Tax Credit
Category: tax
A direct reduction in the tax amount owed, unlike a deduction which reduces taxable income.
A tax credit is a direct reduction of the tax amount owed to a government, as opposed to a deduction which reduces taxable income. In cross-border e-commerce, tax credits include foreign tax credits for income taxes paid abroad and VAT input credits. Tax credits are particularly valuable because they reduce the tax bill dollar-for-dollar rather than just reducing the tax base.
Examples
- • A US seller who pays UK VAT on business expenses can claim a foreign tax credit on their US income tax return to avoid double taxation.
- • A seller paying €5,000 in input VAT on European inventory purchases credits this against their output VAT liability on the quarterly return.
- • The US Foreign Tax Credit (Form 1116) allows US taxpayers to offset income taxes paid to foreign governments against their US tax liability.