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Unformatted text preview: CHAPTER 25 TAXATION OF INTERNATIONAL TRANSACTIONS LECTURE NOTES OVERVIEW OF INTERNATIONAL TAXATION 1. As one of the major countries of the world, the U.S. is particularly involved in the global economy. Point out the multinational source of income of many U.S. companies. 2. Cross-border transactions create the need for special tax provisions and International tax laws are attempting to meet conflicting objectives. These laws are concerned with two types of taxpayers. a. Outbound. U.S. taxation of foreign-source income earned by U.S. taxpayers. b. Inbound. U.S. taxation of U.S. source income earned by foreign taxpayers. c. U.S. taxes worldwide income of U.S. taxpayers but only U.S. income for foreign taxpayers. TAX TREATIES 3. The U.S. tax rules governing cross-border transactions are based on both the Internal Revenue Code and tax treaties. a. Tax Treaties. Bilateral agreements between countries that provide tax relief for those persons covered by the treaties. (1) Tax treaty provisions generally override the general treatment under U.S. tax law or foreign tax statutes. (2) They provide taxing rights with regard to taxable income of residents of one treaty country who have income sourced in the other treaty country. 25-1 25-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes b. U.S. has active income tax treaties with more than 50 countries worldwide (Exhibit 25-1 in text). (1) Treaties do not prohibited either country from taxing income of its residents. (2) Treaties give one country taxing rights and require a credit for taxes paid on the twice-taxed income. c. Primary taxing rights are based on residence of the taxpayer or the presence of a permanent establishment in the country where the income is attributable (Example 4). (1) A permanent establishment is a fixed place of business. (2) Most U.S. income tax treaties reduce the withholding rate on certain items of investment income, such as interest and dividends. 4. U.S. developed a Model Income Tax Convention, which is the “ideal” treaty from the U.S. point of view. a. Model Treaty first published in 1981, withdrawn in 1992, reissued in 1996 and a revised Model Treaty was issued in November 2006. b. The titles tax “treaty” and tax “convention” are used interchangeably. ADDITIONAL LECTURE RESOURCE Taxpayers taking “treaty-based” positions contrary to the Code must disclose the position on their tax return (§ 6114). Taking a treaty-based position requires filing a tax return even in cases where such a return would not otherwise be required. Penalties are imposed for failure to disclose (§ 6712). Double taxation is alleviated not only by income tax treaties but also by numerous other treaties the U.S. enters with other countries. The North Atlantic Treaty Organization (NATO) exempted certain employees who were U.S. nationals from U.S. taxation on amounts paid by NATO. Many trade and navigation treaties have clauses affecting the tax consequences transactions between the treaty...
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- Spring '08
- Taxation in the United States