30 • 1

CHAPTER

30

INTERNATIONAL TAXATION

Paul M. Bodner

Attorney-at-Law

CONTENTS

30.1 Introduction 1
30.2 Overview 1
(a) Methods of Taxation 1
(b) Classical versus Integration 2
(c) Who Is Subject to Tax? 3
(d) Determination of Tax Base 3
(e) Rates 3
30.3 U.S. Taxation of a Foreign
Operation 3
(a) Foreign Branches of U.S.
Corporations 3
(b) Foreign Subsidiaries of U.S.
Corporations 4
30.4 Foreign Tax Credits 9
30.5 Transfer Pricing 14
(a) Specific Transactions 14
(i) Loans 14
(ii) Services 15
(iii) Use of Tangible Property 15
(iv) Use of Intangible Property 15
(v) Sales 15
(b) Internal Revenue Service
Activities 16

30.6 Foreign Currency Issues 16

(a) Functional Currency and

Qualified Business Unit 16

(b) Transactions 17

(c) Translations 17

(i) Branch 17

(ii) Subsidiary 17

(d) Hyperinflationary

Economies 18

30.7 U.S. Taxation of a Foreign

Corporation 18

(a) Overview 18

(i) Investment Income 18

(ii) Business Income 19

(b) U.S. Trade or Business 19

(i) Definition 19

(ii) Effectively Connected

Concept 19

(c) Branch Profits Tax 20

30.8 Income Tax Treaties 20

(a) United States and Income

Tax Treaties 20

(b) General Effects 20

30.1 INTRODUCTION. The term international taxationis a misnomer in that there
is not an independent body of law that applies to international business transactions.
Instead, the United States and other countries apply general tax rules to domestic
companies operating abroad and to foreign businesses investing locally, supple-
mented by special provisions. The United States has the most complex tax system in
the world, and especially complex are the provisions that deal with international busi-
ness activities. This chapter summarizes these U.S. tax rules and assumes that the
reader has a basic understanding of U.S. federal income taxation. A chapter of equal
length could be written on the tax laws of our major trading partners.

30.2 OVERVIEW

(a) Methods of Taxation. With the possible exception of cost of goods sold, taxation
is the largest expense of any business. Taxes can take many forms, and a variety of