When might U.S. income tax treaties with other countries apply to an international joint venture?
Income tax treaties typically reduce tax rates from flows of incomes, royalties and dividends. But income from certain forms of business activity do not garner treaty benefits. For example, a U.S. developer may be able to credit income taxes paid to Mexico from the gain of the sale of real property on the U.S. return. But the tax rates are different in the two nations. As a result, the American firm will still have to pay a different tax rate. If the effective tax rate in one country is 35 percent but in the home country the top rate is 28 percent, the business owner may have to pay the difference to his country’s government. Also, each country treats depreciation and realized income differently, which results in a lot of mismatches in the amount of income you report. PATRICK W. MARTIN is a partner in the San Diego law offices of Procopio, Cory, Hargreaves & Savitch LLP. Reach him at (619) 515-3230 or pwm@procopio.com.
