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Case Study 1: No Economic BenefitLawrence lives in China. He owns and operates his own business there. China has a two-tier income tax system:
The second tier of income tax entitles business owners to certain reduced fees and other benefits, such as ability to rent space in a government building. On which type of taxation can Lawrence claim a foreign tax credit? Click here for an explanation. Since Lawrence receives a specific economic benefit for the second-tier of income tax that he pays, he cannot use those tax payments to compute a foreign tax credit on his U.S. tax return. However, the first-tier income taxes are similar to U.S. income taxes and can be used to figure his foreign tax credit. 
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