FAQ: International Tax
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- How are foreign nationals classified for U.S. federal income tax purposes?
- When does a foreign national qualify as a resident alien for U.S. federal income tax purposes?
- What is the Internal Revenue Code's definition of a non-resident alien?
- Why is a foreign national's status as a resident alien or as a non-resident alien important from a U.S. federal income tax perspective?
- How are foreign nationals who qualify as resident aliens taxed in the U.S.?
- How are foreign nationals who qualify as non-resident aliens taxed in the U.S.?
- When does a foreign national who qualifies as a non-resident alien have to file an income tax return in the U.S. and what tax form has to be filed?
- Are foreign corporations subject to any U.S. income tax liabilities or any reporting requirements?
- What is a withholding tax?
- What is a foreign tax credit?
- What effect does a tax treaty have on the U.S. federal income taxation of foreign nationals and foreign corporations?
- What is a transfer price?
- What is an Advance Pricing Agreement (APA)?
- What is a Foreign Sales Corporation (FSC)?
- What is Value Added tax (VAT)?
- What is effectively connected income?
- What is foreign earned income?
- What is a foreign earned income exclusion?
- What is a foreign housing exclusion?
- What does the term "tax home" mean?
- How are foreign nationals classified for U.S. federal income tax purposes?
For U.S. federal income tax purposes foreign nationals are classified either as resident aliens or non-resident aliens.
- When does a foreign national qualify as a resident alien for U.S. federal income tax purposes?
According to the Internal Revenue Code a foreign national qualifies as a resident alien with respect to a particular calendar year:
(a) if such foreign national has a "green card", i.e. such foreign national is a lawful permanent resident;
(b) when such foreign national meets the Internal Revenue Code's substantial presence test for the year under consideration, i.e. such foreign national is physically present in the United States for 183 days in the current year or for 183 days in the current and prior 2 years based on the following formula: all of the days in the current year plus one-third of the days in the prior year plus one-sixth of the days in the second preceding year; or
(c) when such foreign national elects resident alien status for the year under consideration. - What is the Internal Revenue Code's definition of a non-resident alien?
According to the Internal Revenue Code a foreign national qualifies as a non-resident alien for U.S. federal income tax purposes with respect to a particular calendar year when the foreign national is neither a citizen of the U.S. nor a resident alien of the U.S.
- Why is a foreign national's status as a resident alien or as a non-resident alien important from a U.S. federal income tax
perspective?
A foreign national's status as a resident alien or as a non-resident alien is important from a U.S. federal income tax perspective because it determines the extent and nature of a foreign national's U.S. income tax liabilities and reporting obligations.
- How are foreign nationals who qualify as resident aliens taxed in the U.S.?
Foreign nationals who qualify as resident aliens are subject to the same income tax liability regime and the same income tax reporting regime as U.S. citizens.
- How are foreign nationals who qualify as non-resident aliens taxed in the U.S.?
Foreign nationals who qualify as nonresident aliens are taxed at standard U.S. rates on their business income that is connected with a U.S. trade or business. Additionally, foreign nationals are taxed the rate of 30% on their gross income from other U.S. sources.
- When does a foreign national who qualifies as a non-resident alien have to file an income tax return in the U.S. and what
tax form has to be filed?
A tax form 1040NR return is required if the individual has any income subject to graduated tax rates, is claiming tax treaty benefits, or has had insufficient withholding on fixed or determinable, annual or periodic income.
- Are foreign corporations subject to any U.S. income tax liabilities or any reporting requirements?
Foreign corporations incur U.S. income tax liabilities both on their U.S. trade or business profits and on their U.S. source non-business (investment-type) income. With regard to reporting requirements, foreign corporations are obligated to file tax form 1120F if the foreign corporation has any income subject to graduated tax rates, is claiming tax treaty benefits, or has had insufficient withholding on fixed or determinable, annual or periodic income.
- What is a withholding tax?
A withholding tax is an income tax that is withheld or deducted by a payer from income paid to a payee with the effect that the payee receives a net payment of the full income amount due minus the withholding tax applied. Withholding taxes are typically applied against wages, royalties and dividends. Payers who are obligated by tax authorities to withhold taxes due on payments made are generally held liable for taxes due in the event that they fail to withhold.
- What is a foreign tax credit?
The term denotes the allowance of credit in the case of a citizen of the United States and of a domestic corporation for the amount of any income, or profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States.
- What effect does a tax treaty have on the U.S. federal income taxation of foreign nationals and foreign corporations?
The major purpose of an income tax treaty is to mitigate international double taxation through tax reductions or exemptions on certain types of income derived by residents of one treaty country from sources within the other treaty country.- What is a transfer price?
A transfer price is the price charged by a company to its subsidiary or to a related company for goods, services or intangible property that are transferred to the subsidiary or related company.- What is an Advance Pricing Agreement (APA)?
The IRS reviews and agrees to the taxpayer's transfer pricing method before the taxpayer implements it. An APA spells out the factual nature of the related party transactions, an appropriate pricing method, and the expected range of results from applying the agreed-upon method to the transactions.- What is a Foreign Sales Corporation (FSC)?
Under U.S. law, an FSC is a foreign corporation or a US possessions corporation that is entitled to exclude certain "exempt foreign trade income" from taxation in the United States. A foreign corporation must meet a number of eligibility requirements in order to take advantage of the FSC exemption, including a requirement that its country of organization have a tax information exchange agreement with the United States. The FSC provisions were enacted by the Tax Reform Act of 1984 to replace the DISC provisions.- What is Value Added tax (VAT)?
The VAT is an indirect, consumer-oriented transaction tax that closely resembles a sales tax, but varies in the fact that it is actually included, or imbedded, in the actual price of goods and services at each stage of the production process.- What is effectively connected income?
In connection with tax based on income from sources within or without the United States, income, gain, or loss, which is treated as effectively, connected with the conduct of a trade or business within the United States. The term is used in the case of a non-resident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year.- What is foreign earned income?
In connection with the taxation of citizens or residents of the United States living abroad, the term means the amount received by such individual from sources within a foreign country or countries, which constitute earned income attributable to services performed by such individual.- What is a foreign earned income exclusion?
Exclusion from gross income of foreign earned income of an individual provided for any taxable year it does not exceed the amount of foreign earned income computed on a daily basis at the annual rate of $70,000. The Taxpayer Relief Act of 1997 has increased the exclusion to $72,000 for calendar year 1998 with an annual increase thereafter of $2,000 until calendar year 2002 when the exclusion will become $80,000 for that year and subsequent years. Further increases are provided for tax years beginning in 2008 based on the cost-of-living adjustment.- What is a foreign housing exclusion?
In addition to the foreign earned income exclusion, a taxpayer may also separately claim an exclusion or a deduction from gross income for the taxpayer's housing amount if the taxpayer's tax home is in a foreign country and the taxpayer qualifies under either the bona fide residence or the physical presence test.- What does the term "tax home" mean?
Place of a taxpayer's principal business or employment. In general, the tax home is a taxpayer's main place of business or post of duty, without regard to the place of the taxpayer's family home. A taxpayer's tax home is the entire city of general area in which the taxpayer's main place of work or business is located, regardless of where the taxpayer maintains his family home.
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