The taxpayer was a bona fide resident of the United Kingdom but was working on international waters (oil field). Question: How can he avoid dual taxation: Foreign Earned Income Exclusion, Foreign Tax Credit?

Cool stuff. So, as discussed in Income earned on international waters, it can not be excluded using the Foreign Earned Income Exclusion since it was not earned in a foreign country.

Also, IRC section 863(d) states that “Source Rules for Space and Certain Ocean Activities.–
(1) In general.–Except as provided in regulations, any income derived from a space or ocean activity–
(A) if derived by a United States person, shall be sourced in the United States
* * * * * * * * * *
(2) Space or ocean activity.–For purposes of paragraph (1)–
(A) In general.–The term “space or ocean activity” means–
* * * * * * *
(ii) any activity conducted on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States”

Ok, so it is sourced in the United States – so what? Well, IRC 901 states that one can only take a foreign tax credit against foreign sourced income; if it is sourced in the US, then oops, no foreign tax credit.

A U.S. person with no foreign source taxable income according to U.S. concepts that were subject to a foreign income tax could not claim a credit for the foreign tax because of the limitation on the credit. In that situation, a taxpayer would reduce its U.S. tax liability by claiming a deduction for the foreign tax, by a deduction is a lot less interesting since it only reduces taxable income, not tax due.

But then the US-UK income tax treaty comes to the rescue:

“However, subparagraph 5(a) of this Article preserves the benefits of special foreign tax credit rules applicable to the U.S. taxation of certain U.S. income of its citizens resident in the United Kingdom. See Paragraph 6 of Article 24 (Relief from Double Taxation). “

Then under 5(a)

“(4) Article 24 (Relief from Double Taxation) confirms the benefit of a credit to citizens and residents of one Contracting State for income taxes paid to the other, even if such a credit may not be available under the Code.”

So, you can take the foreign tax credit, but in addition to the regular forms (form 1116…), you would also include a form 8833 to explain that you worked on international waters, that it is “ocean activities” with under the code normally would not be eligible for a foreign tax credit because sourced in the US under 863(d) but that by virtue of Article 24 of the treaty the taxpayer is still eligible for the foreign tax credit.

 

FREE U.S. tax guide for Americans abroad

FREE U.S. tax guide for Americans abroad

The only e-book about U.S. international taxation, which you need to read as U.S. expat:

1. Foreign Tax Credit vs. Foreign Earned Income Exclusion

2. What is the danger of holding a Controlled Foreign Corporation?

3. Why more and more people are renouncing U.S. citizenship?

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