This content is from: United States

US Inbound: IRS international practice units

Jim Fuller
David Forst
As a part of the IRS Large Business & International Division's knowledge management efforts, international practice units have been developed through internal collaboration and serve as both aids and training materials on international tax issues. They are not official pronouncements of law, and cannot be used, cited or relied upon as such. The IRS issued two new inbound international practice units in July 2015: non-services FDAP [fixed or determinable, annual or periodical] income; and branch-level interest tax concepts.

The practice unit dealing with branch-level interest tax concepts provides a pretty good analysis of the rules under § 884(f). A branch-level interest tax is composed of two parts: a withholding tax imposed on interest paid by a US branch to a foreign person (referred to as branch interest) and a tax imposed on the excess of the foreign corporation's interest allocable to income connected to effectively connected income over its branch interest (referred to as excess interest). This practice unit would provide a good review for someone interested in understanding § 884(f).

The non-services FDAP income practice unit focuses on royalty income as an example. The IRS examiner is directed to determine whether the foreign corporation licensor (FC) has an office in the US through which it licenses software to other customers. The IRS examiner is directed to determine whether FC has employees in the US who provide aftermarket technical services related to the software. These are important facts in analysing whether the royalty income would be treated as effectively connected with a US trade or business. The IRS examiner is also told to confirm that the software is licensed and not sold (sale of copyrighted articles). The practice unit provides a reasonably thorough approach to auditing these transactions.

The practice units make references to IPNs (international practice networks). These are IRS employee groups that network in designated areas to broaden, enhance, and share their experiences. They are, more or less, groups of experts on designated issues.

The non-services FDAP income practice unit states that the examiner should consult with the Repatriation/Withholding IPN to determine when the taxpayer's activities create effectively connected income. It also states that the examiner, on a different point, should consult with IRS counsel and the Jurisdiction-to-tax IPN for guidance. The branch-level practice unit refers the examiner to the Treaties IPN for assistance in determining general treaty eligibility including the qualifications under a limitation on benefits article.

Jim Fuller ( and David Forst (
Fenwick & West

Tel: +1 650 335 7205; +1 650 335 7274

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