¹ In this article, “U.S. business” refers to any U.S. person with business operations. Under Sec. 7701(a), a “person” includes an individual, partnership or corporation. A “U.S.” person includes a U.S. citizen or resident, a domestic partnership, a domestic corporation and other entities. A domestic corporation or partnership is one created or organized in the U.S. or under the law of the U.S. or of any state. Other corporations and partnerships are foreign corporations or partnerships.

² Both U.S. and foreign tax law are discussed in this article

³ The AICPA Tax Division publishes a set of checklists entitled “Practice Guide to International Tax Planning” each year for its members, which can be helpful for international tax planning or compliance, available at http://tax.aicpa.org/Resources/Tax+Practice+Guides+and+Checklists/.

⁴ Larger companies are subject to a 35% marginal income tax rate under Sec. 11(b). The small company in this example is subject to a 34% marginal rate, which is used throughout this article.

⁵ State income tax issues are not covered in this article.

⁶ United States Model Income Tax Convention of November 15, 2006, Article 7, Business Profits.

⁷ The U.S. has comprehensive treaties with more than 50 countries. If there is no treaty, maintenance of inventory would likely cause a taxable presence and the company might incur local income tax and be required to file an income tax return. The company may also be liable for collection and remittance of value-added tax (VAT), if applicable. Other taxes could also apply (property tax, etc.).

⁸ Regs. Sec. 301.7701-2(a) provides that “A business entity with only one owner is classified as a corporation or is disregarded; if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner.” (Emphasis added.) This defines a branch as not being a separate entity but, rather, an extension of its owner. The term is often used in a manner that suggests a broader definition.

⁹ A “checkable” foreign entity is a foreign entity for which the U.S. owner makes an election as to entity status under the Sec. 7701 regulations.

¹⁰ See Regs. Sec. 301.7701-2.

¹¹ The term “per se corporation” refers to entities listed in Regs. Sec. 301.7701-2 that are treated as corporations under the income tax law and are not allowed to elect another status under the CTB provisions.

¹² The FTC is computed based on the separation of income into baskets, a process not covered in this article. Starting in 2007, Section 404 of the American Jobs Creation Act of 2004 provides only two baskets: passive category income and general category income.

¹³ When production or sales occur in more than one country, additional allocations are required, under Regs. Sec. 1.863-3(c).

¹⁴ In Liggett Group, Inc., TC Memo 1990-18, Paddington, a Delaware corporation, was the exclusive distributor in the U.S. of J&B Rare Scotch Whiskey, imported from Scotland. Paddington received purchase orders from its customers in the U.S. and forwarded them to J&B, which shipped the merchandise to Paddington’s customers, F.O.B. U.K. Paddington’s customers were responsible for shipping costs. The Tax Court held that these sales were foreign-source sales that increased foreign-source income in the numerator of the limiting fraction, thus increasing the limit on Paddington’s FTCs.

¹⁵ A partnership must have two or more partners, under Regs. Sec. 1.708-1(b). It is a flexible entity, in that it may have partners that are individuals, trusts, estates, corporations, associations or other partnerships.

¹⁶ This also applies to a foreign branch.

¹⁷ Such foreign businesses are often in the form of joint ventures. The foreign country may require a certain level of participation by the foreign partner, etc.

¹⁸ Regs. Sec. 1.704-1 provides some flexibility in sharing of profits and losses from a partnership.

¹⁹ See Atlantic Veneer Corp., 812 F2d 158 (4th Cir. 1987).

²⁰ This rate is scheduled to expire after 2010; see Section 301 of the American Jobs and Growth Relief Reconciliation Act of 2003, as amended by Section 102 of the Tax Increase Prevention and Reconciliation Act of 2005.

²¹ The U.S. works in partnership with other countries through the Organisation for Economic Co-operation and Development to develop uniform transfer-pricing practices to minimize double taxation.