Foreign Tax Credit for Individuals: The Calculations you don’t expect

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Foreign Tax Credit (FTC) is a credit granted in respect of income taxes for income derived from foreign sources. It is a form of unilateral elimination of double taxation.

The concurrent taxation regime determines phenomena of international double taxation on income produced in another foreign State by a taxpayer resident in the State which are attenuated by the foreign tax credit (FTC), provided for in almost all the conventional agreements stipulated, with the purpose of eliminating (or at least limiting) the double taxation generated on the same income subject to taxation both in the foreign country of production and in country of residence.

  1. Systems of taxation and international double taxation

The most widely used tax system in the world is based on the ” worldwide taxation principle” by establishing that the tax resident in a particular State must pay taxes on all sources of income, both domestic and originating outside the territory of the State: this system contrasts with another where the taxation of income takes place in the source country ( source-based taxation principle ) and, therefore, a tax resident pays taxes only on the income produced in the territory of the country in which he resides. 

International legal double taxation manifests itself in the taxation of the same income both in the source State and in the State of residence of the taxpayer. According to which an income is taxed in the state where the person is resident regardless of the place of production of the income. 

  1. International double taxation mitigation tools

The need to tax both worldwide income for residents and domestic source income for non-residents produces double taxation that can be mitigated. And in many cases cancelled on the basis of interstate agreements contained in double taxation treaties to regulate the different taxing power between the Contracting States outlining the different taxation of the income received by one of the two States in respect of non-resident subjects.

This phenomenon of double taxation can be cancelled or in any case mitigated by various methods:

  • The credit method 
  • The full exemption method excludes foreign source income from taxation in the recipient’s country of residence, thus subjecting it to exclusive taxation in the source country;
  • The progressive exemption method 
  • The deduction method 
  • the reduction method
  1. Foreign tax credit (FTC) and taxes paid outright abroad

The tax credit due for income produced abroad is attributed only in the event that the taxes withheld on such income abroad have been paid definitively: the finality of taxes paid abroad corresponds to the non-repeatability of themselves and in substantial and practical terms must not be “susceptible to modification in favour of the taxpayer”. 

In the event of partial payment of taxes abroad, the possibility remains unaffected of proceeding with the immediate deduction of the part of the taxes already paid definitively in the tax period to which the declaration refers). 

It is always ideal to get calculate foreign worker quota before filing for tax returns. A lot of reputed companies are offering these services in Singapore. You can hire them for easy FTC filing and to calculate foreign worker quota.

  1. Concluding points

The tax credit is recognized to subjects fiscally resident in state when the following conditions are met:

  • the production of an income abroad;
  • the contribution of this income to the formation of the total income;
  • the definitive payment of foreign taxes;
  • the foreign tax credit is due within the limit of the gross country tax relating to foreign source income (credit capacity);
  • the capacious foreign tax credit (FTC) is up to the limit of the net tax;
  • The excess with respect to the net tax can be deducted from the tax relating to the subsequent period, requested as a refund or used in horizontal offsetting.