International Taxation Regimes

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While the United States taxes the worldwide income of U.S. taxpayers and then adjusts for foreign tax burdens (in most cases), most countries tax only domestic source income despite the fact that additional income may be earned abroad by a citizen of the country. Many countries, however, apply lower tax rates and simplified taxation rules to investment income earned in the country by foreign nationals, and many countries take the position that investment income is earned where the recipient resides, rather than where the bank or other institution that generates the income is based.

The minority position on international taxation taken by the United States frequently leads to disputes with foreign countries over its tax rules. Many countries also have special bilateral tax treaties with the United States that reach results different from either general U.S. international tax rules, or from foreign international tax rules. Among the important issues often resolved in a tax treaty are rules for determing where a corporation "resides" for tax purposes (the U.S. tends to favor place of incorporation, other developed nations tend to favor the corporate headquarters), and who has a right to tax interest (the U.S. tends to favor the country of the taxpayer's residence, the international norm is to grant limited taxing rights to the country of the payor of the interest). The U.S. often gives up any right to tax business income earned abroad in a country that is not a tax shelter country. Investment income is often taxes at "split the difference" rates.

Even treaties do not provide certainty, by the United States Supreme Court has since the case of Witney v. Robertson (1888) held that an ordinary domestic law passed after a treaty is adopted may override the treaty, another minority view of international law adopted by the United States. Thus, the United States Supreme Court has held that neither the President nor Congress may enter into any truly binding international treaty. Every time the tax code is amended (an it is amended every single year), the question of whether or not that abrogates existing tax treaties is potentially raised.

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