Update: For related blog post see inbound-outbound graphic.
Cross-border taxation can be subdivided into various categories based on the type of transaction being analyzed. At the highest level, the categories include “inbound” and “outbound.” These categories are useful because significantly different U.S. tax rules can apply to the different types of transactions.
When viewed from the United States, “inbound” refers to non-U.S. persons (“persons” meaning both individuals as well as entities) with U.S. income and/or U.S. activities. A typical inbound circumstance exists where a foreign corporation has income and/or activities in the U.S. For instance, Toyota is a Japanese headquartered company. However, Toyota sells its products in the United States. Thus, Toyota is selling “into” the U.S., and Toyota would generally be considered in the inbound category.
In order for a transaction to be considered inbound, however, it is not necessary for product to be imported into the U.S. Continuing the example above, Toyota may decide it is better to manufacture product in the U.S. Consequently, Toyota may form a U.S. subsidiary and have the subsidiary manufacture and sell the product in the U.S. In this circumstance, there has been no product imported into the U.S. However, it is still an inbound transaction because the parent company is from outside the United States and its subsidiary has activities in the United States.
Typical cross-border tax issues related to inbound transactions can include: U.S. withholding taxes, transfer pricing, branch profits taxes, branch interest taxes, earnings stripping, income tax treaties, etc.
“Outbound” refers to U.S. persons with NON-U.S. income and/or NON-U.S. activities. A typical outbound circumstance exists where a U.S. headquartered corporation has income and/or activities in other countries. For instance, Wal-Mart is an American publicly traded company. However, Wal-Mart purchases many of its products from suppliers located outside the United States. Further, Wal-Mart sells many of its products outside the United States (either through foreign subsidiaries or otherwise). Thus, Wal-Mart is a U.S. headquartered company with activities “outside” the U.S., and Wal-Mart would generally be considered in the outbound category.
Typical cross-border tax issues related to outbound transactions can include: foreign withholding taxes, transfer pricing, foreign tax credits and foreign tax credit limitations, subpart F income, Code § 956 inclusions (a.k.a. investments in U.S. property), income tax treaties, etc.
Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.