Pursuant to Revenue Ruling 2011-19, the IRS confirmed that the UK remittance based charge is eligible for a foreign tax credit in the US. A taxpayer wishing to have the U.S. tax offset must comply with all other aspects of the applicable rules pertaining to foreign tax credits. For example, the payment to the UK must be compulsory and the taxpayer must make the appropriate tax elections required in the UK.
Very generally speaking, tax resident non-domiciliiaries living in the UK have the option to pay income tax on their worldwide earnings, or such persons may elect to omit their non UK income and gains from UK taxation, and instead be taxed when they remit the income back to the UK. Under this alterative regime, such persons would pay a remittance basis charge in the amount of GBP30, 000. The charge will most likely be increased next year to the amount of GBP 50,000. It is worth noting that the remittance basis regime should not affect short-term employment transfers to the UK as it is relevant to individuals who have been resident in the UK for 7 out of the last 9 fiscal years.
The UK has similar definitional concepts as the U.S. with respect to when a person is considered UK tax resident and/or UK domiciled. Currently the UK does not have statutory rules with respect to residency; as such UK tax guidance should be obtained to assist with such classification determinations.
As the IRS has now confirmed that the alternative charge is fully creditable against U.S. income tax, non-domiciliaries resident of the UK may assess which tax regime is most beneficial for them whilst having the comfort of knowing that their U.S. income tax offset will be eligible under either scenario.
By Debra Callicutt, CPA