What do "foreign tax credits" aim to prevent?

Foreign tax credits are designed to alleviate the financial burden on taxpayers who earn income in foreign countries and are subject to taxation in both their home country and the foreign jurisdiction. Double taxation occurs when the same income is taxed by two different countries, which can happen frequently with foreign investments or business operations.

The purpose of foreign tax credits is to allow taxpayers to offset their U.S. tax liability by the amount of foreign taxes paid, thereby preventing the taxation of the same income by both the U.S. and the foreign country. This mechanism encourages international business and investment by ensuring that taxpayers are not penalized for earning income abroad, making it more equitable for individuals and companies operating internationally.

The other options relate to different aspects of taxation: double taxation on domestic income is not relevant in this context because foreign tax credits focus on income earned outside the U.S. Overseas tax evasion pertains to illegal activities to avoid paying taxes rather than a legitimate tax credit mechanism. Reducing investment income does not relate to the purpose of foreign tax credits, which is intended to prevent taxation issues, not to decrease income levels. Thus, the focus on foreign income establishes the correct rationale for the function of foreign tax credits.