked out under US rules, and a share of the group's own expenses is pushed against it, so the foreign source income the credit is measured against shrinks even though the tax paid abroad has not moved. That is why two groups with identical foreign tax bills can end up with very different usable credits. The work sits in the apportionment and in evidencing the method used, rather than in copying figures off the foreign assessments.
What are the separate baskets on Form 1118?
Foreign income is not pooled. It is split into separate categories, and the limitation is computed inside each one, so tax paid on income falling in one category cannot shelter US tax on income in another. A group can therefore hold excess credit it cannot use on one side while still paying residual US tax on the other. Getting the split right is the first task on the form, and it usually means going back to the underlying ledgers rather than working from the foreign tax return, which was prepared to answer a different question.
Can our US parent claim credit for tax its foreign subsidiary paid?
In defined circumstances, yes. Where foreign subsidiary earnings are brought into the US tax base, the US corporation can be treated as having paid a share of the foreign income tax borne on those earnings, and that deemed paid amount is claimed alongside tax the corporation paid directly. It is not automatic, and it is not simply the subsidiary's tax bill. The computation runs off the subsidiary's earnings and the tax attached to them, so the subsidiary's own accounts and filings have to be readable and reconciled before the parent's claim can be supported.
Do we still file Form 1118 if the credit comes out at nil?
Usually it is worth preparing the computation anyway. The form is where the group's position on sourcing, apportionment and categories is set out, and where unused credit is recorded so that it can be carried to another year. A year left uncomputed is a year whose excess credit nobody can evidence later, and the sourcing decisions taken in it are the ones an examiner asks about when a later year turns on them. Preparing it also tends to surface apportionment problems early, while the underlying records still exist and the people who made the entries are still there.
What happens to foreign tax credit we cannot use this year?
Excess credit is not necessarily lost. Credit above the limitation in a category can be carried to other years within that same category, subject to the rules governing the carryover. This makes the schedule that tracks it as important as the current year computation: a carryover nobody has recorded is a carryover nobody can claim. When we take over a group's filings we rebuild that tracking schedule category by category from the returns actually filed, because the balances are rarely sitting anywhere in a form that could be handed to a reviewer.
Our foreign tax was adjusted after an audit abroad, so what now?
A change to foreign tax that was accrued and claimed feeds back into the US credit. The claim was made for an amount that has since moved, so the earlier position has to be revisited rather than simply absorbed into the current year. That means returning to the year the tax related to, restating the computation on that year's basis, and reporting the change. Keep the foreign assessment and the payment evidence with the working papers, because a redetermination is only as good as the documents supporting the revised foreign tax figure.
What is a foreign tax credit?
A credit against your home-country tax for income tax you already paid to another country on the same income, so the same amount is not taxed twice at full rates. It is capped: you cannot credit more than your home country would have charged on that income, which is why a higher foreign rate leaves an unused balance rather than a refund. In the US it is claimed on Form 1116, in Canada on the T2209 and T2036, in India on Form 67. See Form 1116.
How do I claim the foreign tax credit?
You report the foreign income, the foreign tax paid on it and the category it falls into, then compute the limit — the credit cannot exceed your own country's tax on that same income. You need evidence the foreign tax was actually paid or accrued, not merely withheld on paper. The form differs by country: Form 1116 in the US, T2209 and T2036 in Canada, Form 67 in India, and the Indian form must be filed before the return. See Form 1116.
