@RicN , the general issue here is that when a US taxpayer and for US tax purposes incurs FT on US sourced income, there is no way to claim FTC -- since the source is US. This occurs ONLY on passive income. Some treaties recognize this and allow a way out. To wit , from --> Foreign Tax Credit – Special issues | Internal Revenue Service
The United States is a party to tax treaties designed to prevent double taxation of the same income by the United States and the treaty country. Certain treaties allow a U.S. citizen an additional credit for part of the tax imposed by the treaty partner on U.S. source income. It is separate from, and in addition to, your foreign tax credit for foreign taxes paid or accrued on foreign source income.
The treaties that provide for this additional credit include those with Australia, Austria, Bangladesh, Belgium, Bulgaria, Canada, Czech Republic, Denmark, Finland, France, Germany, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Malta, Mexico, the Netherlands, New Zealand, Portugal, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, and the United Kingdom.
If a sourcing rule in an applicable income tax treaty treats U.S. source income as foreign source, and you elect to apply the treaty, you can include that income under the category Certain Income Re-sourced By Treaty. Treat the income as foreign source to the extent required in the treaty. You must compute a separate foreign tax credit limitation for any such income for which you claim benefits under a treaty, using a separate Form 1116, Foreign Tax Credit, for each amount of resourced income from a treaty country. See Internal Revenue Code sections 865(h), 904(d)(6), and 904(h)(10) and the regulations under those sections (including Regulation section 1.904-5(m)(7)) for any grouping rules and exceptions.
What this all boils down to is -- in the presence of a treaty allowing "resourced by treaty ", if the taxpayer wishes to assert this treaty benefit, then to the extent the Foreign country treats US sourced income as domestic and taxes as such, then for US purposes the US sourced income can be treated as foreign source income for purposes of Foreign Tax Credit.
Hope this helps
