The Relationship between a Credit and a Deduction for the Foreign Taxes of a Multinational Corporation

24 Pages Posted: 28 May 2014 Last revised: 20 Jun 2014

Date Written: May 26, 2014

Abstract

A credit for foreign taxes paid by a multinational company is usually described as fundamentally different from a deduction for foreign taxes. The credit has been criticized for eliminating the taxpayer's incentive to reduce foreign taxes, whereas a deduction is said to maintain that incentive. On the other hand, the credit is traditionally defended as a method of eliminating double taxation of cross-border income, whereas the deduction is often criticized for producing multiple levels of taxation (and is therefore not an acceptable method of dealing with double taxation under the standard international tax treaties). The argument of this note is that a credit and a deduction for foreign taxes paid by a multinational company are not as different as the foregoing assertions would suggest. Indeed, credits and deductions can be interchangeable, with the distinction only a matter of labels or nominal tax rates.

Suggested Citation

Warren, Alvin C., The Relationship between a Credit and a Deduction for the Foreign Taxes of a Multinational Corporation (May 26, 2014). Harvard Public Law Working Paper No. 14-23, Available at SSRN: https://ssrn.com/abstract=2442306 or http://dx.doi.org/10.2139/ssrn.2442306

Alvin C. Warren (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser Hall 308
Cambridge, MA 02138
United States

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