Deductions for Foreign Tax – Dual Capacity


Energy - Fossil Fuels

Subsidy Type

Tax Expenditure

Committees of Jurisdiction

Senate Finance Committee

$717 FY 16 Budget Score (in mil.)
$11,566 FY 16-25 Budget Score (in mil.)

To prevent double taxation, current tax law allows U.S.-based corporations to receive a credit against their U.S. tax liability for the taxes they pay to foreign countries on income earned abroad – the Foreign Tax Credit (FTC). Special rules for claiming the FTC apply to companies called Dual Capacity taxpayers that pay a foreign levy and receive an economic benefit from the country, like access to government-owned natural resources. The portion of the foreign levy that a Dual Capacity company pays to receive the specific economic benefit is not eligible for a FTC. The Dual Capacity rules were developed in the 1970’s and issued in 1983 to address the concern that royalties and other foreign levies were being disguised as income taxes on, specifically, oil and natural gas companies, allowing them to claim a larger FTC than other industries. Yet aspects of the rule and some court rulings since then have allowed such practices to continue.

The cost of the practice reported here is the savings that would result from instituting the President’s proposal to fix the situation, but there are other ways to recover the lost tax revenue.

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