HAR § 18-235-55 — (1) Taxes paid to a foreign jurisdiction qualify for Hawaii income tax credit under section 235- 55, HRS, and this section, if the taxpayer can show that: (A) The taxpayer is liable for and has paid tax to the foreign jurisdiction

Nothing contained in section 235-55, HRS, or this section shall be construed to permit a credit against the taxes imposed by chapter 235, HRS, on account of federal income taxes paid. (B) The tax paid to the foreign jurisdiction is an income-based tax. Tax imposed with respect to a privilege, activity, occupation, trade, business, or calling is not an income- based tax. In addition, no income tax credit may be claimed for any interest or penalties paid in connection with any income tax imposed by the foreign jurisdiction. (C) The tax paid to the foreign jurisdiction is based upon net income, and that the income is taxed in the same taxable year in which the tax credit is claimed. Taxes imposed on a taxpayer’s gross receipts or gross income, which must be paid regardless of whether or not the gross receipts or gross income constitutes net income, do not qualify for tax credit under section 235-55, HRS, and this section. These taxes do not qualify for tax credit, even though in particular instances the income which is taxed is net income in whole or in part. Taxes imposed upon wages and salaries for services performed within a foreign taxing jurisdiction may qualify for tax credit; the tax must be imposed as a part of a net income tax, even though no deductions are allowed in respect of wages and salaries. (D) The tax is equally applicable to residents and nonresidents. Tax credit may only be taken if the tax imposed by the foreign jurisdiction applies to the taxpayer’s income irrespective of the taxpayer’s residence status. For example, Canada imposes a fifteen per cent withholding tax on gross dividends paid by a Canadian company to a nonresident taxpayer does not qualify for tax credit. This Canadian tax liability shall not qualify for a tax credit pursuant to section 235-55, HRS, and this section, because the tax is not equally imposed on both residents and nonresidents. (2) Income taxes imposed by another jurisdiction shall not qualify for tax credit unless it can be established that the source of the income is outside Hawaii. Taxes paid under the following circumstances, even if imposed as part of a net income tax, shall not qualify for tax credit: (A) Taxes imposed by a foreign jurisdiction upon dividends and interest, merely because the distributing corporation is a domestic corporation or is a foreign corporation resident in the foreign jurisdiction; (B) The earnings and profits from which the dividends are paid are generated from business carried on in the foreign jurisdiction; or (C) The debtor paying the interest is a resident of the foreign jurisdiction. (e) Calculating the net amount of tax paid to a foreign jurisdiction. (1) The amount of tax credit which a taxpayer may claim under section 235-55, HRS, and this section is the net amount of tax paid to a foreign jurisdiction after all credits, reductions, and refunds allowed or allowable by the laws of the foreign jurisdiction have been deducted. The amount of credit available under section 235-55, HRS, and this section, shall not exceed the amount of tax for which the taxpayer is liable to the foreign jurisdiction. A taxpayer must take any credit, reduction, or refund available to the taxpayer to offset the tax liability incurred under the foreign jurisdiction’s tax laws. (2) All deductions shall be taken when determining the tax liability under the foreign jurisdiction’s tax laws even if the taxpayer chooses not to take the deductions at the time the return is filed, including any credit allowed for Hawaii income tax paid under chapter 235, HRS. However, if the taxpayer does not pay the Hawaii income tax prior to or at the time the foreign jurisdiction income tax return is filed, the laws of the foreign jurisdiction usually will not allow the taxpayer to claim any tax credit for the Hawaii tax at that time. (3) Unless otherwise provided under section 235-55, HRS, and this section, tax credit for tax paid to a foreign jurisdiction may not be claimed until after the tax is paid to the foreign jurisdiction. If, after paying the Hawaii income tax, the taxpayer obtains a credit or refund of tax paid to the foreign jurisdiction, the credit or refund must be reported as provided in this section. (f) Calculating the amount of foreign jurisdiction tax eligible for tax credit. As