Explain How International Transaction Affect Taxation

Question 1: Explain how international transactions affect taxation.
How business and investment income is taxed in the United States depends on who is earning the income, the nature of the income, and whether the transaction is covered by a bilateral income tax treaty.
The taxation of international transactions in the United States can be broken down into two categories; the taxation of U.S. person and non-U.S. persons. A corporation’s residency can be broken down into two classes – domestic and foreign. U.S. tax law classifies all income into one of two categories as either U.S. or foreign. A foreign company’s U.S. taxable income is broken into two types: investment income and business income that is effectively connected with a trade or business in the United States. But in order to understand U.S. taxation of international transactions we must also look into the contents of its income tax treaties.
First domestic corporations are subject to U.S. taxation on their worldwide income. A domestic corporation is any corporation that is created or organized under federal or state laws in the United States. This income is from all sources regardless of whether earned from activities in the United States or abroad. Domestic corporations are subject to taxation on a net basis and to a comprehensive anti-deferral regime that is designed to prevent taxpayers from sheltering income in offshore entities. While foreign corporations are subject to U.S. taxation on investment income from the U.S. sources and is taxed on a gross basis at a flat rate of tax and is subject to source withholding. Income that is effectively connected to a U.S. trade or business such as; gains from the sale of assets that give rise to investment income are subject to U.S. tax to the extent that they are derived from U.S. sources.
U.S. tax law determines residency of a corporation