The first meeting between Governor Wanda Vázquez and US Secretary of Treasury, Steve Mnuchin, triggered an anticipated request from the Secretary: The government of Puerto Rico has to identify an alternative to the 4% excise tax of Act 154-2010 (“Excise Tax”). With tax collections of around $1,800 million, the government faces the challenge it knew it would face sooner or later.
Currently, the US Tax Code has general provisions of foreign tax credits (“FTC”) and indirect foreign tax credits (“IFTC”). The FTC prevents double taxation of foreign income of US persons by reducing US tax on that income by the amount of income tax paid to foreign governments for example Puerto Rico. The analysis starts with whether the foreign tax is a creditable tax. Section 901 of the US Tax Code limits the credit to foreign taxes imposed on “income, war profits or excess profits.” AN FTC is also allowed for taxes imposed “in-lieu-of” a generally imposed income tax.
The IFTC applies specifically to controlled foreign corporations (“CFCs”). Section 960 of the US Tax Code generally provides that when undistributed earnings of a CFC are taxed to a domestic corporation as Subpart F income, the domestic corporation may be deemed to have paid a portion of the foreign income taxes paid or deemed paid by the CFC. Thus, a domestic corporation that is taxed on the earnings of a CFC may be able to claim an IFTC for foreign income taxes paid or deemed paid by the CFC to the foreign jurisdiction.