Question

ForCo, a foreign corporation, receives interest income of $100,000 from USCo, an unrelated domestic corporation. USCo has historically earned 85% of its income from foreign sources. What amount of ForCo’s interest income is U.S. source?

Answer 1

$0

Step-by-step explanation:

USCo earns most of its income from foreign sources, i.e. manufacturing, trading or investment activities carried out in foreign countries, not the US. This income is treated separately than domestically earned income for tax purposes and in the balance of payments also. Many large US corporations like Apple, Google, Microsoft, etc., are in exactly the same position, and many of them used to be based in Ireland for tax purposes.

When a company earns the vast majority of its income from foreign sources, you would expect that any interest payments made to foreign corporations come out of that foreign income. For taxation purposes, corporations tend to separate foreign income and expenses from domestic income and expenses.