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International Taxation
Santa Clara University School of Law
Hasen, David M.

INTERNATIONAL TAX – David Hasen – Fall 2013

2 basic problems

1. What happens where US person (including individual, corporation, trust) has Income outside of the US (outbound transactions)

a. E.g. US person works abroad, or invests abroad

2. What happens where a Non US person has US activity (inbound transaction)

Residency?

US person

Outbound Transactions

o Foreign Tax Credit

o Foreign Corporations and Deferral

Inbound Transactions

Non-US person

Inbound Transactions

1. passive investments income- “fixed or determinable income not effectively connected with a US trade of business”- taxed at a flat rate without allowance for deductions.

2. Business profits from the US- income “Effectively connected with a US trade or business”- are taxed at the regular graduated rates with allowance for full complement of deductions and credits.

Question 1- Nationality and Residency

The US exerts its taxing jurisdiction based on citizenship and residency, therefore the first issue is establishing residency.

a. Citizenship/Residency classification is important because it determines the tax base. As validated in Cook v. Tait, US citizenship and residency imposes worldwide taxation, thus all income, irrespective of source, will be subject to US taxation.

b. Further, residency classification will also determine the tax rate: for instance a US citizen or resident will be taxed on a graduated rate, whereas a nonresident alien will be taxed at a flat and graduated rate depending on whether the US source income is passive or effectively connected with a US trade or business.

c. A US person not only refers to individual citizens and residents but also entities such as domestic partnerships or corporations. §7701(a)(30).

I. Individuals

1. Is the US person a US national? If yes, then they will be subject to US taxation on their worldwide income. If the individual has or does reside outside of the US during the taxable year, they may be able to take advantage of taxation deductions, importantly the Foreign Tax Credit.

2. If the individual is not a US national, the next threshold question is whether he is a US resident.

a. An Alien individual will be considered a US resident if:

(1) he is a lawful permanent resident at any time during the calendar year (7701(b)(1)(A)(i)) (or

(2) the individual meets the substantial presence test. (§7701(b)(1)(A)(ii)) or

(3) the individual makes a first year election. (7701(b)(1)(A)(iii)

o (1) Green Card Test §7701(b)(1)(i)- If lawfully admitted to be a US resident by USCIS, then you are a resident alien for tax purposes. Regulations §301.7701(b)-1(b) An alien is a resident alien if they have been granted the privilege of residing permanently in the US as an immigrant in accordance with immigration laws.

o They do not meet the substantial presence test- taxed when became a lawful permanent resident. (7701(b)(2)(ii))

o If meet substantial presence test in the calendar year- the residency start date will be the first day the individual was present in the US. (7701(b)(2)(i

known as the testing period.

o BECAUSE the substantial presence test must be met in the year succeeding the election year, regulation §301.7701(b)-4(c)(3) provides that the election cannot be made before the individual satisfies the substantial presence test for that following year. (may request a filing extension)

Spousal Residency Election- §6013(g) and (h) allows a spouse who is a non-resident alien to elect to be treated as a US resident and to file a joint tax return with their US resident spouse.

EXCEPTIONS

o If, the individual meets the substantial presence test, but they were present in the US for less than one-half of the current year, they will not be treated as a US resident if they

(1) have a tax home in a foreign country AND

(2) they have a closer connection to that foreign country than to the US. (7701(b)(3)(B))

o This exception does not apply if the individual has applied to become a lawful permanent resident.

o Tax Home in a Foreign Country- is defined in §301.7701(b)-2(c)

§ An Individual’s tax home is considered to be located at the individual’s regular or principal place of business. If they do not have a regular place of business, then the individual’s regular place of abode in a real and substantial sense.