International taxation

International taxation

International taxation can mean several things
* the study of the interaction of different countries' tax laws, as they affect individuals and companies with income and assets in more than one country
* the comparative study of different countries' tax laws
* the international aspects of an individual country's tax laws.

Multi-national corporations usually employ international tax specialists to decrease their worldwide tax liabilities. International taxation is a specialty among both lawyers and accountants. Several universities offer degree programs in international taxation, including the University of Florida Levin College of Law, [ European Tax College] , Universiteit Leiden, a collaboration between the Catholic University of Leuven and the Universiteit van Tilburg, the University of Sydney, University of New South Wales, Universiteit Maastricht, New York University, the [ Vienna University of Economics and Business Administration] and the University of Hamburg, Germany.

Interaction of taxes

Tax laws vary in different countries as to
* who or which entity is taxed, for example, how a resident is defined, whether a non-resident is taxed and whether a business entity is taxed or its owners are
* what income is taxed and how it is measured
* what deductions are allowed from taxable income
* when income is taxed or deductions are allowed
* tax rates

These variations create the potential for double taxation (where the same income is taxed by different countries) and "nowhere" taxation (where income is not taxed by any country).

International tax planning aims to minimise the incidence of double taxation, and exploit low tax rates and opportunities for nowhere taxation. Tax authorities also minimise the incidence of double taxation, by entering into tax treaties and through domestic legislation to prevent double taxation, either through the use of foreign tax credits or by exempting from tax foreign income which has already been taxed in a foreign country.

Tax authorities counter international tax planning by
* laws to neutralise the use of companies in low tax countries or tax havens, for example by controlled foreign company legislation
* limiting deductions for payments to foreign related companies which they consider not to be commercially justified, for example by thin capitalisation rules
* requiring withholding taxes on payments to foreign entities
* transfer pricing rules, which require that transactions with foreign related companies should be at market prices (the "arm's length principle")

Transfer pricing has become a significant issue in international taxation. When a company sells goods or services to a related company in another country, the income taxed by the jurisdiction of the selling company may be more than the deduction allowed by the jurisdiction of the purchasing company, thus giving rise to double taxation. Transfer pricing studies aim to resolve these differences.

Comparative taxation laws

International comparative taxation studies and analyzes the structural and analytical difference between several tax systems. Consequently, technical issues are of minor importance.

U.S. international tax laws

U.S. tax law contains rules to address both the activities of residents of foreign countries within the United States (inbound taxation) and the activities of U.S. residents and citizens outside the United States (outbound taxation).

Worldwide taxation

The United States taxes U.S. residents and U.S. corporations on their worldwide income. In addition, unlike most countries in the world, which use a residence-based system of taxation, the United States taxes U.S. citizens on their worldwide income regardless of whether they are currently U.S. residents. The effect of worldwide taxation of non-resident citizens is mitigated by credits for foreign tax and by exemption of a portion of income earned in foreign countries by U.S. citizens who live abroad long term [Internal Revenue Code Section 911] .

Taxation of individuals

Citizens and residents

Definition of resident

A foreign citizen is considered a resident of the United States for income tax purposes if he is considered a resident for immigration law purposes (he holds a "green card"), or he is present in the United States for at least 31 days during the current calendar year and during the last three years (including the current year) he was present in the United States on average at least 183 days. This average is computed by giving the days in the current year a weight of 1, those in the first preceding year a weight of one-third, and those in the second preceding year a weight of one-sixth.

Foreign tax credit

A foreign tax credit is allowed for income tax payable to a foreign country. The credit is limited to an amount of foreign tax equal to the U.S. tax on foreign income.

hares in foreign corporations

A US citizen or resident is taxed on his share of certain income of some foreign corporations in which he has shares. This mostly applies to corporations controlled by US shareholders ("Controlled Foreign Corporations"), and corporations which have a high proportion of their assets in cash or investments or a high proportion of their income from interest or investments ("passive foreign investment companies"). Although these rules were intended to prevent US taxpayers rolling up income offshore without paying US tax on it, their application is much broader and is not confined to corporations in tax havens.


Non-residents involved in a trade or business in the United States are subject to US tax on the profits of that business. Other income (such as dividends or royalties, but not usually interest) is subject to a 30 percent withholding tax, or a lower rate of tax under the provisions of a tax treaty. Interest paid to non-residents is not generally taxed. Rental income can either be treated as a US trade or business or subject to withholding tax.

Taxation of corporations

U.S. corporations

U.S. corporations are allowed a foreign tax credit in the same way as individuals. In addition, when they receive a dividend from a foreign corporation in which they have a significant interest, they are allowed a foreign tax credit for their share of the foreign income taxes paid by that corporation.

US corporations which have shares in foreign corporations are subject to the same rules for controlled foreign corporations and passive foreign investment companies as apply to individual citizens and residents.

Foreign corporations

Foreign corporations with a branch in the United States are taxed on the profits of the branch. Other income (such as dividends or royalties, but not generally interest) is subject to a 30 percent withholding tax, which may be reduced or eliminated by a tax treaty. Interest paid by US banks or other persons to unrelated foreign corporations is not generally taxed in the US. Rental income can either be treated as a US trade or business or subject to withholding tax.

The profits of a US corporation which is a subsidiary of a foreign corporation are therefore subject to double taxation in the US, once under the ordinary domestic rules when the profits are earned and once when the profits are distributed to the foreign parent as a dividend. To prevent foreign corporations avoiding this double taxation by operating in the US as a branch, branches of foreign corporations are subject to an additional tax ("branch profits tax”) which is intended to be the same tax (at 30% or a lower rate under a tax treaty) that would have been imposed on a dividend if the US business had been conducted in a US subsidiary.

To prevent foreign parent corporations stripping out the profits of their US subsidiaries by charging interest on loans, the US has rules (the "earnings stripping" rules) to deny a deduction for "excessive" interest.

ee also

*Permanent establishment


External links

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