Chapter 25: Taxation of international transactions

NRAs must pay tax equal to at least the lesser of

26% (or 28%) of AMTI, or Regular US rates on net real property gain for the year

To apply, foreign corp must have been a CFC for an uninterrupted period of ____during tax year

30 days or more

If transportation begins or ends in the US and the US is not merely an intermediate stop, __ % of such income is US source income

50

A domestic corp or partnership continues to be treated as domestic if:

A foreign corp acquires substantially all of its properties after March 4, 2003 The former owners of the US corp hold >=80% of foreign corps stock after transaction The foreign corp does not have substantial business activities in its country of incorporation

commercial traveler

A limited ___ exception applies to non-resident aliens in the US 90 days or less during the tax year. If US compensation does not exceed $3,000 and the services are performed for a non- US enterprise not engaged in a US trade or business, the income is not US sourced

FTC cannot exceed the lesser of:

Actual foreign taxes paid or accrued, or US taxes (before FTC) on foreign-source taxable income

either FMV or tax book value of assets

Allocation and apportionment of interest expense is based on

Green card test

An individual is considered a resident of the US on the first day of the tax year in which he or she is physically present in the US after the card is issued Residency status remains in effect until the card is revoked or the individual had abandoned permanent resident status

Exceptions to interest income being treated as source income inside the US

Certain interest received from a US corp that earned >= 80% of its active bus income from foreign sources over the prior 3 yr period is treated as foreign-source income Interest received on amts deposited with a foreign branch of a US corp is treated as foreign-source income if the branch is engaged in the commercial banking business

Major tax issues related to foreign currency exchange include:

Character of gain/loss (capital or ordinary) Date of recognition of gain/loss source of foreign currency gain/loss

Exceptions apply to the substantial presence test for

Commuters from Mexico and Canada who work in the US Foreign gov't-related individuals (ex diplomats) Qualified teachers Trainees and students Certain professional athletes

"gross up" (add to income)

Corporations choosing the FTC for deemed-paid foreign taxes must __ dividend income by the amount of deemed-paid taxes

foreign-source income

Gain attributable to an office or fixed place of business maintained outside the US by a US resident is ___

Income from the sale of personal property other than inventory is sourced at the residence of the seller unless:

Gain on the sale of depreciable personal property Gain on the sale of intangibles

the residence of the seller

Generally, income, gain, or profit from the sale of personal property is sourced according to ____

location of real property

Generally, the ____ determines the source of any income derived from the property

Residency test for non citizens

Green Card test Substantial Presence test

where the sale takes place

Income from the sale of p however, is sourced based on ____

When the seller has produced the inventory property:

Income must be apportioned between the country of production and the country of sale 50/50 allocation is used unless taxpayer elects to use the independent factory price or the separate books and records method

US-source income

Income or gain attributable to an office or fixed place of business maintained in the US by a nonresident is ____

Subpart F Income includes the following

Insurance income (section 953) Foreign base company income (954) International boycott factor income (999) Illegal bribes Income derived from section 901(j) foreign country

taxing rights

International tax treaties generally provide ___ for the taxable income of residents of one treaty country who have income sourced (earned in) in the other treaty country

Section 332

Liquidating a US subsidiary into an existing non-US subsidiary

withholding

Most US income tax treaties reduce _____ on certain items of investment income

FMV

Once ___ is used for interest expenses, the taxpayer must continue to use the method

Certain types of income generated by a controlled foreign corporation are currently included in income by US shareholders, regardless of distributions, including:

Pro rata share of Subpart F income Increase in earnings that the CFC has invested in US property

Outbound capital changes

Similar to exchanges of assets for corporate stock of a domestic corporation, realized gain/loss may be deferred on certain ____, moving corporate business outside the US

allow a credit for thee taxes paid on the twice-taxed income

Tax treaties generally give one country primary taxing rights and require the other country to ___

US dollar

Taxpayers default functional currency is the

minimize taxation

Taxpayers may be tempted to manipulate the source income of allocation and apportionment of deductions to

Foreign Tax credit

The U.S. allows a ___ to be claimed against the U.S. tax to reduce double-taxation (US and foreign) of the same income

"worldwide" income

The U.S. taxes U.S. taxpayers on ____ income

Model Income Tax Treaty

The US has developed a ____ as the starting point for negotiating income tax treaties with other countries

Outbound taxation and inbound taxation

The US taxation of cross-border transactions can be organized in terms of :

Tax consequences of transferring assets to a foreign corporation depends on

The nature of the exchange The assets involved Income potential of the property Character of the property in the hands of the transferor or transferee

Substantial presence test

This mathematical test applies to people in the US without a green card An individual in the US 182=3 days during the year is a resident for the year for tax purposes

"tainted" assets

Transfer of ___ triggers immediate recognition of gain but not loss

How to calculate US taxes (before FTC) on foreign-source taxable income

US tax before FTC x (Foreign-source taxable income/ worldwide taxable income)

Generally, nonresident alien individuals (NRAs) and foreign corps are subject to US taxation on

US-source income and Foreign-source income when that income is effectively connected with the conduct of a US trade or business

US shareholder

a US person who owns (directly or indirectly) 10% or more of voting stock of the foreign corp

permanent establishment

a branch, office, factory, workshop, warehouse, or other fixed place of business

Qualified business unit (QBU)

a separate and clearly identified unit of a taxpayers trade or business uses a foreign currency as its functional currency

