§ 8.5 General Sourcing Rules for Income

• Library: Rights of Foreign Nationals (OSBar) (2020 Ed.)

§ 8.5 GENERAL SOURCING RULES FOR INCOME

The concept of sourcing income is important for determining double-tax relief such as foreign tax credits, treaty exemptions, and foreign earned-income exclusions, since only foreign source incomes are eligible for such relief. General source rules are described below along with notes regarding the typical taxes that are applied:

(1) Wages—sourced to the United States based on U.S. workdays, not by the location of the payroll function. IRC § 861(a)(3).

(2) Interest—sourced based on the payer's residence (e.g., interest earned on a bond from a U.S. corporation is sourced to the United States, and interest on an Australian bank account is sourced to Australia). IRC § 861(a)(1).

(3) Dividends—sourced based on the payer's residence (i.e., where the corporation paying the dividend is incorporated). IRC § 861(a)(2). Qualified dividends paid to a U.S. resident are taxed at a preferential federal rate of 15 percent. See IRC § 1(h)(1)(C), (h)(11). Dividends paid to a nonresident are subject to 30 percent withholding unless a tax treaty provides for a lower rate (typically 15 percent). See IRC § 871(a)(1)(A).

(4) Recoveries and refunds—taxable if a previous U.S. tax benefit was received. For example, if the taxpayer deducts Oregon taxes when paid in 2018 but receives a refund in 2019, the refund is taxable on the 2019 federal return to...