Foreign Tax Credit – Don’t Trust ESPN
Today I was listening to ESPN radio, two hosts were discussing an NFL team moving to London. They said it would never happen because the player would have to pay the 45% maximum rate in England, as well as the 37% highest rate in the U.S., giving up roughly 82% of their income. However, this would not happen due to the foreign tax credit.
The first misconception about the foreign tax credit is that it is related to a treaty. In fact, the foreign tax credit is part of U.S. law and applies even if the taxes are paid in a non-treaty country. The basics of how it works are that for taxes paid in the foreign country, there is a credit on the U.S. tax return to avoid double tax. There are some caveats, such as limitations if other income is earned in a country with no tax, and it does not apply to income exempt under the foreign earned income exclusion. Also, the tax must be an actual, involuntary income tax, and there are timing issues, as well as some other considerations. In general though, it is an effective method to lessen the effects of double taxation.
There is a lot of planning that can be done with foreign tax credits For example, a taxpayer that has not filed in a foreign country, nor filed in the U.S., can gain compliance in both countries and possibly only pay one tax by getting the credit. Overall, it is not common to have a pure double tax.
Therefore, back to ESPN, all things being equal, an NFL player playing in London would pay the 45% tax on the income earned in London and then get a credit on the U.S. return so there was no additional tax. There are of course more details than that, but they would definitely not be paying a pure double tax at a rate of over 80%. As with many international tax issues there are many misconceptions and unfounded fears, it is always best to ask a professional……an international tax professional.