Taxation in the US is not uniform because of the diverse classification of incomes earned by individuals. This study identifies various forms of incomes and the logic behind the taxation in the US. It is evident that some exceptions exist during tax treatments on aspects like trade and receivable services. The study goes further to identify the existence of rules to curb possible abuses of the tax treaty.
U.S. TAX in the TREATMENT
US Tax Treatment
Items of income considered earned from within the U.S.
Earned income can be defined as the payment for the performed personal services, for example wages, professional fees or salaries. The list below provides the categories of the types of income tax. It is essential to appreciate the fact that deductions made on the income are determined by the category in which the income falls. The column with heading variable income consists of income in the category of either unearned or earned income or even both (Fraser, 2009).
Types of income
Variable income: they include rents, royalties, and business profits
Unearned income: such incomes include annuities, pensions, social security benefits, Alimony, gambling winnings, capital gains, and interest dividends.
Earned income: tips, professional fees, bonuses, commissions, wages and salaries
Besides the types mentioned which always occur in the form of cash, other taxable sources of income exist although not in cash form. This is exemplified by reimbursements made by an employer to the worker like expenditures on lodgings and meals (Dilworth, 2009).
The tax treatment of income from trade or service receivable between related parties
This part is applicable for purposes of realizing the income treatment resulting from an individual from service or trade gained from another. The exception to this is the case is when gains whether indirectly or directly service a trade from another person relating to any income inclusive of service fee, discount and stated interest resulting from the service and trade receivable (Fraser, 2009). Such will be perceived as interest may have been taken as a deficit to the obligor under receivable. The featuring of income in the form of interest pursuant in this phase shall only be implemented for reasons of section 551 to 558 and section 904 of the code and regulations thereunder. Sections 861 via 863 principles and regulations therefore will be put in place to realize the origin of such interest income for reasons of section 904 (Hammer, Shartsis & American Bar Association, 2005).
Considering the income featured as interest in this section, the essential regulations for this section 864 and section 864 override all the conflicting necessities of the code and regulations that is related to foreign PHC, foreign tax credit limitation, and controlled foreign companies. For instance, section 864 states the interest originating from a factored service or trade receivable but does not meet the qualifications of subpart F de minis rule under the section 864 (b) (3). Similar with the section 954 (c) (3) (A) (I) of the country exception or the essential regulations for financing interest exports under section 9049 (d) (2) exist with 954 (c) (2) (B). Even if this section is missing, the treatment of this interest will be under the administration of this section (Kennedy, & Society for Mining, Metallurgy, and Exploration (U.S.) 2008).
Income subject to withholding of tax at source
Washington-United States source income as payment to the foreign individuals amounted to a total of $140 billion every year. Many of the types of the source income of the United States given to foreign persons as payment is subject to withholding tax (30%) although an exemption or reduced rate may be put in place in case it applies as per the tax treaty (Bater, 2007). For reasons of reminding of their obligations, which are withheld, this sheet of fact, the second in the list of relating to the tax gap globally gives an explanation of the regulations for correct information reporting and withholding of United States source income as payment to foreign individuals. Overall, an individual who pays source income of the United States to a foreign individual must keep back the correct amount of tax, account payment 1042-s form and file 1042 form before 15 March of the year after the payments (Dilworth, 2009).
Withholding Agent: Withholding agent is the individual who is the subject making the payment. One is a withholding agent if they are a United States or foreigner in the power of anything about the income of a foreigner who is under the withholding (Kennedy, & Society for Mining, Metallurgy, and Exploration, (2008)..
Rules to prevent the abuse of the benefits provided under a tax treaty
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