Comment Re:Why subsidize? (Score 1) 1030
I think you are missing the essence of my question, which is "Deduct from what? From revenue to compute taxable income or from U.S. income tax?" I am not intimately familiar with natural resource accounting and taxation, but I believe that if I mine a resource, say coal, and pay a property owner a royalty, that royalty is considered a cost of the coal and is accounted for as any other cost of production. I believe the same accounting is also applied to a severance tax, which is levied in some U.S. states. In contrast, a state income tax is accounted for as a business expense, albeit a period expense rather than part of the cost of the coal.
Foreign income taxes are, I believe, treated differently for purposes of U.S. income tax. There is at least the option of treating them as a credit on an income tax return. I know this is the way the taxes levied on foreign dividends are handled on a personal tax return. Say that a Thai company paid me $1,000 in dividends. I would only get $900, with Thailand withholding $100. I would be expected to report the full $1,000 in income, which if I were in the 25% marginal U.S. tax bracket, would increase my U.S. income tax by $250. I could, however, elect to file a foreign tax credit form (1116, I believe) and claim the $100 as a credit against my U.S. tax. The net result would be that I pay the $250 in tax, with Thailand getting $100 and Uncle Sam getting $150.
Again, I want to emphasize my ignorance of the actual practices, but it is my understanding that the "Royalties that companies pay to foreign governments for the oil they extract" could be properly accounted for as a severance tax. If they are accounted for like a foreign income tax and deducted from the U.S. income tax, then I agree with your implication that that is unfair. If it is treated as a state income tax and deducted as a period expense, than that is also unfair, but it shouldn't amount to much money compared to the theoretically correct accounting, which treats it as a cost of goods sold.
My question is, which method is used?