Navigating Global Tax Rules
This guide provides an interactive overview of key U.S. international tax provisions. It simplifies complex topics, from how multinational companies are taxed to rules for individuals working abroad. Use the navigation to explore different areas.
For U.S. Companies Abroad
Learn about tax credits, deductions for export income, and the anti-avoidance rules that affect U.S. businesses with foreign operations.
For Foreign Companies in the U.S.
Understand how the U.S. taxes income earned by foreign entities within its borders, and how tax treaties can reduce tax burdens.
For Individuals
Explore the rules that determine U.S. residency for tax purposes and the tax implications of renouncing U.S. citizenship.
Core Concepts
Transfer Pricing: The Arm's-Length Standard
When companies within the same corporate group do business with each other across borders, the price they set for goods or services is called a "transfer price." U.S. tax law (IRC Section 482) requires these prices to be "arm's length"—meaning they should be the same as if the companies were unrelated. This prevents companies from shifting profits to low-tax countries to minimize their tax bills. This interactive example demonstrates how the IRS can adjust income to reflect an arm's-length price.
The group shifts all profit to the lowest-tax country (Country M, 10% rate).
Entity Classification
A U.S. company operating abroad can structure its foreign operation as either a branch or a subsidiary. The choice has significant tax implications.
Foreign Branch
An extension of the parent company. Its profits and losses are reported immediately on the U.S. parent's tax return. Losses can offset U.S. income.
Foreign Subsidiary
A separate legal entity. Its profits are generally not taxed by the U.S. until they are paid as a dividend to the U.S. parent (deferral). This is subject to anti-deferral rules.
Sourcing of Income
The U.S. tax system needs to determine the geographic source of income (U.S. vs. foreign). This is critical for calculating the Foreign Tax Credit and taxing foreign persons.
Interest: Sourced to the residence of the debtor.
Dividends: Sourced to the residence of the paying corporation.
Rents/Royalties: Sourced to where the property is located or used.
Services: Sourced to where the services are performed.
U.S. Companies Abroad (Outbound)
This section covers the key tax provisions, benefits, and anti-avoidance rules for U.S. entities with foreign operations. These rules govern how foreign profits are taxed by the United States.
Foreign Tax Credit (FTC) Limitation
To prevent double taxation, the U.S. allows a credit for foreign taxes paid. However, the credit is limited to the amount of U.S. tax on foreign-source income. Use this calculator to see how the limitation is computed.
Participation Exemption (100% DRD)
To move towards a territorial system, the U.S. allows certain corporations to exempt dividends received from foreign subsidiaries. This is a major benefit for multinational corporations repatriating foreign earnings.
- Benefit: 100% deduction for the foreign-source portion of dividends.
- Requirement: The U.S. corporate shareholder must own 10% or more of the foreign corporation.
- Consequence: No foreign tax credits can be claimed on dividends that receive this deduction.
Global Intangible Low-Taxed Income (GILTI)
GILTI is a complex anti-avoidance rule that subjects U.S. shareholders to immediate tax on a portion of the income of their Controlled Foreign Corporations (CFCs), intended to discourage shifting profits to low-tax jurisdictions. A 50% deduction mitigates the impact. Calculate a simplified GILTI inclusion below.
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Subpart F Income
The original anti-deferral regime. It targets passive income (like interest, dividends) and certain related-party sales income, subjecting it to immediate U.S. tax to prevent shifting mobile income offshore.
Base Erosion & Anti-Abuse Tax (BEAT)
A minimum tax on large corporations that make significant deductible payments (like interest or royalties) to related foreign affiliates, preventing the "erosion" of the U.S. tax base.
FDII & IC-DISC
Tax incentives that provide deductions (FDII) or tax-advantaged structures (IC-DISC) to encourage the export of U.S. goods and services.
Foreign Companies in the U.S. (Inbound)
This section explains how the United States taxes foreign persons and corporations on their U.S.-source income. The rules differ based on whether the income is from an active business or passive investments.
Taxation of Business Income
If a foreign person is engaged in a trade or business in the U.S., their income that is "effectively connected" to that business is taxed.
- Taxed on a Net Basis: Gross income minus allowable deductions and expenses.
- Taxed at U.S. Graduated Rates: The same tax rates that apply to U.S. businesses.
- Filing Requirement: Foreign corporations must file Form 1120-F.
Taxation of Non-Business Income
Passive, investment-type income (known as FDAP income) earned by foreign persons from U.S. sources is taxed differently.
- Taxed on a Gross Basis: No deductions are allowed.
- Withholding Tax: Tax is collected via a 30% statutory withholding rate. The U.S. payer is responsible for withholding the tax.
- Tax Treaty Benefits: Income tax treaties between the U.S. and other countries often reduce this 30% rate significantly.
Tax Rules for Individuals
For individuals, international tax status often depends on residency. This section covers the tests for becoming a U.S. resident for tax purposes and the consequences of expatriation.
U.S. Residency: Substantial Presence Test
A foreign individual can be treated as a U.S. resident for tax purposes if they spend enough time in the country. This test is met if you are present in the U.S. for at least 31 days in the current year AND 183 days over a 3-year weighted period. Calculate your status below.
Expatriation: The "Exit Tax"
When certain high-net-worth or high-income individuals renounce their U.S. citizenship, they may be subject to an "exit tax."
- Mark-to-Market Regime: The individual is treated as having sold all their worldwide property at fair market value on the day before expatriation.
- Gain Recognition: Any gain from this "deemed sale" is taxed in that year, typically as a capital gain.
- Exclusion: A significant exclusion amount ($821,000 for 2023) is available to reduce the taxable gain.
- Covered Expatriate: The tax applies to "covered expatriates" who meet certain tax liability or net worth thresholds.