The U.S. International Tax Treatment of Partnerships: A Policy-Based Approach

As the use of partnerships as vehicles for international investment has increased, corresponding attention has been given to the U.S. tax issues associated with international partnerships.' The resolution of these tax issues, however, can be elusive. Tax treatment is often uncertain because entities that the U.S. treats as partnerships are chameleon-like. Although the distinguishing feature of a partnership (as opposed to a corporation) under U.S. tax law is that its profits and losses are recognized by its individual partners, in the analysis of subtler issues it is often unclear whether a partnership should be viewed as a mere aggregate of its partners or as a separate, stand-alone entity. Uncertain tax treatment also arises in the international context with respect to hybrid entities-the situation where one nation characterizes an entity as a partnership while another nation characterizes it as a corporation.' These issues have become more prominent since the IRS issued regulations that permit taxpayers to elect whether most domestic unincorporated business associations and many foreign business associations should be treated for federal tax purposes as corporations or partnerships (or in some cases as branches). 3