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Old 09-24-2015, 06:06 AM
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When are foreign taxes accrued for credit purposes?

I was tax resident in Hong Kong until 1 March, 2013. I moved with my existing employer to the US and was tax resident there from 1 March, 2013 until 20 December, 2014. I then moved to Australia.

In early 2014, I had some deferred compensation vest. Being US tax resident at the time, all of the vested amount is subject to US tax. However, as I was in HK for some of the vesting period, a portion of that compensation is also subject to tax in Hong Kong. In theory, I should be eligible for a FTC in the US.

The Hong Kong tax will be paid this year and I am no longer in the US. Consequently, I would like to claim FTCs on an accruals basis, which I can elect to do. The question is whether the HK tax liability accrued in 2014!

Technically, HK will subject a portion of my 2014 vested amount to tax, by amending my 2013 HK tax return, as this was the last year I was in HK, rather than me filing a 2014 HK tax return. Unusual, but that is how HK works adminstratively. Typically, the IRS would say a tax liability has accrued on the last day of the foreign tax year for which the foreign return is filed. However, more generally the IRS states that "foreign taxes accrue when all the events have taken place that fix the amount of the tax and your liability to pay it". If I had resigned prior to the vesting date, or been fired for certain causes, I would not have received the deferred compensation at all, and there would have been no HK tax liability. Moreover, the value of the deferred compensation, being stock, was not known until the vesting date, in 2014, and so the amount of HK tax payable was also not known until that vesting date. It seems to me that in this instance, the HK tax liability did not accrue until the deferred compensation vested. That is, it accrued in 2014 (the result I would like) and not in 2013.

Apologies for the long thread. Thoughts would be greatly appreciated.

Thanks



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Old 09-26-2015, 04:21 PM
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In early 2014, I had some deferred compensation vest. Being US tax resident at the time, all of the vested amount is subject to US tax. ========.Correct; even if you were a US resident ONLY for tax purposes, you must report your world wide income and US source income to the IRS. your state in US. However, as I was in HK for some of the vesting period, a portion of that compensation is also subject to tax in Hong Kong. In theory, I should be eligible for a FTC in the US.

The Hong Kong tax will be paid this year and I am no longer in the US. Consequently, I would like to claim FTCs on an accruals basis, which I can elect to do. The question is whether the HK tax liability accrued in 2014!=======>Aslongas you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the foreign tax in HK. As you said below, your HK taxes generally accrue when all the events have taken place fixing the amount of the tax and your liability to pay it.

Technically, HK will subject a portion of my 2014 vested amount to tax, by amending my 2013 HK tax return, as this was the last year I was in HK, rather than me filing a 2014 HK tax return. Unusual, but that is how HK works adminstratively. Typically, the IRS would say a tax liability has accrued on the last day of the foreign tax year for which the foreign return is filed. However, more generally the IRS states that "foreign taxes accrue when all the events have taken place that fix the amount of the tax and your liability to pay it".========>Correct.I guess it is really complicated to interpret the IRS provision/code. An accounting method in which expenses are counted when incurred whether you pay the bill at that time or not; you can claim your foreign tax credit on form 1116 even if you did not directly pay or accrue the tax yourself. The amount of foreign tax that qualifies is not necessarily the amount of tax withheld by HK. Only the legal and actual foreign tax liability that you accrued during the year qualifies for the credit.

If I had resigned prior to the vesting date, or been fired for certain causes, I would not have received the deferred compensation at all, and there would have been no HK tax liability. Moreover, the value of the deferred compensation, being stock, was not known until the vesting date, in 2014, and so the amount of HK tax payable was also not known until that vesting date. It seems to me that in this instance, the HK tax liability did not accrue until the deferred compensation vested. That is, it accrued in 2014 (the result I would like) and not in 2013.==========>>Then you may claim the credit on your 2014 US return when HK tax was incurred.



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