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U.S. International Tax Law by xdu18397


									   U.S. International Tax Law

   University of Leiden –
   International Tax Center
   May-June 2009

   Professor William P. Streng
   University of Houston Law Center
   5/4/2009      (c) William P. Streng    1

   Segment One – Overview
   U.S. International Tax Law

   Relevance of U.S. International
   Taxation course
   Considerations concern:
       1) Inbound investment and
   business activities
       2) Outbound investment and
   business activities
   5/4/2009      (c) William P. Streng    2

   United States
   international taxation
  Cross-border U.S. income taxation of
   transnational transactions
  Two U.S. income taxation systems:
   1. Internal Revenue Code rules, &
   2. U.S. bilateral income tax treaty
    (see U.S. Model Income Tax Treaty &
   OECD Model Tax Treaty)
  Cf., foreign country income taxation.

5/4/2009         (c) William P. Streng        3

            The process of going

           1)   Export of goods

           2)   Licensing of intangibles

           3)   Investment in non-movable
                assets in destination jurisdiction

5/4/2009               (c) William P. Streng     4

  Process of coming into the
  United States

Immigration – changing individual or
 entity U.S. tax status
Passive Investment
 securities (stocks & bonds)
 real estate
Active trade or business

5/4/2009               (c) William P. Streng     5

  IRC §61 - Income “from
  whatever source derived”

Tax base theory:
 Cost analysis - cost to government
 Benefit analysis - what benefits
 Ability to pay?

5/4/2009               (c) William P. Streng     6

Other jurisdictional

1. Political allegiance (i.e., passport)
2. Residence
3. Domicile or permanent residence
4. Physical location of the owner’s

5/4/2009         (c) William P. Streng     7

  Considering the reach of
  cross border taxation

   Impact of "customary international
   International tax collection &
     enforcement problems –
     no cross-border tax enforcement
     therefore, collection at source on
     passive, investment income.
5/4/2009         (c) William P. Streng     8

International Tax
Neutrality Concepts
 Capital export neutrality - same
  tax rate regardless of the
  location of taxpayer (but
  possible higher foreign tax cost).
 Capital import neutrality - all
  firms in the same market are
  subject to the same rate of tax.
5/4/2009         (c) William P. Streng     9

  Limiting international
  economic double taxation
  1) territorial/exemption system
      current proposals
  2) foreign tax credit system - the
    source country has priority to tax.
    or, deduction - foreign tax paid.
  3) allocation of the income tax liability
    - e.g., lower withholding rates at
    source – bilateral response.
5/4/2009          (c) William P. Streng     10

Deferral Principle of U.S.
Outbound Taxation

1) Taxation of branch income - §61
2) Foreign subsidiary - respecting the
  foreign legal entity personality.
  But, possible U.S. income tax
  applicability of “Subpart F” (of
  Subchapter N) limiting tax deferral.
Consider transfer pricing opportunities
5/4/2009          (c) William P. Streng     11

Potential “Double Non-

Cross border tax “arbitrage” –
What is “arbitrage”?
Objective: avoidance of taxation in both
 jurisdictions because of differing residence
 or sourcing rules.
Achieved through (1) income characterization
 rules & (2) use of hybrid entities.

5/4/2009          (c) William P. Streng     12

 The Role of International
 Bilateral Tax Treaties
§894(a)(1) - “due regard” for treaties.
Purposes of bilateral income tax treaties:
1) define “residence” status.
2) tax rate reductions – avoiding double
  taxation (allocate income to residence?)
3) cooperation between taxing authorities and
  enable the exchange of tax information.

5/4/2009          (c) William P. Streng     13

 Other Relevant
 International Agreements
1) Tax Information Exchange Agreements
2) FCN Treaties – Friendship, Commerce and
    Navigation Treaties
3) Memoranda of Understanding (MOUs) on
    specific issues: Note IRS Announcements
    2006-4, 2006-5 & 2006-6 (Japan, Canada
    and Mexico).
4) Mutual Legal Assistance Treaty – criminal
5/4/2009          (c) William P. Streng     14

  Tax Treaty Ratification
1) Negotiation by U.S. Treasury Department
2) “Advice & consent” by U.S. Senate, after
   review by Foreign Relations Committee
   (not the Senate Finance Committee)
3) No U.S. House of Representatives
   participation in the tax treaty process.
4) Effective upon an exchange of instruments
   of ratification.
5/4/2009          (c) William P. Streng     15

Treatment of Income Items
under Income Tax Treaties
  Business income - tax if “permanent
    establishment”; cf., sales income but no
    P.E. in a foreign jurisdiction.
  Personal services income -183 day rule &
    income not from U.S. fixed base.
  Nonbusiness income - reduction of the rate
    of tax withholding at source.
  Capital gains - tax immunity at source.
  Other income - tax at residence.
5/4/2009          (c) William P. Streng        16

Certain Treatment under
Income Tax Treaties
  Taxes covered – “income taxes” - not
   state taxes. Cf., California “unitary
  Resident status defined – “tie-
   breaker” rules are applicable.
  “Savings clause” for U.S. taxpayers.
  Tax expatriation provision is included.
5/4/2009          (c) William P. Streng        17

Treaty Shopping - Inbound
Situation & “LOB”
   1) Third Foreign Country Corp
          owns 100% of
   2) Netherlands Corporation
      (“participation exemption”)
          owns 100 % of
   3) U. S. Corp. (&U.S. investment)
   Cf., U.S. outbound investment
   situation & treaty shopping.
   (next slide)
5/4/2009          (c) William P. Streng        18

Responses to “Treaty
    Limit “treaty shopping”? How?
    1) “Form vs. substance” – Aiken
       Industries case.
    2) Statutory anti-treaty shopping
       rules – e.g., Code §884(e).
    3) Anti-conduit rules-Code
    4) “Limitation of benefits”
       provisions in income tax treaties.
5/4/2009           (c) William P. Streng    19

Treaty Nondiscrimination
    Model Treaty, Article 24.
    1) Provides for taxation of
    nationals of the other country no
    more burdensome than taxation of
    locals - assuming the same
    2) Applicability of tax treaty
    provisions to states in the U.S. (but
    not other tax treaty provisions).
5/4/2009           (c) William P. Streng    20

Tax Treaty Administrative
Cooperation Provision
   1. Information provided to the
   other country:
     a) Routine exchanges
     b) Spontaneous exchanges
     c) Specific requests
   2. Mutual agreement procedures
   3. Privacy concerns – see
   §6103(k)(4) re IRS sharing
   information with treaty partner
5/4/2009           (c) William P. Streng    21

Relationship between the
Tax Treaty and the Code
      Code §7852(d)(1) – provides that
      neither tax treaty nor a Code
      provision has preferential status.
      “Later in time” rule of priority –
      Code or the applicable treaty.
      “Treaty override” issue –
      can/should Congress override a
      tax treaty?
5/4/2009            (c) William P. Streng   22


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