Agenda

Several important concepts in U.S. international income taxation, notably jurisdiction to tax the income of nonresident aliens and foreign corporations and the availability of foreign tax credits, are based on the "source" of items of gross income, which in turn is based on the class or category of income. Classes of income are sourced under a mixture of statutory, regulatory and "common law" rules broadly based on the principle that the source of income is the economic activity that gave rise to it. But specific rules have been developed over time without much internal consistency that cannot always be easily derived from the general principle or that deviate from it in a manner that is not necessarily intuitive. Understanding these rules thoroughly can help practitioners secure for their clients the most efficient tax treatment available under U.S. federal income tax law and avoid traps with respect to cross-border transactions.

This presentation focuses on the rules governing the source of income under the Internal Revenue code and U.S. income tax treaties for various classes of income and their significance in international tax planning, particularly with respect to the availability of foreign tax credits for U.S. taxpayers and U.S. taxing jurisdiction over items paid to nonresident alien individuals and foreign corporations.

Presentation Objectives:

The objectives of this 60-90 minute audio discussion include providing participants with a conceptual understanding and practical application of the following:

1. Overview of importance of source of income rules

a) Under the Code and regulations promulgated thereunder

i. Jurisdiction to tax items of income paid to nonresidents and foreign corporations and related withholding tax obligations of U.S. payors

ii. Foreign tax credit limitation

b) Under U.S. income tax treaties

2. Source of income rules under the Code

a) Sale of tangible property, including inventory and real property

b) Sale of stock, including stock of United States real property holding companies

c) Service fees

d) Rents

e) Royalties

f) Interest

g) Dividends

h) Financial guarantees

i) Income from certain derivatives

j) Sourcing by analogy

k) "Source" of deductions

l) Losses

3. Source as affecting jurisdiction to tax income of nonresident aliens and foreign corporations and withholding tax obligations of U.S. payors

a) FDAP: only U.S. source income is subject to tax

b) ECI: generally limited to U.S. source income

4. Foreign tax credit limitation

a) Foreign tax credit limitation formula in the Code

b) Possible relief under U.S. income tax treaties

i Treaty re-sourcing rules

ii Agreement of competent authorities

Upon completion of this program, participants will be able to:

1. Apply the Internal Revenue Code source of income rules to a wide variety of classes of payments in cross-border transactions

2. Determine whether payments made by U.S. persons to nonresident alien individuals and foreign corporations are subject to U.S. withholding tax under the Code

3. Evaluate the likelihood of whether payments received by U.S. taxpayers in cross-border transactions will support foreign tax credits

Speakers

John P. Warner, Ansgar A. Simon