International Tax

Foundations of U.S. International Taxation (Portfolio 6000)

  • This Portfolio provides an introduction to and overview of the application of the U.S. income tax system in the international environment.


Tax Management Portfolio, Foundations of U.S. International Taxation, No. 6000, provides an introduction to and overview of the application of the U.S. income tax system in the international environment. U.S. international taxation extends to two fundamental types of transactions: (1) investments or undertakings of U.S. persons outside the United States (outbound transactions); and (2) investments or undertakings of foreign persons in the United States (inbound transactions).

The Portfolio begins by reviewing the terminology of U.S. international taxation, focusing on the types of entities subject to U.S. tax and how the nature of the entity often determines the imposition of tax.  It also discusses the difference between worldwide and territorial systems of taxation, and how the United States has modified its worldwide system to use a residence-based system for certain foreign taxpayers.  The Portfolio also addresses the issues of nationality, residence, and expatriation.

An important issue in international taxation is the sourcing and allocation of business income and expenses. The Portfolio reviews the U.S. approach in these areas with discussions of the source of income rules, transfer pricing, and expense allocation. The Portfolio then reviews the basic U.S. income tax rules for inbound transactions of foreign taxpayers.  Areas addressed are effectively connected income taxed at the graduated U.S. income tax rates; fixed or determinable income taxed at a flat rate; and the special provisions for the taxation of gains of foreign persons on sales of U.S. real estate. Also addressed is the U.S. taxation of outbound transactions by U.S. citizens and residents.  This section explains the foreign tax credit, Subpart F, passive foreign investment companies (PFICs), the exclusion for foreign-source earned income, and foreign currency transactions.

The Portfolio reviews the U.S. tax provisions for international corporate reorganizations, focusing on §367(a) and §367(b) and the extensive regulations issued thereunder. It also discusses the role of tax treaties in the U.S. tax system, examining the provisions of the U.S. Model Income Tax Treaty and explaining where and why the Model Treaty deviates from the Code provisions. The role of characterization is also explained, with the Portfolio describing how the characterization of income can have a critical effect on the application of U.S. income tax to transactions in an international setting. The tax implications of characterization of entities under the “check-the-box” regulations are also discussed.  Lastly, the Portfolio addresses key international tax agreements with foreign stakeholders, including those with the Organisation for Economic Cooperation and Development (the “OECD”) with respect to international policy and the Pillar 1 and Pillar 2 global minimum tax agreements.

This Portfolio may be cited as Tonkovich, 6000 T.M., Foundations of U.S. International Taxation.

Table of Contents

I. Essential Elements of U.S. International Taxation
II. Inbound U.S. Taxation
III. Outbound U.S. Taxation
IV. International Corporate Reorganizations
V. Income Tax Treaties
VI. The Question of Characterization
VII. International Tax Planning

Julia M. Tonkovich
Julia M. Tonkovich
Executive Director
Ernst & Young LLP
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