There was a marked increase in foreign tax credit claims in the year 2005, in part due to a one-year tax break allowing corporations to repatriate foreign income and pay a lower rate of US income tax, Internal Revenue Service (IRS) figures released on August 25 have shown.
According to the IRS’s summer statistics of income bulletin, foreign-source taxable income for corporations that claimed a foreign tax credit rose 61% over 2004, while the foreign tax credit increased 43.9%. This was partly due to the one-time repatriation ‘tax holiday,’ legislated the year before, wrote Melissa Costa, an economist with the agency’s Special Studies Returns Analysis Section.
The American Jobs Creation Act, passed by Congress in October 2004, ushered in a series of new tax breaks in an attempt to stimulate domestic investment. One of the most significant of these was the one-year ‘tax holiday’ which allowed US firms to transfer earnings from foreign operations back to the United States and pay an effective income tax of 5.35% instead of 35%. The repatriated funds had to be used in job creation and domestic investment activities.
For the 2005 tax year, 5,837 US corporations claimed more than USD84bn in foreign tax credits, reducing their US tax on worldwide income by 30.3%, from USD278.2bn to USD194bn. They reported a total of about USD402bn in foreign-source taxable income, slightly more than 50% of total worldwide income.
About 68% of total foreign-source taxable income of corporations that claimed a foreign tax credit was accounted for by corporations whose primary business was manufacturing. Those corporations reported 69% of the total foreign tax credit.
A little more than half of foreign-source taxable income came from Europe, with nearly 40% from European Union (EU) countries. The top three EU countries included the United Kingdom, which accounted for 12.5% of total taxable income, followed by the Netherlands, with 9.2%, and Ireland, with 5.6%.
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