Rationalizing the Arbitrary Foreign Tax Credit

61 Pages Posted: 30 Nov 2021 Last revised: 30 Aug 2023

See all articles by Jordan M. Barry

Jordan M. Barry

University of Southern California Gould School of Law

Ariel Jurow Kleiman

Loyola Law School Los Angeles

Date Written: February 21, 2021


The foreign tax credit is a cornerstone of the United States’ international tax regime and enjoys broad bipartisan support. Yet despite its enduring popularity, careful analysis reveals that the foreign tax credit is surprisingly arbitrary. Taxes are creditable in their entirety or not at all, and only “pure” income taxes receive a credit. Even a slight deviation from the law’s narrow definition of an income tax renders a foreign tax completely uncreditable.

The current approach is clearly problematic. It is a fundamental tenet of tax policy that the law should treat items based on their economic substance, but the credit’s all-or-nothing approach does not. Nor do the policy rationales underlying the foreign tax credit support starkly different treatment for pure income taxes compared to all other taxes.

We identify principles to reform the foreign tax credit in accordance with economic substance and the policy goals underlying the credit. We then use those principles to evaluate various possible reforms. Depending on which goals policymakers choose to prioritize, plausible options range from eliminating the credit to greatly expanding its scope. But in any event, the way forward involves abandoning the credit’s sharp, arbitrary distinction between pure income taxes and all other taxes.

Keywords: tax, tax policy, international taxation, corporate taxation, foreign tax credit

JEL Classification: K34, H25, F23

Suggested Citation

Barry, Jordan and Jurow Kleiman, Ariel, Rationalizing the Arbitrary Foreign Tax Credit (February 21, 2021). San Diego Legal Studies Paper No. 20-438, Tax Law Review, Available at SSRN: https://ssrn.com/abstract=3548960 or http://dx.doi.org/10.2139/ssrn.3548960

Jordan Barry

University of Southern California Gould School of Law ( email )

699 Exposition Blvd.
Los Angeles, CA 90089
United States

Ariel Jurow Kleiman (Contact Author)

Loyola Law School Los Angeles ( email )

919 Albany Street
Los Angeles, CA 90015-1211
United States

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