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Tax Implication of the Post Sanctions Relief; the “Iran Nuclear Deal”. Congress’s concern about foreign tax credit regarding Iran

Posted by: Zaher Fallahi
Posted On: Sep 27, 2015

In his September 22nd, 2015, letter to the Obama administration, The House Ways and Means Committee Chair Paul Ryan, Republican of Wisconsin, requested the administration to disclose whether, as part of its “nuclear deal with Iran”, referring  to the July 14, 2015 agreement signed by Iran and P 5+1 (US, China, Russia, Britain, France + Germany) also known as” Joint Comprehensive Plan of Action (JCPOA)”, it intends to waive the punitive measures imposed by Internal revenue Code Section 901 (j) regarding taxes paid on income earned in Iran by US businesses and individuals under the US tax law. See Foreign Tax Credit and related tax law below.

Important. The above issue is only one international tax matter concerning Iran. There are numerous other US international tax laws that may apply to the US taxpayers dealing with or living in Iran. For additional information, click  http://zflegal.wpengine.com/taxation-of-persian-americans-living-in-iran-4/

For information on the Office of Foreign Assets Control (OFAC ) with respect to Iran, click http://zflegal.wpengine.com/services/the-us-treasury-office-of-foreign-assets-control-ofac/

Background Information

Foreign Tax Credit

If a US taxpayer pays or accrues income taxes to a foreign country on foreign source income and is subject to U.S. tax on the same income, he or she may be able to either take a tax credit for those foreign taxes or take a deduction as “itemized deductions” on Schedule A.

 Note. Once you choose to exclude either foreign earned income or foreign housing costs according to IRS Form 2555, Foreign Earned Income Exclusion, you cannot take a foreign tax credit for taxes on income you can exclude. If you do take the income tax credit, one or both of the choices may be considered revoked. Therefore, it is strongly advisable to consult a tax professional before you decide.

Under 26 US Code Section 901, foreign income tax credit, denies the foreign tax credit to countries under US sanctions, in pertinent sections provide:  

(j) Denial of foreign tax credit, etc., with respect to certain foreign countries  (1) In general  Notwithstanding any other provision of this part (A) no credit shall be allowed under subsection (a) for any income, war profits, or excess profits taxes paid or accrued (or deemed paid under section 902 or 960 to any country if such taxes are with respect to income attributable to a period during which this subsection applies to such country, and (B) subsections (a), (b), and (c) of section 904 and sections 902 and 960 shall be applied separately with respect to income attributable to such a period from sources within such country.

(2) Countries to which subsection applies (A) In general. This subsection shall apply to any foreign country. (i) the government of which the United States does not recognize, unless such government is otherwise eligible to purchase defense articles or services under the Arms Export Control Act. (ii) With respect to which the United States has severed diplomatic relations. (iii) with respect to which the United States has not severed diplomatic relations but does not conduct such relations, or (iv) which the Secretary of State has, pursuant to section 6(j) of the Export Administration Act of 1979, as amended, designated as a foreign country which repeatedly provides support for acts of international terrorisms. (B) Period for which subsection applies .This subsection shall apply to any foreign country described in subparagraph (A) during the period (i) beginning on the later of (I) January 1, 1987, or (II) 6 months after such country becomes a country described in subparagraph (A), and (ii) ending on the date the Secretary of State certifies to the Secretary of the Treasury that such country is no longer described in subparagraph (A).

Under 26 U.S. Code Section 901-Taxes of foreign countries and of possessions of US,  Section 901 (J) (5) provides:

Section 901(J)(5) Waiver of denial

(A) In general. Paragraph (1) shall not apply with respect to taxes paid or accrued to a country if the President (i) determines that a waiver of the application of such paragraph is in the national interest of the United States and will expand trade and investment opportunities for United States companies in such country; and (ii) reports such waiver under subparagraph (B).  (B) Report. Not less than 30 days before the date on which a waiver is granted under this paragraph, the President shall report to Congress (i) the intention to grant such waiver; and (ii) the reason for the determination under subparagraph (A)(i).

Zaher Fallahi, Tax Attorney, CPA, advises US taxpayers, with their IRS audit, IRS Offshore Voluntary Disclosure Program (OVDP), Streamlined Filing Compliance Procedures, Report of Foreign Bank and Financial Accounts (FBAR), Foreign Account Tax Compliance Act (FATCA), Foreign Trust and Offer-in-Compromise.  Out of approximately  1,300,000 US lawyers, about 2% are also CPAs, and we are one of them. Telephones: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), e-mail taxattorney@zfcpa.com