22 Aug 2009

US sourced Income

by Darren

The US has a comprehensive set of rules to specify the geographical source of different types of income. The main reason for having these rules is: 1. To determine whether US corporations are entitled to credits for foreign taxes paid 2. Whether a foreign corporation is subject to US taxes. The basic rules for identifying the source of income are as follows: Interest - where the payor or debtor resides. Dividends - where the corporate payor resides. Personal Services - where the person provides the services Rent - where the property is located Gains from Real Estate - where the property is located Royalties - where the intangible property is used. Inventory profit - if purchased for sale where the contract is entered into. If manufactured 50% where it was manufactured and 50% where the title of goods passes. Generally the source rules are quite similar across countries. However, did you notice that dividends source are different between USA and Australia. An Australian company earning income from the US and subsequently paying a dividend. That dividend will be subject to tax in the US where as a US company earning income in Australia and paying a dividend, those dividends are generally subject to US taxation as well. Is this fair to the Australian government? Should the US receive all tax money? We will need to examine the double tax agreement between the US and Australia to really understand the impact of this. I will look at double tax agreements late spring so stay tuned. In the coming weeks we will look into the details of how specific types of income are treated under US tax laws from a non-resident perspective.

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