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Lecture 13

ACCT40610 Lecture Notes - Lecture 13: Tax Treaty, Double Taxation, Passive Income

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O' Brien

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Chapter 13
Increasingly, firms and their tax advisors are formulating strategies to reduce
state and local taxes, such as real and personal property taxes,
unemployment taxes, and sales & use taxes.
For a state tax to be constitutional, it must not discriminate against interstate
o E.g., an income tax of 3% for resident
corporations and 5% for non resident
corporations would be unconstitutional.
State taxes can only be levied on businesses having nexus - degree of contact
between business and the state. Nexus can be established via:
o Legal domicile: nexus in the state where incorporated.
o Physical presence: employees or real or personal property; however,
sales reps alone do not create nexus.
o Regular commercial activity is argued by some states to create an
economic nexus; the law is still unclear.
Other issues: catalog sales, internet sales.
States may tax only the income attributable to a firm’s in-state business
activity; how is State X’s share of Corporation C’s taxable income
Under UDITPA (Uniform Division of Income for Tax Purposes Act) model,
apportion based on factor weights:
o Sales.
o Payroll.
o Property (cost).
Over 1/2 of the states double-weight sales; this favors in-state businesses.
Other states only consider sales factor.
Tax treaties govern the jurisdiction to tax as well as exceptions related to tax
Business activities are taxed only by the country of residence (incorporation)
unless the firm maintains a permanent establishment in another country.
o E.g., a fixed location, such as an office or factory, with regular
commercial operations (but not merely exporting).
If there is no tax treaty, uncertainty may exist as to what level of activity
triggers jurisdiction.
Double taxation may result from two jurisdictions claiming the right to tax
the same income.
The U.S. taxes the worldwide income of its citizens, permanent residents, and
domestic corporations.
If the U.S. corporation has a branch that is doing business as a permanent
establishment, both the foreign country and the U.S. will tax the branch
What relief exists for double taxation?
o Deduction for foreign taxes, or
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