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International Taxation
University of Kentucky School of Law
Bird-Pollan, Jennifer

International Tax Bird-Pollan Spring 2017
 
Introduction
 
Individuals Taxed on Worldwide Income
US Citizens
The US taxes the worldwide income of US citizens regardless of where they reside or are domiciled (§ 1.1-1(b))
US could tax a native citizen of the US who at the time income was received, was permanent resident and domiciled in Mexico, the income being from property located in Mexico (Cook v. Tait)
Resident Aliens
Generally
Individuals who are classified as “resident aliens” are also taxed on their worldwide income, and generally subject to the same US tax treatment as US citizens
There are two tests to determine if person is considered “resident alien” under the Code
Two Tests:
Green Card Test
An individual who is a permanent resident of the US under the immigration laws
Substantial Presence Test (§ 7701(b)(3))
Formula intended to identify aliens who spend substantial periods of times within US, and will be met if:
Individual was present in the US on at least 31 days during the calendar year, and
Sum of the number of days on which such individual was present in the US during current year and 2 preceding calendar years (when multiplied by table) equals or exceeds 183 days
Current year = 1
1st preceding year = 1/3
2nd preceding year = 1/6
Days of Presence Excluded
Certain medical conditions (§ 7701(b)(3)(D))
Individual was unable to leave the US on such day because of a medical condition which arose while such individual was present in US
Individual who initially unable to leave, but remains in US beyond a reasonable period of time, day of presence will not be excluded
Days in transit
Alien individual may exclude days of presence in the US if individual is in transit between two foreign points, and is physically present in the US for fewer than 24 hours (§ 301.7701(b)-3(d))
Regular commuters from Mexico/Canada
Alien individual is not considered to be present in the US on days that the individual commutes to the US from their residence in Mexico or Canada if they regularly commute (§ 301.7701(b)-3(e))
Exceptions
“Closer Connection” Exception
Individual is present in the US during less than half the current year, and
For the current year, person has a tax home in a foreign country, to which person has a closer connection to
TP has a closer connection to foreign country if they have maintained more significant contacts with the foreign country than with US (§ 301.7701(b)-2(d)(1))
Exempt Individuals (§ 7701(b)(5))
Foreign government-related individual
Teacher or trainee
Student
Professional athlete temporarily in US to compete in a charitable sporting event
First-Year Election
Alien may, if requirements are met, elect to be treated as a resident if they make an election under § 7701(b)(4)
Someone may want to do this if they wanted to be entitled to US deductions and/or have a lot of US investments
Certain Expatriates and Long-Term Permanent Residents
Background
§ 877 was enacted to try and stop US citizens from renouncing their citizenship as a way to avoid paying tax
It taxed a nonresident on all income from US sources and on gains realized with respect to stock and securities in US corporations and certain other property during the ten years following loss of citizenship
Expatriation to Avoid Tax (§ 877)
Alternative tax regime applies to any person who lost US citizenship within the 10-year period immediately before the close of the tax year if:
Average annual NI tax for period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000, or
Net worth as of such date is $2 million or more
Long-Term Residents
§ 877(e) applies to LT residents of US who:
Terminate US residence, or
Who commence to be treated as residents of another country pursuant to a US tax treaty and do not waive treaty benefits 
Special Source Rules (§ 877(d))
Expatriate’s gains from the sale of certain property as income derived from US sources are taxed as income, including:
Sale of property
Stock/debt obligations
Income or gain derived from controlled foreign corporation
 
Market-to-Market Regime (§ 877A)
General Rule
All property of a covered expatriate shall be treated as sold on the day before expatriation date for its FMV
Person is subject to income tax on the net unrealized gain in their property as if property had been sold for its FMV on the day before the expatriation or termination of residency
This applies to property the individual had when he/she expatriated
Election (§ 877A(b))
If a TP makes an election under this section, they will not have to pay tax on the item until it is sold/disposed of
Applicable Persons:
Any US citizen who relinquishes citizenship
Person is treated as relinquishing citizenship on earliest of the following four dates (§ 877A(g)(4)):
Date the individual renounces his US nationality before a diplomatic or consular officer of the US,
Date the individual fu

r partnership
US partner in a foreign partnership will be taxed immediately on its share of the entity’s income
US partner in a foreign corporation will be taxed only when profits are repatriated in the form of corporate distributions/sale of stock
Trusts and Estates
Background
US trusts and estates are subject to US taxation on their worldwide income so it’s important to know if T/E is foreign or US
Test (§ 7701(a)(30)(E):
A trust is considered a US trust if:
A court within the US is able to exercise primary supervision over administration of it, and
One or more US persons have the authority to control all substantial decisions of the trust
 
 
Source Rules
 
Introduction
Background
US source rules derive from an attempt to identify the geographic locus of the economic activity or financial arrangements that generated the income
The U.S. when used in geographical sense includes the States and the “District of Columbia (§ 7701(a)(9))
Foreign Tax Credit
The source of income is also essential to the calculation of the FTC because it is generally accorded only with respect to foreign taxes on foreign-source income and is primarily applicable to US persons
Model Treaty
Article 23(3) – allows the US and treaty country to stipulate different source rules for items of gross income 
 
Interest
General Rules
The source of interest depends generally on the residence of the payor who pays the interest
Interest payment from U.S. resident and U.S. corporations are generally characterized as U.S. source income (§ 861(a)(1))
“Resident of the US” includes (§ 1.861-2(a)(2)(i)):
Individual who is US resident at time of payment
Domestic corporation
Domestic partnership who is engaged in US T/B
Foreign corporation/partnership who is engaged in US T/B
Interest payment from foreign corporations and non-residents (including U.S. citizens residing abroad) will generally be characterized as foreign source income (§ 862(a)(1))
Exceptions