Post your initial response to one of the following discussion topics (topic 1 or topic 2).Make sure your responses are substantive in nature and that you reference the applicable IRC code provisions and other professional sources used to support your postings.
Discussion Topic 1: Why do income source rules play a more prominent role in the taxation of foreign persons? How does the potential for United States withholding contribute to this?
Discussion Topic 2: The international tax law changes contained in the Tax Cuts and Jobs Act (TCJA) are the most sweeping since 1986. In what ways did these changes bring the United States closer to a territorial tax system than a credit system?
Do the discussion first with citation and references. Then do the response down below.
Posted 1
Why do income source rules play a more prominent role in the taxation of foreign persons? How does the potential for United States withholding contribute to this?
Income sources play a more prominent role for foreign people because they are generally subject to tax only on their US source income. This means any income that is produced by an activity or an investment in the US. Income effectively connected with a U.S. trade or business is subject to regular graduated income tax rates after providing for allowable deductions and exemptions. Income not connected with U.S. trade or business is subject to a withholding tax with no allowance of deductions. The U.S. tax rules also allows for certain foreign trade income to be exempt from U.S. taxation.
A good portion of things foreign people do outside of the US are not considered foreign-sourced income, therefore it is not subject to US federal withholding tax. The IRS states “As a general rule, wages earned by nonresident aliens for services performed outside of the United States for any employer are foreign source income and therefore are not subject to reporting and withholding of U.S. federal income tax” ((Persons employed abroad by a U.S. person: Internal Revenue Service 2021)). In most cases, a foreign national is subject to federal withholding tax on U.S. source income at a standard flat rate of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign national’s country of residence and the United States.
Persons employed abroad by a U.S. person: Internal Revenue Service. Persons Employed Abroad by a U.S. Person | Internal Revenue Service. (2021, September 15). Retrieved November 4, 2021, from https://www.irs.gov/individuals/international-taxpayers/persons-employed-abroad-by-a-us-person.
Internal Revenue Code Sections 3401, 3402, and 3403
Income Tax Regulations 31.3401(a)-1 et seq; 31.3402(a)-1 et seq; and 31.3403-1.
Internal Revenue Code Section 7701(a)(30) for the definition of a U.S. Person
Revenue Ruling 75-485 on the U.S. and Foreign Payment of a U.S. Citizen-Employee Abroad
Revenue Ruling 92-106 on Withholding / Reporting on Wages for Services Performed Within and Outside the United States
Posted 2
Hi, everyone,
Under a territorial tax, the United States would not tax profits earned overseas by US-resident corporations. The Tax Cuts and Jobs Act effectively exempted some of these profits, but retained taxation on some categories of foreign profits and imposed a new minimum tax on another.
The current US system is a hybrid system between a territorial and a worldwide system. The Tax Cuts and Jobs Act (TCJA) eliminated taxation of repatriated dividends but expanded taxation of income accrued within CFCs. The current system can be characterized as a territorial system for normal returns from foreign investment, defined in the US tax law as the return of up to 10 percent on tangible assets because these returns face no US corporate income tax. The result is that US companies investing overseas and foreign-resident companies from countries with territorial systems both pay only the local corporate income tax rate in countries where they place physical capital assets. In addition, US companies no longer have an incentive to avoid US taxation by contracting production to locally owned firms, as they would under worldwide taxation.
The new tax law, however, departs from territorial taxation in its treatment of intangible profits, which represent the bulk of profits for some of the largest US multinational corporations. Because TCJA eliminated the tax on repatriated dividends, it increased the rewards for income shifting: profits now not only accrue tax-free overseas but are also tax-free when brought back to the US parent. To counter this, TCJA included GILTI, the tax on global intangible low-taxed income. This low-rate tax on intangible profits as they accrue reduces the incentive to shift these profits out of the United States.
Finally, the new tax law retains the long-standing rules in subpart F for taxing the passive income US firms accrue within their foreign affiliates. These rules, and similar rules in other countries, have long been viewed as a needed backstop to prevent base erosion in territorial systems.
