This is my
first ever posting!! I am very excited to share my knowledge with those who
want to learn more about U.S. International Tax.
Before we
explore U.S. taxing system related to cross-border activities, let’s take a
look at two basic regimes of income taxation: territorial and worldwide.
In
territorial taxation the taxing country taxes only income arising within it,
regardless of the residence or nationality. It is also known as “source-based”
taxation system.
In worldwide
taxation the taxing country taxes the entire income from all sources of a class
of persons (individuals and entities) connected to it, generally by nationality
or residence. It is also known as “residence-based” taxation system. US is the
classic example of worldwide tax system.
Wait a
minute!! US has worldwide tax system, which imposes tax on the worldwide income
of US citizens, US residents, and entities. This means non-US resident can earn
free money in the US?!!!!
Nice try.
Unfortunately, that is not the case.
US uses a
“hybrid” taxing system, which applies worldwide tax system to US persons
(individuals and entities) and applies territorial system to non-US persons.
So if you are
a US person, you pay taxes to US government even though you didn’t step a foot
in US land. This might cause double taxation, which means you pay tax twice (US
and foreign country) on the same income. This is not good, right?
To mitigate
this double tax situation, US is nice (??) enough to provide two potential
relief. I say potential because they might not work for everyone. Not nice
enough to save the day I guess.
That is
Foreign earned income exclusion (individual only) and foreign tax credit (both
individual and entities). I will cover this in later posting. Stay tuned!!
Summary of today's posting.
In next
posting, I will talk about two basic patterns under US International tax
framework.
Disclaimer
Discussions
and materials in this posting are for informational and educational purpose only.
These are not professional or legal advice.
