The Basic Framework of Cross-Border Taxation

By Nevius, Alistair M. | Journal of Accountancy, March 2013 | Go to article overview

The Basic Framework of Cross-Border Taxation


Nevius, Alistair M., Journal of Accountancy


U.S. citizens are taxable on their worldwide income, with a credit or deduction for taxes paid on foreign income. The United States makes no distinction between earnings from business or investment activities within the United States and those outside its borders. Tax laws governing cross-border transactions are both arcane and complex, and they present a host of traps, demanding familiarity with the basic tax rules that apply to both U.S. and foreign persons.

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Transactions by U.S. taxpayers in other countries are generally referred to as "outbound transactions," while those of foreign taxpayers within the United States are "inbound transactions." Rules for outbound transactions capture foreign income for U.S. tax purposes and are intended to prevent tax avoidance through the use of foreign entities. The tax rules governing inbound activities impose tax on income from sources within the United States and income that is effectively connected with the conduct of a trade or business within the United States. Some inbound income of a nonresident alien (e.g., capital gain income) is not taxed unless the individual is in the United States for more than 183 days during the tax year.

The Internal Revenue Code provides default rules for taxing cross-border transactions. However, a tax treaty between the U.S. and the home country of a foreign taxpayer, or a country in which a U.S. taxpayer does business or produces income, takes priority over the default rules. Thus, assessing the tax impact of cross-border activity requires familiarity with any applicable tax treaty as well as with the default rules ser forth in the Code.

Ina world that is now a "global village," even small firms must master cross-border tax issues to serve clients well: Cross-border transactions are simultaneously becoming more frequent and more complex. …

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