The economic case for foreign tax credits for cash flow taxes

Since consumption-based direct taxes typically include a business-level cash flow tax (CFT), any foreign country considering such a tax system faces the risk that a CFT might not be eligible for foreign tax credits in the United States. In this paper, we present the economic case for granting creditability for CFTs, arguing that such treatment is appropriate under current U.S. law, regardless of whether one applies the fairly general wording of the statute or the highly mechanical tests of the regulations. Moreover, we argue that, if this position is rejected, U.S. law and/or regulations should be changed to make CFTs creditable.