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Please reply to the below discussion in 2 paragraphs. In the first, clearly state with which parts of the other student’s thread you agree or disagree. You must provide an explanation for why you agree or disagree with the other student’s thread. In the second, add some additional comments of your own that add to the discussion.  the reply must be at least 250 words.

 What are the major U.S. tax issues that apply to foreign inbound and outbound transaction?

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The U.S. tax system is complex, and it even gets more complex and arcane when foreign inbound and outbound transactions are involved. Some major U.S. tax issues with regard to inbound and outbound transactions concerns withholding taxes, transfer pricing, branch profits, interest, dividends, income tax treaties, gain and loss from sales of property, sales of manufactured inventory, and so forth (Spilker, et al., 2021). The basic idea lies under the tax issue is to understand which tax authorities have jurisdiction to tax the transaction. To understand that we first need to understand what inbound and outbound transactions are.  

Inbound transactions refer to a non-U.S. citizen or resident engages in business transactions in the United States (the non-U.S. individuals are also referred to entities) (Spilker, et al., 2021). This concept concerns a non-U.S. person with U.S. income/U.S. activities. For instance, Honda’s headquarter is in Japan, it sells automobile to U.S., because Honda is a non-US. entity that has income earned in U.S., thus making Honda to be in inbound category. Honda also has a subsidiary, Acura in the U.S., since Honda, the parent company, is outside of the United States, but has activities in the U.S., therefore, the activities are considered inbound transactions. Nonresident aliens are generally subject to tax on U.S source income, which is not effectively connected with a U.S. trade or business, at a flat 30% tax rate. U.S. tax rates would be applied if their income is effectively connected with a U.S. trade or business (Aquilio, 2005).  The primary issue for the inbound transaction is whether the income is from sources within the United States (Aquilio, 2005).

An outbound transaction is a business activity conducted outside the United States by a U.S. citizen or resident (or an entity) (Spilker, et al., 2021). It can also be defined as a U.S. person with non-U.S. income. An U.S. citizen is employed outside of United States, earning non-U.S. income, would be considered outbound. Another example includes a company in the States having a branch in another country would also be regarded as outbound due to the non-U.S. activities the company conducts.

Such cross-border issues are handled differently by countries depending on what country the person resides or where the transaction is originated from or who is the borrower with regard to bond, dividends, and so forth. Countries apply source-based and residence-based jurisdiction to determine tax nexus. (Spilker, et al., 2021). To further illustrate the two applications on outbound/inbound transaction in country perspective, let’s assume that Jim, a U.S. citizen, who often does home improving work in Montreal, Canada. Since Jim earns some of his income in Canada, Canadian government would withhold Jim’s Canadian income tax based on geographic source of the income, which is source based. While American government would tax Jim’s worldwide income with residential base. Note that American government taxes Jim’s aggregate income. Because Jim is an American citizen, hence, he must pay taxes to American government based on his worldwide income (include income earned from Canada). However, Jim does get foreign income tax deduction. We see the tax issues are both geographic (source) and residential. Countries often work together to make income tax treaties to mitigate tax burden on taxpayers like Jim, in the story, to encourage international trades and business.

U.S. tax laws govern both inbound and outbound transactions to prevent tax avoidance. In summary, one needs to keep in mind that income rising from inbound activities connecting effectively to a trade and business within United States are subject to net taxation at the U.S. tax rate. While FDAP (often referred to passive income, not connected effectively to a trade and a business) is subject to 30% tax rate. In regard to the outbound transactions, U.S. taxpayers are subject to their worldwide income tax to the extent the foreign taxing jurisdiction did not tax the income at a rate equal to or greater than U.S. corporate tax rate 21% (Spilker, et al., 2021). U.S. investors who invest money in foreign countries must be aware of Code of subpart F as it gets too complex.


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