International Aspects of U.S. Income Taxation

International Aspects of U.S. Income Taxation

Description

This book addresses international aspects of U.S. tax law—the rules that govern U.S. taxation of U.S. activity by foreign persons and foreign activity by U.S. persons. It is an outgrowth of materials I have prepared for various courses in international taxation offered in the LL.M. program in taxation at New York University School of Law over the last twenty-five years. Though primarily attended by LL.M. students from the United States and numerous foreign countries, J.D. students also enroll in the courses, and there is no reason why the book may not be used with either group of students. The book is informed not only by teaching experience, but also by my experience practicing international tax law. I have tried to cover not only what is academically interesting, but also what is practical and important to tax practitioners in the private and public sectors. International tax draws from many sources and is exceedingly difficult. The book is designed to capture all that a student needs (other than the Internal Revenue Code and Treasury Regulations) to gain a sophisticated understanding of the field. There are many fine primers and treatises on international tax, but the rules are so intricate that students, who rarely have time to read outside sources, learn best by focusing on the primary material. My observation is that it is desirable that students studying international tax have prior or contemporaneous academic or practical exposure to corporate tax and at least passing familiarity with partnership tax. Each section of the book begins with carefully selected reading assignments in the Code and Regulations, followed by introductory “Notes” and then primary and secondary materials (cases, rulings, legislative history, etc.). In order to illustrate the effect of treaties, the reading assignments often include provisions of the U.S. Treasury Model Treaty and the treaty between the United States and the Netherlands, which are reproduced in the Appendix. Most sections conclude with a problem, which may be used as a vehicle for class lecture or discussion, designed to text understanding of the material in as practical a setting as brief hypothetical patterns permit. The Notes provide introductory explanation and probe policy and practical issues raised only peripherally or obscurely by the other assigned reading material. Though principally intended as a teaching resource, the book may also serve as a research and practice tool for practitioners. The Notes, which cite numerous cases, administrative materials, and law review articles, provide overview and analysis of most relevant practice areas and are an entry point to more detailed research. In that sense the Notes function as a concise analytical compendium, with more depth than a primer but not as exhaustive as a treatise. A table of contents follows immediately and a table of authorities and index are at the end of Volume 2. The fourth edition was current through July 1, 2009. The fifth edition, which reflected developments through August 1, 2014, included only Volume 1. This sixth edition updates Volumes 1 and 2 through September 1, 2015. Here are some of the highlights since 2009. On inbound matters, the FATCA regime of requiring foreign financial institutions to register with the U.S. government or face a 30-percent withholding tax on U.S. source receipts has been implemented along with information exchange agreements with over 110 countries. The United States has continued to update treaties around the world (although Senator Paul continues to hold up ratification of several), and in 2015 Treasury proposed significant BEPS-inspired changes to the U.S. Model Treaty. Other important statutory and regulatory developments include repeal of the “80-20” rules (which had relaxed withholding tax on interest and dividends paid by U.S. corporations conducting primarily foreign business), a new source rule treating guarantee payments like interest, and controversial new rules subjecting dividend-equivalent swap payments to withholding tax. Elsewhere, source countries continue pressing to expand the scope of a permanent establishment, particularly in the area of services and activities of subsidiaries and commissioners. The foreign tax credit area has been especially active. The Supreme Court’s unanimous decision in PPL confirmed that creditability issues turn on substance, not form. And several anti-abuse measures were taken: Regulations clamping down on “foreign tax generator” transactions were finalized, and the government has so far had nearly unanimous success, on doctrinal grounds, in generator cases pre-dating the regulations. Congress enacted Sections 909 and 901(m) to combat foreign tax “splitters” and credits for taxes on income that permanently escapes U.S. taxation, and Treasury has pitched in with new “technical taxpayer” regulations. For revenue reasons, Congress once again postponed the choice to adopt worldwide apportionment of interest expense, this time to 2021. Turning to transfer pricing, expansive cost sharing regulations were finalized, but the government lost important cases in Veritas, Xilinx, and Alteras. And the OECD’s BEPS project, discussed below, threatens to make fundamental changes to transfer pricing around the world. Subpart F has been relatively quiet, although Treasure finally issued regulations addressing CFC loans to foreign partnerships; the active finance and look-through rules have been serially extended and the branch rules dealing with foreign base company sales income have been finalized. The PFIC area, too, has been inactive. Regulations under Sections 367 and 956 have been refined in the government’s ongoing effort to combat repatriation schemes (e.g., “Killer B” and “Deadly D” reorganizations). Regulations under Sections 367 and 7874 (and important Notices promising more) continue the government’s war against corporate expatriations (“inversions”), which seem to have slowed in the wake. The confluence of BEPS, inversions, and an enormous accumulation of unrepatriated cash and earnings in U.S. multinational companies’ foreign subsidiaries has inspired much talk of international tax reform, and for the first time in a long time, with the White House sharing at least a conditional willingness with the Republican-controlled Congress to reduce tax on U.S. companies’ foreign earnings, it appears to be more than just talk. There may actually be legislation in the not too distant future. Unquestionably, current fixation on international taxation owes much to the ubiquitous BEPS project, and not introduction of the subject of international taxation could be complete without mentioning BEPS.

Publication Date

2015

Edition

6

International Aspects of U.S. Income Taxation

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