International Taxation

Chapter 3Determining Source of Income

Learning objectives

• Determine why sourcing rules are important before and after the Tax Cuts and Jobs Act (TCJA).
• Identify the steps to analyze the source of income.
• Identify how various types of income are sourced.
• Recognize how the effectively connected income (ECI) rules interact with sourcing rules with respect to dividends paid by foreign corporations.
• Recognize how the sourcing rules for use of tangible and intangible property interact with the sale of personal property sourcing rules.
• Identify the modified rule of Section 863(b), that now provides that gross income from the sale or exchange of property produced by the taxpayer will be sourced at the place of manufacture.

Summary of source of income rules

U.S. businesses are generally taxed on worldwide income. The geographic source of business gross income, as derived either from within or outside the United States, may determine the extent to which such income is subject to U.S. taxation. The U.S. rules for sourcing income provide an important foundation for the U.S. taxation of international activities. The statutory source rules can be overridden by specific treaty provisions between the United States and a foreign country.

The criteria for determining source of income vary, depending on the nature or type of income. Taxpayers must carefully characterize their income to decide which criteria are applicable (for example, royalty income versus gain from sale of personal property). ...