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USAco, a domestic corporation, operates a branch in foreign country F. Under cou

ID: 2424597 • Letter: U

Question

USAco, a domestic corporation, operates a branch in foreign country F. Under country F tax laws, taxable income equals the gross receipts derived from sources within country F, reduced by deductions for significant costs and expenses incurred to produce the gross receipts. However, interest expense is not deductible in computing taxable income. The tax that country F imposes:

(a) may be creditable because the tax passes the net income test

(b) is not creditable because the tax does not pass the the net income test

(c) is not creditable

(d) is creditable

Explanation / Answer

(d) is creditable

Tax has been paid on the interest expense in the foreign country as the expense is not deducted for arriving at taxable income. Therefore, direct credit will be allowed for the same as per IRS Manual