Refer Code section 904: Limitation on Credit:
Source of income rules play a very vital role when it comes to computation of foreign tax credits limitation of a taxpayer. If foreign taxes paid are in excess of foreign tax credit limitation these are called excess credits.
Refer Code section 861: Income from sources within the United States and code section 862: Income from sources without the United States
Source rules for gross income depend upon categories of income. If a domestic Corporation or a U.S resident pays interest, it is a U.S source income. If interest is paid by a foreign corporation or a nonresident it is considered foreign source.
If dividends are paid by a domestic corporation it will be a U.S source income and if a foreign corporation pays dividends these are considered foreign source.
Personal Services Income is U.S source if the services are performed in the U.S and foreign source if the services are performed outside of U.S.
Rental and Royalty income is U.S source from the property in U.S and foreign source form the property outside of U.S.
Gains from the sale of property in the U.S are U.S source and from the property located outside of U.S are foreign source.
Refer Code section 862 (a) (b)
Gross income from the sale of inventory depends upon where the sale occurs.
Refer Reg 1.861-7(c)
The place of sale is where the title of merchandise passes from seller to buyer.
If title of goods passes in the U.S, income is considered U.S based and if the title of goods passes outside of the U.S income is considered foreign source.
Ref Reg 1.863-3
Methods to determine income attributable to production activity and sales activity—
50/50 method
Under this method a U.S manufacturer will allocate 50% of the gross profit from export sales for which title passes outside of U.S and the other 50% based on the percentage of production assets outside of U.S.
Deductions are apportioned between U.S source and foreign source income. There must exist a factual relationship between the deduction and gross income..
There are different source of income rules that apply to currency exchange gains and losses, insurance underwriting business, international communication income, space and ocean activities income, and transportation income. Also different rules apply to interest expenses and research and experimentation expenditures.
Disclaimer:
This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.
References:
http://www.irs.gov/publications
U.S Taxation of International Transactions by Robert J. Misey, Michael S. Schadewald
Introduction to United states International Taxation by Paul R. McDaniel, Hugh j. Ault and James R. Repetti
International Taxation by Joseph Isenbergh
International Taxation in a nutshell by Richard L. Doernberg.
International Income Taxation, Code and Regulations by Robert J. Peroni – CCH
Mansoor Suhail (Mani)
Accountant
BSBA – EA – ICIA – RA
Tax for Canada and U.S.A
Web: www.theaccountingandtax.com and www.taxservicesguru.com
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