Title: SDI Netherlands, B.V. v. Commissioner: an alternative solution for taxing royalties paid to foreign intermediaries

Authors: Todd W. Hood

Addresses: Barkley School of Law, 2000 McCracken Blvd., Paducah, Kentucky 42001, USA

Abstract: The IRS and the Tax Court have adopted diametrically opposing positions regarding the source of income from royalties which arise from the use of patents within the US and which are paid from one foreign corporation to another foreign corporation. The purpose of this article is to argue that neither the Tax Court|s approach nor the IRS|s approach is satisfactory and to propose an alternative approach. However, before proceeding, this article examines the basic statutory scheme for imposing a withholding tax on royalties sourced within the US. Secondly, this article reviews the case law interpreting the statutory scheme prior to the Tax Court|s holding in SDI Netherlands, 107 T.C. 161 (1996). Thirdly, this article considers the facts of SDI Netherlands in the context of the prior case law. Fourthly, this article reviews the reasoning of the IRS|s and the Tax Court|s approaches and delineates the weaknesses of each approach. Lastly, this article proposes an alternative solution based on a system of limited credits.

Keywords: royalties taxation; foreign intermediaries; IRS; withholding tax; patents; case law; limited credits; USA; United States; Tax Court; Internal Revenue Service.

DOI: 10.1504/IJPL.2008.021236

International Journal of Private Law, 2008 Vol.1 No.3/4, pp.368 - 381

Published online: 12 Nov 2008 *

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