GILTI foreign tax credit limitation
Foreign tax credits are limited annually to the amount of U.S. tax on foreign source taxable income as computed under U.S. tax principles. Thus, if the U.S. person pays more tax to the source country of the foreign source income than is due to the U.S. on the same foreign source income, the U.S. will limit the amount of foreign taxes that can be credited against U.S. tax liability.
Mathematically, the foreign tax credit limitation is computed as a taxpayer’s precredit U.S. tax liability multiplied by a ratio (not to exceed one), the numerator of which is the taxpayer’s foreign source taxable income and the denominator of which is the taxpayer’s worldwide taxable income for the year.
Foreign income taxes not credited because of the limitation can generally be carried back or forward to other taxable years, subject to the limitations for those years. However, foreign income taxes paid or accrued with respect to GILTI may not be carried back or carried forward.
Additionally, there is a 20% reduction to GILTI-related foreign income taxes eligible for credit in the U.S.
