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Virtual Taxation: Source-Based Taxation In The Age Of Derivatives, Reuven S. Avi-Yonah

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What are the implications of the explosive growth in the market for derivative financial instruments for international taxation? As Rosenbloom (1996) has pointed out, derivatives do not pose a particular international tax problem as long as one focuses on residence-based taxation. In that context, the issues raised by derivatives are the same as in a purely domestic context, which have been discussed extensively elsewhere (e.g., Warren, 1993). However, when the focus is on source-based taxation, and in particular source-based taxation of passive income (i.e., withholding taxes), the rise of derivatives has far-reaching implications. In 1994, then U.S. International Tax Counsel …