JacobsReport
on International Financial Planning

The JacobsReport is a free email newsletter that will discuss investment, business, tax and financial planning in an international context. Reports will be issued as the author's work schedule permits, but will usually be issued on a weekly schedule.

Timing of U.S. Tax on Income Earned Overseas

QUESTION: It was brought to my attention by another CPA that income earned overseas is only taxed when brought back to the US. Is this correct?  I have never heard that before, could this be a misinterpretation of the current tax law? 

REPLY:  Numerous commentators make a similar statement when discussing the tax treatment of foreign subsidiaries of U.S. based multi-national corporations. In that context, the statement is usually true -- but not always.

His statement could be true (depending on the facts) in the case of a foreign corporation that is engaged in a business outside the U.S. The statement is not true with respect to income earned by a transparent entity such as a foreign trust, a foreign partnership, a branch operation or a foreign proprietorship. It is also not true with respect to the investment income of a controlled foreign corporation or a passive foreign investment company.

Many decades ago, it was legally possible to defer the U.S. tax on all forms of income earned by a foreign corporation or a foreign trust. The foreign corporation rules were changed in 1962 and the foreign trust rules were changed in 1976.