💵 Can a country deny a Foreign Tax Credit (FTC) for income taxes from another country if it does not recognize the legitimacy of its government?
In an article titled “FTCs and the ‘Two-State Problem’: Recognizing Contested Governments for Tax Purposes” and published by Tax Notes International on June 15, 2020, Ben Satterthwaite discussed this topic in relation to the U.S. and Venezuela (at the time having an internal dispute between the government of Nicolás Maduro and the election of Juan Guaidó by the National Assembly).
Here are some of the article’s highlights + comments from the Latin American Tax Policy Forum (LATPF):
➡ Section 901(j)(2)(A) of the U.S. IRC lists a few categories of countries in relation to which the U.S. refuses to grant FTC. Countries that have governments unrecognized by the U.S., or countries with which they severed diplomatic relations, are on that list.
➡ Much like other countries in LatAm, the U.S. has had a tax treaty with Venezuela for quite some time. Though in principle one could argue that the equivalent of Art. 23B of the OECD – OCDE Model should allow an FTC in the context of a tax treaty, Art. 24(3) of the treaty between the United States and Venezuela says that credits for Venezuelan taxes shall only be granted as permitted by domestic law.
➡ The author says that, at the time, the U.S. Treasury had not published a list of countries subject to Section 901(j)(2)(A) featuring Venezuela, which might raise the question of whether its income tax was indeed targeted by a denial of FTC. This is not an uncommon discussion in LatAm, particularly when it comes to domestic lists of non-cooperative countries (“tax havens”). If a country meets the legal requirements for being qualified as a “tax haven” but has not been listed as such by the local tax authorities, is it still a tax haven? What if it meets the criteria and has been listed by the local tax authorities, but the country has become a tax treaty partner?
You can find the author’s article on Tax Notes here: https://bit.ly/3Sw5pjk 🌎
If you are interested in learning more about the creditability of foreign taxes in Latin America, here is a short list of articles on the topic recommended by the Latin American Tax Policy Forum (LATPF):
✳ “Tax Sparing y Matching Credit: ¿Medidas para Incentivas Inversiones Extranjeras o para Fomentar la Doble no Tributación?”, by Arhayliz M. Travieso. Published by IBDT – Instituto Brasileiro de Direito Tributário (2021). Available in Spanish at: https://bit.ly/4d8AAJV
✳ “Los convenios de doble tributación en la recaudación de la administración tributaria del Ecuador”, by Milca Orellana, Nestor Gutierrez and Ena Feijoo. Published in Revista Espacios (2019). Available in Spanish at: https://bit.ly/3YJcFN1
✳ “Acordos e Tratados de bitributação: regulação, segurança jurídica e reflexos fiscais”, by Marcelo Pereira Amorim. Published by Universidade de Brasília (2022). Available in Portuguese at: https://bit.ly/4c4Wo84
