Question

Sun Incorporated, a U.S. corporation, owns 5,000 acres of undeveloped land in Country D, but is not engaged in business in Country D and has no income (under U.S. concepts) from Country D sources. Country D has a generally applicable tax imposed on net income at a rate of 30%. Under Country D tax law, an owner of real estate is deemed to realize the imputed rental value of any real estate to the extent that the imputed rental value exceeds the actual rental income (if any) received. Costs and expenses attributable to the imputed rent are allowed as a deduction in computing the base of the Country D tax. Accordingly, the 30% Country D tax is imposed on an imputed rental value from Sun Incorporated’s land equal to $50,000 per year, less the cost and expenses attributed to the imputed rent. Is this tax creditable? What would the results be if the United States had severed diplomatic relations with Country D?

Answer 1

Yes, the taxes paid in Country D will be creditable to Sun Incorporated in the income tax return filed in US. As US tax law allows credit of taxes paid in foreign countries if the same is taxable in US and taxes have been paid in a country outside US. Thus, income tax paid on this deemed income is allowable as credit in IT Return in Form 1118 (as it is a corporation) provided Sun Incorporated reports the income on which tax credit is to be availed.

However, if US had severed diploomatic relations with country D, tax credit will not be allowed as the law specifically excludes the tax credits earned in a country with which US has severed diplomatic relations.