Simplify the foreign tax credit. The core purpose of the foreign tax credit (FTC), which has been part of the Code for more than 80 years, is to prevent double taxation of income by both the United States and a foreign country. The FTC rules are complex in large measure, but not exclusively, because the global economy is complex. The nine separate baskets for allocating income and credits set forth in section 904(d)(1) are especially complicated to apply, particularly for small businesses. (The basket regime is intended to prevent inappropriate averaging of high- and low-tax earnings.)

These rules may never be truly simple, but actions can be taken to temper the extraordinary complexity of the current regime. At a minimum, Congress should act to (a) consolidate the separate baskets for businesses that are either starting up abroad or that constitute small investments; and (b) eliminate the alternative minimum tax credit limitations on the use of the FTC.

In addition, consideration should be given to accelerating the effective date of the "look-through" rules for dividends from so-called 10/50 companies. The Tax Reform Act of 1986 created a separate FTC limitation for foreign affiliates that are owned between 10 and 50 percent by a U.S. shareholder. The requirement for separate baskets for dividends from each 10/50 company was among the most complicated provisions of the 1986 Act, and in 1998, Congress acted to afford taxpayers an election to use a "look-through" rule for dividends (similar to the one provided for controlled foreign corporations under section 904 (d)(3)). The implementation of the rule was delayed, however, until 2002. In addition, a separate "super" FTC basket is required to be maintained for dividends that are received after 2002 but are attributable to pre-2003 earnings and profits. The current application of both a single basket approach for pre-2003 earnings and a look-through approach for post-2002 earnings results in unnecessary complexity. The "super" basket should be eliminated and the effective date of the look-through rule accelerated.