Ch 9 Taxation of International Trans

BEAT

- 10% min tax that is meant to prevent foreign and domestic corp operating in the US from avoiding US domestic liability via income shifting - limited to large firms (>500M in sales) - must pay BEAT to the extent it exceeds ordinary corp income tax liability

Issues with World Wide Taxation

- Discouraged companies from repatriating foreign profits - encouraged companies to move their legal HQ out of the US through want are called "inversions" - most other developed countries have "territorial" - giving them a competitive advantage

Foreign Tax Credit

- FTC - provisions are designed to reduce the possibility of double taxation - allows a credit for foreign income taxes paid - credit is a dollar for dollar reduction of US income tax liability --- FTC is subject to an overall limitation --- may result in some form of double taxation on income where the US tax rates are lower than those of the countries in which the income is earned

Tax Havens

- a country where either --- locally sourced income or residents are subject to zero or low levels of local income taxation --- the country of operations has high levels of data and info secrecy laws that restrict the flow of fin and commercial info away from the country - usually has adopted rules that allow taxpayers to establish residency with minimal presence

When a corp invests in a foreign country, the issue of which country should tax the corp's earnings arises...

- absent an agreement b/t two countries it is difficult to govern entities/individuals that earn income in country A, but are a citizen of country B - the US tax rules on cross-border trans are based on the IRC and tax treaties b/t the US and other countries - most US income tax treaties reduce the withholding tax rate on certain items of investment income (interest & dividends)

tax treaty (definition)

- bilateral agreement made by two countries to resolve issues involving double taxation of income - generally gives on country primary taxing rights and requires the other country to allow a credit for the taxes paid on the twice-taxed income - can help provide guidance on the treatment of income when the IRC or the foreign tax statutes disagree

Allocation and Apportionment of Deductions

- deductions and losses must be allocated and apportioned between US and foreign source income --- deductions directly related to an activity or prop are allocated to the activity or prop. Then, deductions are apportioned between US and foreign source --- a deduction NOT directly related to any class of gross income is ratably allocated to all classes of gross income. Then, apportioned between US and foreign source income

GILTI and FDII

- designed as a world wide tax on deemed intangible income - firms face roughly the same tax rate on intangibles used in serving foreign markets regardless of where those intangibles are located - encourage firms to place profits and intellectual property in the US

Dividend income

- dividends received from domestic corp are sourced inside the US - generally, dividends paid by a foreign corp are foreign-source income - Exceptions: --- if 25% or more of foreign corp's gross income is effectively connected with a US trade or business for the 3 years immediately proceeding dividend payment, that percentage of the dividend is treated as US source income

Participation Exemption

- exempts foreign profits paid back to the US from domestic taxation (move closer to a territorial tax system) - firm can only receive the participation exemption on their foreign profits if they meet the following three requirements --- must own 10% of the vote or value of the controlled foreign corp's stock --- must own the company for 366 or more days --- the US corp cannot deduct a dividend if that dividend received a tax benefit in a foreign country

Tax Treaties

- for foreign taxpayers, the US generally taxes only income earned within its borders - the US taxation of cross-border transactions can be organized in terms of outbound taxation and inbound taxation

Sourcing of Income and Deductions

- foreign taxpayers generally are taxed only on income sourced inside the US *AND* - US taxpayers receive relief from double taxation under the FTC rules based on their foreign-source income

Interest income

- from US gov, DC, US corp, and non-corp US residents is treated as US source income -Exceptions --- certain interest received from a US corp that earned 80% or more of its active business income from foreign sources over the prior 3 year period is treated as foreign -source income --- interest received on amounts 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

Sale or Exchange of Property

- generally, the location of real prop determines the source of any income derived from the prop - income from sale of personal prop depends on several factors, including: --- whether the prop was produced by the seller --- the type of prop sold (inventory, cap asset) --- the residence of the seller

Before the passage of TCJA, the US....

- had a "worldwide" corp tax system, which taxed global earnings of US based companies with a credit for taxes paid to foreign govs - deferred the US tax payment until the earnings were repatriated (if a firm "permanently reinvested" those earnings, then taxation was deferred indefinitely).

TRJA 2017 One Time Trans Tax

- included in the 2017 Subpart F income of C Corps with Unrepatriated E&P was the US parent's share of the untaxed, unrepatriated post 1986 E&P of its 10% owned foreign subsidiaries, measured typically as of the end of 2017 - this E&P was subjected to a tax rate of 15.5% (8% of the E&P was distributed in a form other than cash) --- the tax was payable immediately or by election the payment could be spread over 8 years --- no foreign tax credit was allowed against the one-time tax liability

Rent & Royalties Income

- income received for tangible prop(rents) is sourced in country in which rental prop is located - income received for intangible prop is sourced in the country in which the prop is used -------ex. patents, copyrights, secret processes, and formulas

BIG Changes thru TCJA 2017...

- participation exemption - global intangible low tax income (GILTI) - foreign - derived intangible income (FDII) - base erosion & anti-abuse tax (BEAT)

Personal Service Income

- sourced where the services are performed - limited commercial traveler exception to avoid being classified as US source income applies to non-resident aliens in the US 90 days or less during the tax year if: --- US compensation does not exceed $3,000 --- the service are performed on behalf of -------- a non-US enterprise not engaged in a US trade or business *OR* -------- an office or place of business maintained in a country outside the US by an individual who is a citizen or resident of the US, a domestic partnership, or a domestic corp

Worldwide Tax System

- taxes all domestic-source income, as well as the foreign-source income of resident corps - allow their resident corps to claim tax credits to offset their foreign income taxes to prevent double-taxation

Territorial Tax System

- taxes only the portion of a corp's income originating within the country's borders - prevents double taxation of cross-border flows because resident corp's foreign-source income is exempt from tax

Calculating FTC

- use the lesser of the formula and foreign taxes paid - Formula is (foreign-source taxable income) / (total worldwide taxable income) * US tax before FTC - the limitations can result in unused (noncredited) foreign taxes for the tax year --- carry back 1 year --- carry forward 10 years

Transfer Pricing/Income Shifting

- when two companies that are part of the same multi-nation group trade with each other, they establish a price for the transaction - price should be the same as a conventional market price for that same trade should the parties be unrelated - However, that price can often be manipulated in a multinational setting

Double Irish with a Dutch Sandwich

-Assign intellectual property rights to overseas subsidiaries (i.e., move the iPhone patent to Ireland - First Irish Subsidiary) ---Irish subsidiary receives the royalties from sales sold to U.S. customers ---U.S. profits are lowered ---Ireland has a loophole that allows the company to transfer its profits to an "offshore company" -Second Irish subsidiary is used for sales to European customers ---Uses a Dutch subsidiary to collect European sales ---All sales are sent back to the first Irish subsidiary First Irish subsidiary has all of the money and can send it to a Tax Haven (0% tax rate)

FDII

Foreign Derived Intangible Income - increase the incentive to companies to bring and keep intellectual prop and the associated profits in the US - foreign derived profits in excess of the "normal" return to qualified investments is = to US income (net tested income) related to the export of goods or services minus 10% of QBAI - companies are allowed to deduct 37.5% of their FDII against their taxable income - effective rate on each dollar of FDII is 13.125%d

QBAI

qualified business asset investment

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