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InternationalIncomeTaxationChapter2ProfessorsWellsPresentation:January19,20122Whomdoyousee?AnOldLadyoraYoungLady?YourPerspectiveMatters3Chapter2–TaxSourcingRulesp.77Income&DeductionsIRC§§861–865Sourcingobjectives:1)Foreigntaxpayers–identifytheirincomewithintheU.S.incometaxsphere.2)U.S.taxpayers–determinewhetherthe“firstrighttotax”belongstotheforeignjurisdiction,i.e.,beforeavailabilityoftheU.S.foreigntaxcredit.Question:WhyDoesSourcingMatter?4InterestIncomeSourcingp.78§861(a)(1)&§862(a)(1)1)Sourceofinterestincomedependspayor’sresidence.2)FlowthroughtorecipientsofforeignsourcecharacterizationifU.S.corp.has80percentofitsincomederivedfromaforeignsource.§861(c)(1).Proportionateallocationunderarelatedpersonrule-§861(c)(2).Relatedperson–10%+owner.3)PayorisaU.S.branchofForeignCorporation:SourceofinterestisU.S.per§884(f)(1).Question:WhyDoesSourcingMatter?5DividendsSourcingp.701.DividendfromaU.S.corporationhasU.S.source-§861(a)(2).2.Dividendsfromaforeigncorporationasforeign-sourceincome--§862(a)(2).3.However,dividendsfromaforeigncorporationaretreatedasproportionallyU.S.sourcedif25percentorgreateroftheforeigncorp.'sgrossincomewasECI–USTB.§861(a)(2)(B).Basedon“gross”ratherthan“net”fromeachsource.USParentAngolanCorporationForeignSourceAngolanCorporationUSTradeorBusinessUSParentMixedSourcingUSCorpAngolanCorporationUSSource1236Rents&RoyaltiesIncomeSourcingp.79Sourceofrentalandroyaltyincomeisdeterminedbyplacewherepropertyisphysicallylocatedorused–bothtangibleandintangibleproperty.§861(a)(4)or§862(a)(4).SeeRev.Rul.68-443retrademarklicensingincome–placeofinitialsaleoftrademarkedgoodsnotrelevantfordeterminingsourcingofroyaltyincome.Holdingisthatroyaltyisforeignsourcebecausetheproduct’sultimateuseoutsidetheU.S.–i.e.foreigntrademarks.XCorporationYCorporation•USManufacturer•Trademarkplaceonproducts•Productsoldtonon-UScustomersinUSLicenseforForeign-UseRoyalty7CompensationforPersonalServices–IncomeSourcingp.81Incomesourcedwheretheservicesareperformed-§§861(a)(3)&862(a)(3).RevRul60-55–commissionsalesoutsideU.S.Foreigncorp..receivescommissionsforsales/representationservicesprovidedinforeigncountrieseventhoughshipmentofthepurchasedgoodsfromtheU.S.andpaidfromUS.Query:Wherearetheservicesperformed?Answer:OutsidetheUSbecausethatiswheretheplaceofpersonalserviceswereperformed.ForeignCorporationYCorporationNon-USCustomerSaleofProduct8DeMinimisCompensationSourcingRulep.83DeminimisexceptioninU.S.-§861(a)(3):i)InU.S.lessthan90daysii)Compensationnotexceeding$3,000(a“cliffprovision”)andiii)Anexpenseofaforeignemployer.Thissourcingruleeffectivelyprovidesataxexemption.Question:WhyDoesSourcingMatter?9CompensationforPersonalServices–AllocationIssueAnallocationissueariseswhenservicesareperformedbothwithinandoutsidetheUnitedStates.Whatisanappropriateallocationapproach?Stemkowskicase–p.83(includealsotrainingcamptimebutnotoff-seasonperiod).Regulations–p.88allocateincomeonbasisoftime,notfactsandcircumstances.Specialrulesforfringebenefitsandhardshipdutypay.In2007,proposedregulationsprovidespecialsourcerulesfor“eventbasis”situations(professionalathletes,musicians,andthelike).10FurtherCompensationIssues1)Compensationorroyaltyincome?Boulezcase–p.89Noparticipationinterestinthecopyright.2)Signingbonus(paymentforwhat?).3)Non-competepayment,includingexclusivesign-onfee;wheredoesapersonnotcompete?Korfundcase–p.95.4)Sign-onagreement(nofutureservicesagreement)–Rev.Rul.74-108,p.96Question:WhyDoesSourcingMatter?11SaleofRealPropertyp.99Incomeissourcedwheretherealpropertyislocated.§861(a)(5)&§862(a)(5)Whatisrealproperty?Question:WhyDoesSourcingMatter?12SaleofPersonalPropertypp.89-1091)Inventory-§§861(a)(6)&865(b)“passageoftitle”testbut,Reg.§1.861-7(c)retaxavoidance.A.P.GreenExportCo.–p.100titlepassagestructuredtooccuratthedestinationoutsideU.S.–clearintentnoted.2)Noninventorypersonalpropertyisdeemedsoldattheresidencelocation–p.105.Code§865(a).Sourceruleapplicabletobothgains&losses.Question:WhyDoesSourcingMatter?13SpecialPersonalPropertySourcingRulespp.106-108Depreciation(p.106)issourcedtocountrywheredepreciationisclaimed.Code§865(c).IntangiblePropertySale(p.107)§865(d)1)Saleforfixedamountissourcedbyresidenceofseller.2)Saleforacontingentpayment.Cf.,royalties(notapropertysale;i.e.,ordinaryincome)issourcedthesameasaroyalty.Note:Goodwillissourcedaccordingtothelocationwheregoodwillwasgenerated.See§865(d)(3)Question:WhyDoesSourcingMatter?14SourcingRulesforSpecialEntitiesSaleofstockofaforeignaffiliateistreatedasforeignsourcegainif:(i)saleoccursintheforeigncountry(notUS);(ii)50%offoreignaffiliate’sincomederivedinthatcountryfromactivebusiness,and(iii)foreignaffiliateis80%owned,thenSeeCode§865(f).Personalpropertysaleswillbeforeignsourceif(1)soldthroughaforeignbranchwhena10%foreigntaxwaspaid(seeCode§865(e)(1))or(2)soldforuseoutsideoftheUS,issoldbyaU.S.branch,butaforeignoffice“materiallyparticipated”inthesale(seeCode§865(e)(2)).SaleofstockofaU.S.realpropertyholdingcorporationisUSsource(seeCode§861(a)(5)).See(later)FIRPTArules.15Manufacture&SaleofInventoryPropertyp.109OutboundCase:Co