1

Interest is sourced by the residence of the debtor. What happens if NRA meets president of USCo at St. Andrew’s Golf Course for the British Open. “My company needs money.” NRA agrees to loan president of USCo $ 500K at the British Open and gives him a check. The following year at the British Open, president of USCo pays the interest to NRA. D/or acquired the money and the d/or repaid the interest in Scotland, a foreign country. That is still U.S. source interest b/c the residence of the president of USCo is the U.S.

F loan r

US

NRA

USCo

2

U.S. individual loans money to ForCo. ForCo pays interest. The interest is foreign source income

FUS loan r

US

ForCo

3

U.S. individual traditionally banks w/ U.S. Bank. U.S. Bank opens a branch office abroad. U.S. individual deposits money and earns interest from the foreign branch. U.S. individual making the deposit is essentially loaning money to U.S. Bank, a U.S. taxpayer. Is this foreign source income or U.S. source income? It’s foreign source income, a special rule. Banks have great lobbies in Washington. Underlying policy reason: We prefer people to bank w/ the foreign branches of U.S. banks than with foreign banks unaffiliated w/ the U.S. We want to protect our own banks. We want to keep our banks strong.

US

F

US BankUS

For Branch

Deposit R

4

ForCo has a branch in the U.S. The money was not loaned to ForCo but to the U.S. branch, which is not a legal entity. N/ foreign source income. It’s U.S. source income

F

US

F Bank

US Branch

US

Dep

osit

r

5

A big accounting firm in Hong Kong sends an accountant to the U.S. where he earns $ 100,000. for the year. Basic rule: Compensation income is sourced by where the services are performed. Here, HK accountant earns $ 100K of U.S.-source income. Payor of income must withhold. And HK accountant must file a 1040 NR

HKAcc

US

1/1/x1 to 12/31/x1

F

USEarns $100,000

6

There is a de minimis rule. If an individual is in the U.S. for less than 90 days, earns less than $ 3K, and works for a foreign business, that individual has earned foreign source income. Rule allows a person to resource income such that it’s foreign source income. HK accountant comes to the U.S. for two days. He arrives on 2/1, leaves on 2/2, and earns $ 2,500. What’s the source of those services performed in the U.S.? The source of the income is foreign source income b/c the accountant satisfies the de minimis rule. HK accountant was in the U.S. for only two days, he earned less than $ 3K, and he works for an accounting firm in Hong Kong. It’s all foreign source income

HKAcc

US

2/1/x1 to 2/2/x1

F

USEarns $2,500

7

Payments for intangible property are sourced by where the property is used. HPC produces a film in the U.S. using U.S. actors and U.S. money. They license it to a theatre chain in Canada. What’s the source of that income? Where is it being used? In Canada. Therefore, the source of that income is foreign source income. What happens if HPC licenses the film to Canadian Theatre Group and CTG has a theatre in Buffalo, NY, right across the border. In that situation, part of that royalty income is really U.S. source income b/c the film is being shown in the U.S. Once again, HPC will have to apportion it between U.S. source and foreign source income. What does HPC want? Foreign source income. As a practical matter, should HPC ask CTG if they are going to show the film at any theatres in the U.S.? Of course not. If HPC doesn’t know that the film is being shown in the U.S., then what they don’t know can’t hurt them. If HPC licenses its film to a foreign theatre chain, it’s foreign source income. But if HPC knows or should know that the film is being shown in the U.S., then royalty income must be apportioned btwn U.S. and foreign source.

Hollywood Production Company

US

Canadian Theatres

Foreign

U.S.

royaltiesfilm

license

film production

8

HPC licenses its film to a theatre chain in Buffalo. It’s U.S. source income. What happens if the Buffalo theatre company has a theatre in Hamilton, Ontario? Whether Buffalo theatre company has a foreign theatre in its theatre chain is something that HPC would want to know. If HPC knows that the Buffalo theatre company has a theatre in Ontario, then it can re-source U.S. source royalty income as foreign source income. Therefore, HPC should ask Buffalo theatre chain if the film will be shown in Canada

Hollywood Production Company

US

Buffalo Theatres

Foreign

U.S.

royaltiesfilm

license

film production

9

LPC produces a film in the UK. They license it to the Seattle Theatre Chain. STC pays a license fee. Unless a treaty applies, there will be withholding. In this situation, wouldn’t you want to know whether the Seattle Theatre Chain had a theatre across the border in Vancouver? If they did, part of the royalty income would be foreign source income in which the Seattle Theatre Chain would n/ have to withhold

London Production Company

UK

Seattle Theatres

U.S.

Foreign

royaltiesfilm

license

film production

10

Professor lives and works in London. He sells his baseball card collection to Hans. B/c professor’s tax home is England and England’s tax rate is greater than 10%, the gain realized on the sale of his baseball card collection is foreign-source income

RM US

F

U.S. baseball cards

Hans