4.2 Foreign Tax Credits for Japanese Companies 4.2.1 Basic Rules Under the FTC system, a Japanese company is allowed to take credits for foreign corporation tax or counterpart of Japanese corporation tax, including foreign local tax and withholding tax, suffered directly by the Japanese company. Note that certain foreign taxes are not eligible for the FTC; e.g. withholding tax on deemed dividends generated under the secondary adjustment as a result of a transfer pricing settlement and withholding tax on dividends from a Foreign Subsidiary defined in 4.1.2. A Japanese company can take a deduction from its taxable income for foreign taxes directly paid by itself in lieu of a foreign tax credit. In either case, all foreign taxes need to be dealt with in the same way, i.e. if a company chooses to take a FTC for a foreign tax, the other foreign taxes paid by the company for the year are not deductible.
4.2.2 Creditable Limit The amount of foreign tax for which credit can be taken is limited to the lower of: (i) the adjusted creditable foreign tax; and (ii) the creditable limit. In calculating adjusted creditable foreign tax, where foreign income tax is paid at a high rate (generally a rate in excess of 50 percent (35 percent for fiscal years beginning on or after 1 April 2012)), an amount relating to the excess tax must be excluded from the creditable foreign tax. However, this amount does qualify as a tax deductible expense. The creditable limit for corporation tax purposes is calculated as follows:
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