set forth in this section, only tax on income derived or received from sources outside the State and taxed by another jurisdiction is eligible for tax credit. Tax paid to a foreign jurisdiction on income from a source in the State or income which is excluded from Hawaii income tax is not eligible for tax credit under section 235-55, HRS, and this section. In calculating a taxpayer’s §18-235-55 foreign jurisdiction tax liability, only deductions related to the income or property subject to the tax of the foreign jurisdiction shall be allowed. The amount of tax credit which the taxpayer may claim shall be limited to the lesser of: the maximum amount of credit allowed as calculated under this subsection; or the actual amount of tax, which qualifies for the tax credit, paid to the foreign jurisdiction. To determine the maximum amount of credit allowed under section 235-55, HRS, the taxpayer shall: (1) Calculate the amount of the taxpayer’s Hawaii income tax liability, for the taxable year, based on the taxpayer’s entire income without regard to source; (2) Calculate the amount of the taxpayer’s Hawaii income tax liability, for the taxable year, based on the taxpayer’s entire income less any income which also is taxed by the foreign jurisdiction; (3) Subtract the amount of tax liability calculated in paragraph (2) from the amount of tax liability calculated in paragraph (1). The difference is the maximum amount of credit which is allowed under section 235-55, HRS. The maximum amount of credit allowed, however, shall be compared to the actual amount of tax paid to the foreign jurisdiction; the lesser of the two shall be the amount which the taxpayer may claim as tax credit pursuant to 235-55, HRS, and this section. Example 1: A married resident of Hawaii has taxable income of $14,000 in 1993; $9,000 is from a source in Hawaii and $5,000 is from a source in State Q. Both Hawaii and State Q require the taxpayer to report the $5,000 as income. The taxpayer files a joint Hawaii income tax return for 1993; the taxpayer’s spouse reports no income. After taking the standard deduction, but before any tax credit is taken, taxpayer’s Hawaii income tax liability based on taxable income of $14,000 is $792 (calculated using the tax tables prescribed by the director under section 235-53, HRS). Had the Hawaii income tax been computed based only on the $9,000 from sources in Hawaii, the tax would have been $407. For purposes of this rule, State Q income tax for 1993, imposed upon the taxpayer as a nonresident with respect to the income having its source in State Q, is $129. The computation of the credit is as follows: Hawaii income tax on entire income $792 Hawaii income tax on income from sources in Hawaii 407 Maximum credit allowable $385 ($792 minus $407) Since the actual amount of State Q tax paid ($129) is less than the $385 maximum credit allowable, the actual amount of Hawaii income tax credit which may be taken is $129. Unless there are any further reductions (e.g., reductions for any tax credit granted by State Q for any Hawaii income tax paid), the amount of tax credit available shall remain $129. Example 2: An individual taxpayer, whose domicile is in Hawaii, temporarily resides in State X. The taxpayer earns a salary of $10,000 for personal services performed in State X. Taxpayer also has rental income of $5,000 from real property located in Hawaii and $2,000 in distributions from a partnership located in and doing business in Hawaii. Under the provisions of State X law, the taxpayer’s salary ($10,000) and partnership income ($2,000) but not the rental income, are subject to income tax. In this case, State X income tax on $12,000 of taxable income is $226. After applying all available State X tax credits, the taxpayer can reduce the State X tax liability to $162. For purposes of this example, assume the taxpayer elects to take the standard deduction and that the State X tax is paid before the Hawaii income tax liability is paid. The taxpayer’s Hawaii income tax liability based on taxable income of $17,000 (using the tax tables prescribed by the director under section 235-53, HRS) is $1,023. The tax liability on income only from sources in Hawaii is $69. The amount of Hawaii income tax credit available to the taxpayer, therefore, shall be the lesser of the maximum amount of credit allowable, or the actual amount of tax paid to the foreign jurisdiction: Hawaii income tax on entire income $1,023 Hawaii income tax from sources in Hawaii 69 Maximum credit allowable $ 954 ($1,023 - 69 = $954)