Session 14 - International Taxation

� Provide an overview of the taxation of international tax rules � Introduce the FTC � Provide an overview of transfer pricing

15.518 Fall 2002 Session 14

International tax systems

� Territorial - no tax is generally due on income earned outside of the country in which the parent is located � Worldwide - all income is subject to taxation by the country in which the parent is located
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US taxes worldwide income of citizens and permanent residents US taxes worldwide income of domestic corporations US taxes the US source income of nonresident aliens US taxes the US source income of foreign corporations

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15.518 Fall 2002 Session 14

Withholding

� In addition to taxes imposed on earnings, transfers (interest payments, dividends, royalties, etc.) between a corporation and its foreign shareholders (individuals or corporations) are generally subject to withholding taxes. � The general withholding rate imposed by the U.S. is 30% of the payment amount. This rate can be reduced by tax treaties between the various jurisdictions

15.518 Fall 2002 Session 14

Some definitions

� A domestic corporation is one incorporated in one of the 50 US states � A foreign corporation is one that is not a domestic corporation � We will focus on taxation of corporations rather than individuals or partnerships

15.518 Fall 2002 Session 14

U.S. Framework

� Worldwide taxation � Elimination of double taxation � Deferral � “Arm's-Length” related party transactions � Business purpose

15.518 Fall 2002 Session 14

Worldwide Taxation

� The U.S. taxes the worldwide income of U.S. corporations (also U.S. individuals, partnerships, estates or trusts) irrespective of where it is earned � The U.S. corporation is also generally taxed by the other countries where it operates � In an extreme case, a U.S. corporation could “lose” almost all its