The only thing that hurts more than paying an income tax is not having to pay an income tax.
— Lord Thomas R. Duwar
This chapter shows how governments tax corporate income from foreign sources, such as foreign corporations or foreign branches. Tax planning can be a major source of value for the multinational corporation because of national differences in tax systems and tax rates. Careful planning can lessen the corporation's tax liability and thereby increase the value of the firm.
Here is a word of caution before we begin. This chapter is not intended to be your sole reference on international taxation and tax planning. International taxation is an exceedingly complex area that requires a detailed knowledge of the domestic tax code, as well as knowledge of foreign tax systems and bilateral tax treaties. Indeed, each nation maintains its own peculiar tax code, with definitions of income and expenses that often are at odds with those of other countries. And within each nation's tax code, there are numerous exceptions to the usual rules. These exceptions can have subtle and profound implications for tax planning.
This chapter uses the U.S. tax code to illustrate issues in international taxation, such as how a worldwide tax system that uses foreign tax credits reduces the threat of double taxation of foreign-source income. Nevertheless, for brevity the chapter ignores many subtleties and exceptions in the U.S. tax code. If the ...