[Editor's Note: This narrative is derived from Rhoades & Langer, U.S. International Taxation and Tax Treaties, § 12.02[a][ii][B] (Matthew Bender). Available also in print at the LexisNexis® Store.]
The foreign tax credit is the international taxpayer's chief defense against double taxation of the same items of income, once by the foreign jurisdiction and once by the United States.
A partnership is considered to pay whatever foreign tax is imposed on the partnership entity by the foreign country. [Treas. Reg. § 1.901-2(f)(4)(i).] The partnership regulations [Treas. Reg. § 1.702-1(a)(6) and § 1.704-1(b)(4)(vii)] set forth the rules for allocating foreign tax paid by a partnership among partners. Under those regulations, the partner is to take into consideration his distributive share of the taxes paid by the partnership. The election to treat taxes as a deduction is made at the partner level. [Treas. Reg. § 1.702-1(a)(6).]
Foreign law will apply the foreign tax at the entity level when the entity is recognized as a tax paying entity under foreign law, even if it is a disregarded entity (generally, a "DE") under U.S. law. [ Treas. Reg. § 301.7701-2(c)(2)(i).] Under those circumstances, the person that is treated as owning the assets of the DE is considered as legally obligated to pay the foreign tax for U.S. tax purposes. [ Treas. Reg. § 1.901-2(f)(4)(ii).]
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