One of the hottest specialties in tax practice involves the
rules of international taxation. Unlike those plain old ordinary tax
advisers like me who can help you avoid the pinch from Uncle Sam,
these international tax mavens can help their clients avoid taxes in
lots of countries all at once.
And if you have to ask how much they charge, you probably can't
afford them. Who knows? I think they bill you by the minute.
So who needs them? Well, anyone who imports or exports goods, and
these days the United States imports and exports more than $500
billion of goods a year. Needless to say, where there is trade, the
governments of both trading countries will want to tax the gains. On
the other hand, the sellers want to minimize their tax liabilities.
Hence, the need for international tax specialists.
Perhaps a simple example can help here. Last year, my wife and I
bought a 1970 Chevy Impala convertible. It's white with a red
interior, and it came with a set of Michelin white-wall radial
Now, I know that eventually, one of those little doggies is going to
blow, and when it does, we are going to have to buy one (if not
So here's the deal. I called Hibdon Tires here in Norman and they
told me that those Michelin whitewalls cost about $100 apiece. Mind
you, I'm not complaining about the price (and the car just screams
out for Michelin whitewalls). But I just know that one of these days
we're going to pay Hibdon $400 for a new set of rubber. Now let's
suppose that both companies will make a fair profit, say, $40 for
Hibdon and $60 for Michelin.
The international tax issue revolves around deciding which country
gets to tax those profits. Of course, Hibdon is a U.S. company. But
Michelin is a French company. Does the United States get to tax the
profits of both companies? Does France?
Do both? It's bad enough to pay taxes in one country. Imagine if
you had to pay taxes to two countries on the same income.
Well, that's where the international tax rules come into play. In
general, the idea is to figure out where that $100 of profits is
earned and to divide it into so-called "U.S.-source" income and
"foreign-source" income and let the respective countries tax it
accordingly. (Alternatively, the United States generally allows its
citizens and companies to claim a foreign tax credit for any foreign
income taxes paid on their foreign-source income.)
Basically, here's how the rules work. The United States taxes
U.S. citizens and corporations ("U.S. persons") on their worldwide
income. So there is no question that the United States can, and
will, tax Hibdon on its $40 profit.
By contrast, the United States taxes nonresident aliens and
foreign corporations only on income with a sufficient connection or
"nexus" to the United States. So the United States will only tax
Michelin on the profit it earned in the United States. …