Foreign tax credit for Tax on Income / Profit

Lesson Summary-Foreign Tax Credit for Cambodia Tax on Income (profit)

Allowed Foreign tax credit can be offset against profit (income) tax liability, but the foreign tax credit is a non-refundable tax credit for income taxes paid to a foreign government as a result of foreign income tax withholding. Amounts in excess of income tax are usually nonrefundable.

A foreign tax credit (FTC) is generally offered by income tax systems that tax residents on worldwide income to mitigate the potential for double taxation. The foreign tax credit is available to a company that has investment income from a foreign source/country when resident companies in Cambodia brought foreign income from foreign countries, resident companies will be subject to withholding tax from foreign government for their incomes (e.g. dividend paid).

Profit (income) tax liability = tax on profit(income) – foreign tax credit

Example 1

Assume ABC Company registered in Cambodia. ABC Company bought shares from XYZ Company registered at Country A. This year 2018 XYZ paid dividend to ABC Company, but under foreign tax law , this dividend will be subject to withholding tax.

Assume that tax on income (profit) is $20,000 for ABC Company and allowed foreign tax credit is $1,000. Calculate profit(income) tax liability.

Answer 

Profit tax liability = tax on income – foreign tax credit = $20,000-$1,000=$19,000.

So Profit tax liability =$19,000.