Pub 17

Foreign income taxes. Generally, you can take either a deduction or a credit for
   income taxes imposed on you by a foreign country or a U.S. possession. However,
   you cannot take a deduction or credit for foreign income taxes paid on income that
   is exempt from U.S. tax under the foreign earned income exclusion or the foreign
   housing exclusion. For information on these exclusions, get Publication 54, Tax
   Guide for U.S. Citizens and Resident Aliens Abroad. 


Pub 514

Generally, only income, war profits, and excess profits taxes (income taxes) paid or
   accrued during the tax year to a foreign country (defined later) or a U.S.
   possession qualify for the foreign tax credit. However, under certain conditions a
   tax paid or accrued to a foreign country or U.S. possession in lieu of a tax on
   income, war profits, or excess profits will qualify. (See Taxes in Lieu of Income
   Taxes, later.) 

   Whether an amount imposed by a foreign country (foreign charge or levy) qualifies
   for credit depends on the characteristics of the charge involved. 

   As a general rule, to qualify for the credit, the foreign tax must have been imposed
   on you and you must have paid or accrued the foreign tax. You cannot shift the
   right to claim the credit by contract or other means unless specifically provided by
   foreign law. A qualified tax that is deducted from wages is considered to be
   imposed upon the recipient of the wages. 

   Amount of foreign tax that qualifies. The amount of qualified foreign tax that
   you can use each year for credit purposes or as a deduction is not necessarily the
   amount of tax withheld by the foreign country. The amount of qualified foreign tax,
   for credit or deduction purposes, is only the amount of foreign income tax that is
   the legal and actual tax liability that you paid or accrued during the year. 

   Foreign tax refund. You cannot take a foreign tax credit or deduction for income
   taxes paid to a foreign country to the extent it is reasonably certain the amount
   would be refunded, credited, rebated, abated, or forgiven if you made a claim. 

   For example, the United States has tax treaties or conventions with many countries
   allowing U.S. citizens and residents reductions in the rates of tax of those foreign
   countries. However, some treaty countries require U.S. citizens and residents to
   pay the tax figured without regard to the lower treaty rates and then claim a refund
   for the amount by which the tax actually paid is more than the amount of tax figured
   using the lower treaty rate. For credit or deduction purposes, the taxpayer's
   qualified foreign tax is the amount figured using the lower treaty rate and not the
   amount actually paid, since the taxpayer can claim a refund for the excess tax paid. 

   Subsidy received. If a foreign country returns your foreign tax payments to you in
   the form of a subsidy, you cannot claim these payments as taxes qualified for the
   foreign tax credit. A subsidy can be provided by any means but must be
   determined, directly or indirectly, in relation to the amount of tax, or to the base
   used to figure the tax. 

   The term "subsidy" includes any type of benefit. Some ways of providing a subsidy
   are refunds, credits, deductions, payments or discharges of obligations. The credit
   is also not allowed if the subsidy is given to a person related to you, or persons
   who participated in a transaction, or a related transaction, with you. 

   Shareholder receiving refund for corporate tax in integrated system. Under
   some foreign tax laws and treaties, a shareholder is considered to have paid part of
   the tax that is imposed on the corporation. You may be able to claim a refund of
   these taxes from the foreign government. You must include the refund (including
   any amount withheld) in your income in the year received. Any tax withheld from
   the refund is a qualified foreign tax. 

   Example. You are a shareholder of a U.K. corporation. You receive a $100
   refund of the tax paid to the United Kingdom by the corporation on the earnings
   distributed to you as a dividend. The U.K. government imposes a 15% withholding
   tax ($15) on the refund you received. You receive a check for $85. You include
   $100 in your income. The $15 of tax withheld is a qualified foreign tax. 

   Foreign country. A foreign country includes any foreign state or political
   subdivision thereof. Income, war profits, and excess profits taxes paid or accrued
   to a foreign city or province qualify for the U.S. foreign tax credit. 

   A foreign country also includes the continental shelf of a foreign country if the
   country has exclusive rights under international law over the exploration and
   exploitation of natural resources there, and exercises taxing jurisdiction over that
   exploration and exploitation. This rule for continental shelf areas is limited to
   activities involving natural resources. 

   U.S. possessions. For foreign tax credit purposes, all qualified taxes paid to
   possessions of the United States are considered foreign taxes. For this purpose,
   U.S. possessions include Puerto Rico, Guam, the Northern Mariana Islands, and
   American Samoa. 

   When the term "foreign country" is used in this publication, it includes U.S.
   possessions unless otherwise stated. 

   Penalties and interest. Amounts paid to a foreign government to satisfy a liability
   for interest, fines, penalties, or any similar obligation are not taxes and do not
   qualify for credit.