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'International taxation' is the study of international tax treaties and international aspects of domestic 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, 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.

Contents

Comparative taxation laws

U.S. international tax laws

Worldwide taxation

Taxation of individuals

Citizens and residents

Definition of resident

Tax rates

Foreign tax credit

Controlled foreign corporations

Non-residents

Portfolio interest

Taxation of corporations

U.S. corporations

Foreign corporations

Branch profits tax

Earnings Stripping

External links

Comparative taxation laws

Usually a sub-branch of international taxation, international comparative taxes studies analyses 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 annually. In addition, unlike most countries in the world, which use a territorial system of taxation, the United States taxes U.S. citizens on their worldwide income regardless of whether they are currently U.S. residents. There are, however, rules to mitigate the potential for double taxation under this approach. For example, section 911 of the Internal Revenue Code (the "Code") provides for an exemption of a portion of income earned and housing expenses paid in foreign countries by U.S. citizens who live abroad long term.

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.

Tax rates

The United States has a progressive rate structure. Currently, the highest marginal rate is 35 percent. Certain types of investment income are subject to lower tax rates. For example, gain derived from the sale of a capital asset held more than 1 year is subject to tax at a 15-percent rate, as are dividends received (provided certain holding-period requirements are met).

Foreign tax credit

The United States allows a foreign tax credit for income tax paid or accrued directly to a foreign country. The credit is subject to a limitation that is intended to deny a credit to the extent the foreign tax exceeds the U.S. tax on foreign source income. Credits disallowed in the current year may be carried to other taxable years and generally may be claimed in those years, subject to the limitation.

Controlled foreign corporations

In general, a U.S. shareholder's share of the earnings of a corporation is not subject to U.S. tax until that income is paid to the shareholder as a distribution. However, to prevent deferral of U.S. tax on certain types of highly-mobile income through the use of corporations located in tax havens, the United States requires a U.S. shareholder to include in income its share of certain passive-type income (such as interest and dividends) and other types of highly-mobile income of certain foreign corporations (for example, "controlled foreign corporations" or "passive foreign investment companies") in the year the income is earned, without regard to whether it is distributed.

Non-residents

Non-residents involved in a trade or business in the United States are taxable on the same terms as U.S. residents with respect to any income that is connected with that trade or business. Investment income not derived from the active conduct of a trade or business (such as interest, dividends, rents, or royalties) is subject to a 30 percent withholding tax on a gross basis. This rate may be reduced or eliminated if the taxpayer is a resident of a country with which the United States has a tax treaty.

Portfolio interest

The United States does not generally tax non-residents on interest paid with respect to bank deposits in U.S. banks. The United States also does not tax "portfolio interest," which generally is interest paid by a U.S. person to a foreign unrelated person that is not a bank. Neither of these exemptions applies, however, where the income is derived from the active conduct of a trade or business in the United States.

Taxation of corporations

The United States has a "classical" corporate tax system, meaning that corporate earnings are taxed twice; once when earned, and again when distributed. There are exceptions to this general rule, such as special rules applicable to certain investment and small-business entities. The United States has a progressive rate structure. The highest marginal rate is 35 percent.

U.S. corporations

U.S. corporations are allowed the same direct foreign tax credit as individuals, subject to the same limitations (see above). Corporations are also allowed a foreign tax credit for the foreign income taxes paid by foreign subsidiary companies in which they have at least a 10-percent direct interest or a 5-percent indirect interest down to the sixth tier (the “indirect credit”). The indirect credit is allowed for the portion of the foreign tax paid on the profits distributed to the parent. The indirect credit is intended to provide greater parity for tax purposes between foreign subsidiaries and foreign branches and is limited in the same manner as the direct credit.

Foreign corporations

Foreign corporations engaged in business in the United States are taxed on their business income at the same rates that apply to U.S. corporations. Generally they are allowed the same deductions as U.S. corporations. Investment income not derived from the active conduct of a trade or business (such as interest, dividends, rents, or royalties) is subject to a 30 percent withholding tax on a gross basis. This rate may be reduced or eliminated if the taxpayer is a resident of a country with which the United States has a tax treaty. Foreign corporations are subject to the same rules as non-resident individuals regarding real estate and portfolio interest.

Branch profits tax

Since 1987, the United States has applied a corporate tax to business income earned by a foreign corporation’s U.S. branch in addition to the regular income tax. This “branch profits tax” is means to tax the earnings of a U.S. branch at the same effective rate as such earnings would be taxed if they were earned instead by an U.S. subsidiary. Accordingly, the tax is similar to the withholding tax that applies to earnings remitted by a U.S. subsidiary to its foreign parent. It applies at the same 30-percent rate (or lower treaty rate) to the portion of after-tax branch profits that represents the "dividend equivalent amount." The "dividend equivalent amount" is equal to the current earnings and profits of the branch attributable to the United States. This amount is decreased to the extent that the earnings are retained within the branch and used to increase U.S. net equity.

Earnings Stripping

The United States does not allow a current deduction for certain “excessive” interest paid by a corporation to a related person if the corporation's debt-to-equity ratio exceeds 1.5 to 1 and the interest received is not subject to full taxation in the recipients hands. Generally, interest is considered excessive to the extent it exceeds 50 percent of the company's adjusted taxable income for the year. Interest expense disallowed under these rules may be carried forward and deducted in a later year.

External links

★ IBFD International Bureau of Fiscal Documentation: Non-Profit Portal to Cross-Border Tax Expertise.

★ IFA International Fiscal Association: a professional organisation dedicated to the study and advancement of international and comparative tax law.