An exception to the foreign tax credit requires translation at the rate when the taxes were ___

actually paid

Interest expense

allocated and apportioned to all activities and property regardless of the specific purpose for incurring the debt

Controlled foreign corporations

any foreign corp in which > 50% of total voting power or value is owned by US shareholders on any day of tax year

Indirect credit

available to US corporations for dividends received (actual or constructive) from foreign corporations foreign corp pays tax in foreign jurisdiction When foreign corp remits dividends to the US corp, the income is subject to tax in the US

Direct foreign tax credit

available to taxpayers who pay or incur a foreign income tax. Only the person who bears the legal burden of the foreign tax is eligible for the credit

For purposes of the foreign tax credit, foreign taxes accrued are translated at the ____

average exchange rate for the tax year

No gain or loss is recognized on foreign currency transactions until the transaction is ____

closed/complete

When foreign branch operations use a foreign currency as functional currency

compute profit/loss in foreign currency translate into US dollar using average exchange rate for the year

The American Jobs Creation Act of 2004

created strict rules to deter owners from turning domestic entities into foreign entities

statutory and residual groupings (foreign vs domestic)

deductions are apportioned between

classes of income

deductions directly related to an activity or property are allocated to ___

To minimize current tax liability, taxpayers often attempt to ____

defer the recognition of taxable income

Limit

designed to prevent foreign taxes from being credited against US taxes on US-source taxable income

Foreign tax credit provisions

designed to reduce the possibility of double taxation allows a credit for foreign taxes paid may be direct or indirect elect to do it

Citizenship

determined under the immigration and naturalization laws of the US statutes broken down into nationality at birth or through naturalization

Dividend income

dividends from domestic corps are sourced inside the US and dividends paid by a foreign corp are foreign-source income

Indirect FTC is only available if

domestic corp owns 10% or more of voting stock of foreign corp

Gains and losses realized by NRAs ad foreign corps on US real property interests (USRPI) are treated as

effectively connected with the conduct of a US trade or business

Foreign taxes are deemed paid by the US corporate shareholders in the same proportion as dividends bear to _____

foreign corp's post-1986 undistributed E&P

Interest income

from the US gov't, the District of Columbia, from US corporations and from non-corporate US residents is treated as US source income

Treaty provisions

generally override the treatment called for under the Internal Revenue Code or foreign tax statutes

section 482

gives the IRS the power to reallocate income, deductions, credits, or allowances between or among related persons when: necessary to prevent the evasion of taxes to reflect income more clearly

Exceptions to dividend income being foreign-source income

if >= 25% of foreign corps income is effectively connected with a US trade or business for the 3 tax years immediately preceding dividend pmt, that percentage of the dividend is treated as US source income

Distributions from foreign corporations (out of E&P)

included in income at exchange rate in effect on date of distribution. No exchange gain/loss is recognized

Non-resident alien income not "effectively connected" with US trade or business includes

includes dividends, interest, rents, royalties, certain compensation, premiums, annuities, and other fixed,determinable, annual, or periodic income 30% tax generally is withheld by payers of the incom

Nonresident alien (NRA)

individual who is not a citizen or resident of the US

"tainted" assets include:

inventory installment obligations and accounts receivable

IF the transmission is from one point to another in the US via satellite,

it is not considered international communication

For foreign taxpayers, the US generally taxes only income earned within ____

its borders

Foreign currency transactions

may be necessary to translate amounts denominated in foreign currency into US dollars

Deductions and losses

must be allocated and apportioned between US and foreign source income

Direct credit

not available to a US corporation operating in a foreign country through a foreign subsidiary

Gain or loss

on foreign currency transactions is considered separately from the underlying transaction (purchase or sale of goods)

Section 862

provides that if interest, dividends, personal service income, income from the sale or use of property, or other income, is not US source income, then it is foreign-source income

Exchange gains/losses

recognized on remittance from the branch

Inbound taxation

refers to the US taxation of US source income earned by foreign taxpayers

outbound taxation

refers to the US taxation of foreign-source income earned by US taxpayers

One way to defer the recognition of taxable income for controlled foreign corporations is to

shift the income-generating activity to a foreign entity that is not within US tax jurisdiction

Gain on the sale of intangibles

sourced according to prior amortization Contingent pmts are sourced as royalty income

Gain on the sale of depreciable personal property

sourced according to prior depreciation deductions any excess gain is sourced the same as the sale of inventory

Rent and Royalties- income received for tangible property (rents)

sourced in country in which rental property is located

Rent and royalties- Income received for intangible property (patents and copyrights)

sourced where property producing the income is used

Personal service income

sourced where the services are performed

Section 351

starting a new corp outside the US

Functional currency approach under FAS 52 is used for

tax purposes

Which country receives primary taxing rights usually depends on

the residence of the taxpayers or The presence of a permanent establishment

direct bearing on a number of tax provisions

the sourcing of income and deductions inside or outside the US has a _____

International communication income derived by a US person is 50% US source income if

the transmission is between the US and a foreign country

foreign currency

treated as property other than money

Income from sale of personal property depends on several factors including:

whether the property was produced by the seller The type of property sold The residence of the seller

Indirect FTC =

(Actual or constructive dividend/Post-1986 undistributed E&P) x Post-1986 foreign taxes