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December 28, 2004
JS-2168 Treasury Issues Guidance Relating to Special Foreign Tax
Restrictions no Longer Applicable to Iraq and Libya -- Today the Treasury Department issued guidance updating the list of countries subject to the special foreign tax credit and other restrictions of section 901(j) of the Internal Revenue Code to reflect the recent waiver of such restrictions with respect to Libya. Treasury issued guidance earlier this year reflecting the removal of Iraq from the list of countries subject to such restrictions. In addition, today's guidance also updates the list of countries subject to the limitations on the foreign earned income exclusion imposed by Code section 911(d)(8) to reflect the recent removal of travel-related restrictions with respect to Iraq and Libya.
Section 901 generally allows taxpayers a credit against U.S. income tax for taxes paid to a foreign country. However, special rules in sections 901(j) and 952(a)(5) generally deny foreign tax credits and impose other restrictions in the case of income attributable to countries with which the United States does not conduct diplomatic relations or which have been identified as sponsors of international terrorism. The restrictions of section 901(j) and related provisions cease to apply with respect to a particular country when the Secretary of State certifies to the Secretary of the Treasury that the country no longer meets the criteria in that section or when the President waives the restrictions pursuant to section 901(j)(5). On December 10, 2004, the President issued a Presidential Determination which waives the application of section 901(j) with respect to Libya. Accordingly, the special foreign tax credit restrictions of section 901(j) no longer apply to income and taxes attributable to Libya. Revenue Ruling 2005-3 provides an updated list of countries subject to section 901(j) that reflects this development with respect to Libya and the earlier development with respect to Iraq.
Section 911 generally permits an individual who is a U.S. citizen or resident and who lives and works outside of the United States to exclude certain foreign earned income. However, special rules in section 911(d)(8) provide that the section 911 exclusion is not available for income earned in countries for which there are prohibitions on engaging in transactions related to travel to, from, or within that country. On July 29, 2004, the President issued an Executive Order which effectively lifted the sanctions against Iraq, effective July 30, 2004. On September 20, 2004, the President issued an Executive Order which effectively lifted the sanctions against Libya, effective September 21, 2004. Accordingly, the special restrictions on the foreign earned income exclusion no longer apply to income earned in those countries. Revenue Ruling 2005-3 updates the list of countries subject to section 911(d)(8) to reflect these recent developments with respect to Iraq and Libya.
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