FOREIGN TAX CREDIT

Foreign Tax Credit

“Tax credits” refers to amounts allowed as deductions from the tax due in the form of creditable withholding taxes
and foreign income tax paid or accrued. A tax credit certificate is an accountable form issued to a taxpayer in
acknowledgment of an approved tax credit which is issued by the BIR.

Tax credit, as used in the Tax Code, refers to the taxpayer's right to deduct from the income tax due the amount of tax
he/it has paid to a foreign country subject to limitations. Tax credit is allowed to lessen the harshness of taxation where
the same income is subject to both the foreign tax and the Philippine income tax.

TAX DEDUCTION VERSUS TAX CREDIT

Tax deduction is a deduction from gross income. Tax credit, on the other hand, is a deduction from Philippine income
tax itself. While there are numerous taxes that may be deducted from gross income, there is only this foreign income
tax that may be claimed against Philippine income tax.

TAXPAYERS ENTITLED TO TAX CREDIT

1. Resident citizens;
2. Domestic corporations;
3. Members of general professional partnerships; and
4. Beneficiaries of estates and trusts.

TAXPAYERS NOT ENTITLED TO TAX CREDIT

1. Non-resident citizens;
2. Alien individuals, whether resident or non-resident; and
3. Foreign corporations, whether resident or non-resident.

PHILIPPINE INCOME TAX DUE

The taxpayer's income tax payable is computed first based on his/its taxable income before tax credit may be
deducted.
Income Tax Payable PXXX
less: Tax Credit for Foreign Income Taxes Paid or Incurred XXX
Philippine lncome Tax Due PXXX

LIMITATIONS ON CREDIT FOR FOREIGN TAXES

The amount of tax credit shall be subject to the following limitations:

1. For taxes paid to one foreign country.

Formula:

Taxable Income from foreign country x Phil. Income Tax = Tax Credit vs. Actual
Taxable Income from all sources
*Whichever is LOWER.

2. For taxes paid to two or more foreign countries.

Formula:
Limitation 1
Taxable Income from foreign country #1 x Phil. Income Tax = Tax Credit vs. Actual
Taxable Income from all sources

Taxable Income from foreign country #2 x Phil. Income Tax = Tax Credit vs. Actual
Taxable Income from all sources
*Whichever is LOWER.

Limitation 2
Taxable Income from ALL foreign country x Phil. Income Tax = Tax Credit vs. Limit 1
Taxable Income from all sources
*Whichever is LOWER.

True or False
1. The amount of foreign tax credit shall not exceed the same proportion of the tax against which such credit is
taken, which the taxpayer's taxable income from sources within such country taxable under the Code bears
to his entire taxable income for the same taxable year.

Page 1 of 2
 2. Tax credit refers to amounts allowed as deductions from the tax due in the form of creditable withholding
taxes and foreign income tax paid or accrued.
3. For purposes of determining the tax credit that may be allowed a taxpayer, foreign income taxes shall mean
taxes proper only, hence, interest, surcharge or penalty relative to tax delinquency shall maybe credited.
4. Tax credit is a deduction from Philippine income tax itself while tax deduction is a deduction from net
income.
5. If the taxpayer is entitled to a foreign tax credit and he did not choose to exercise such right, such tax credit
may not be allowed as deduction from his gross income.
6. If a taxpayer signifies in his return his desire to claim a credit for foreign taxes, it is understood that it shall
apply to income taxes paid to all foreign countries and a portion of such tax shall be allowed as a deduction
from gross income.
7. In the case of any individual who is a member of a general professional partnership or a beneficiary of an
estate or trust; the basis of foreign tax credit shall be his proportionate share of any such tax of the partnership,
estate or trust paid or incurred during the taxable year to a foreign country if his distributive share of the
income is reported for Philippine income taxation.
8. The total amount of the foreign tax credit shall exceed the same proportion of the tax against which such
credit is taken, which the taxpayer's taxable income from sources outside the Philippines taxable under the
Tax Code bears to his entire taxable income for the same taxable year.
9. At the option of the taxpayer and irrespective of the method of accounting employed in keeping his books,
the law may allow him to claim tax credit in the year in which the taxes for the foreign country accrued,
provided that such election maybe change in the returns for all subsequent years which means that no portion
of any such tax shall be allowed as deduction from gross income.
10. Tax credit refers to the taxpayer's right to deduct from the income tax due the amount of tax he/it has paid to
a foreign country subject to no limitations.

Problem 1
Dynasty Company, a domestic corporation, has the following data for 2017:
Taxable income, Philippines P50,000
Taxable income, JAPAN Foreign Country 30,000
Income tax paid to JAPAN Foreign Country 12,500
Philippine income tax paid, three quarters of the year 5,000
1. Tax credit for foreign income taxes paid is
2. The Philippine income tax still due, after credit for foreign income taxes paid is

Problem 2
Mr. Christian Maliwat, a resident citizen, has the following data for 2017:
Taxable income, Philippines P500,000
Taxable income, JAPAN Foreign Country 300,000
Taxable income, SINGAPORE Foreign Country 200,000
Income tax paid to JAPAN Foreign Country 125,000
Income tax paid to SINGAPORE Foreign Country 55,000
Philippine income tax paid, three quarters of the year 50,000
Assume the income tax paid to foreign country is treated as allowed deduction.
3. The total tax credit is
4. The Philippine income tax still due, after credit for foreign income taxes paid is

Problem 3
Dynasty Company, a resident foreign corporation, has the following data for 2017:
Taxable income, Philippines P500,000
Taxable income, JAPAN Foreign Country 300,000
Taxable income, SINGAPORE Foreign Country 200,000
Income tax paid to JAPAN Foreign Country 125,000
Income tax paid to SINGAPORE Foreign Country 55,000
Philippine income tax paid, three quarters of the year 50,000
5. Tax credit for foreign income taxes paid is
6. The Philippine income tax still due, after credit for foreign income taxes paid is

Page 2 of 2