CH 9 US and Foreign Income

OUTBOUND TRANSFERS gain/loss may be deferred on certain outbound capital changes, moving corporate business outside the U.S. such as?

-starting a new corp outside the US - Liquidating a U.S. subsidiary into an existing non-U.S. subsidiary

FOREIGN TAX CREDIT LIMITATIONS unused credit for foreign taxes CB period? CF period? limited to specific?

1 year 10 years baskets

RESIDENCY TESTES FOR NON-CITIZENS SUBSTANTIAL PRESENCE TEST (people with NO green card) EXCEPTIONS apply for:

1. Commuters from Mexico and Canada who work in the U.S. 2. Foreign government-related individuals (e.g., diplomats) 3. Qualified teachers 4. Trainees and students, and 5. Certain professional athletes

SOURCING OF INCOME Interest Income EXCEPTIONS: treated as foreign income

1. Interest received from a U.S. corp. that *earned ≥ 80%* of its active business income from *foreign sources* over the prior 3 year period 2. Interest received on amounts deposited with a foreign branch of a U.S. corp. if the branch is in the *commercial banking business*

ALLOCATION AND APPORTIONMENT OF DEDUCTIONS special rules apply to

1. Research and development expenditures 2. Certain stewardship expenses 3. Legal and accounting fees 4. Income taxes 4. Losses

SOURCING OF INCOME sale or exchange of property Income from sale of PERSONAL property depends on several factors, including

1. Whether the property was produced by the seller 2. The type of property sold (e.g., inventory or a capital asset) 3. The residence of the seller

FOREIGN CURRENCY TRANSACTIONS major tax issues include:

1. character of gain/loss (cap. or ord.) 2. date of recognition of gain/loss 3. source of foreign currency gain/loss

SOURCING OF INCOME sale or exchange of property income, gain, or profit from the sale of PERSONAL property is sourced according to the RESIDENCE OF THE SELLER UNLESS: gain on sale of:

1. depreciable personal property (sourced according to prior deprec. deductions) (excess gain sourced like sale of inventory) 2. intangibles (sourced according to prior amortization) (contingent pmts = royalty income)

Subpart F income goes to: foreign based company income, which is divided into 3 types:

1. foreign personal holding company income 2. foreign base company sales income 3. foreign base company services income

CONTROLLED FOREIGN CORPORATIONS Subpart F income includes:

1. insurance income 2. foreign base company income 3. illegal bribes

CONTROLLED FOREIGN CORPORATIONS certain types of income generated by a CFC are INCLUDED in income by US S/H without regard to actual distributions includes:

1. pro rata share of Subpart F income 2. increase in investment in US property (US real property, debt obligations and stock)

INTERNATIONAL TAX TREATIES Which country receives primary taxing rights usually depends on

1. residence of the taxpayer 2. presence of a permanent establishment (branch, office, warehouse, etc)

EXPATRIATION TO AVOID US TAXATION U.S. tax applies to U.S.-sourced income of persons who relinquished their U.S. citizenship within ______ years of deriving that income Only applies if person gave up citizenship to_____________--

10 years avoid US tax

FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT (FIRPTA) Any purchaser or agent acquiring a USRPI from a foreign person must withhold ______% of AMT REALIZED on disposition (THAT THE FOREIGN SELLER WOULD BE RECEIVING)

10%

INDIRECT FOREIGN TAX CREDIT Credit is available for 2nd and 3rd tier foreign corps if _____% ownership requirement is met Credit is also available for 4th through 6th tier foreign corps if additional requirements are met

10%

CONTROLLED FOREIGN CORPORATIONS US S/H is a US person who owns (directly or indirectly) ______% or more __________________ in the foreign corp

10% voting stock

INDIRECT FOREIGN TAX CREDIT ONLY available if domestic corp owns __________% or more of _________________ of foreign corp

10% voting stock

RESIDENCY TESTES FOR NON-CITIZENS SUBSTANTIAL PRESENCE TEST (people with NO green card) An individual in the U.S. ________ days during the year or in the past _______ years is a US RESIDENT for the year for tax purposes

183 days 3 years

SOURCING OF INCOME dividend income EXCEPTION: If ≥ _______% of foreign corp.'s gross income is effectively connected with a U.S. trade or business for the 3 tax years immediately preceding dividend payment, that __________ of the dividend is treated as __________-source income

25% percentage US

CONTROLLED FOREIGN CORPORATIONS to apply, foreign corp must have been a CFC for an uninterrupted period of ___________ days or more during the tax year

30 days

US TAXATION OF FOREIGN CORPS DIVIDEND EQUIVALENT AMOUNT (DEA) TAX IS _____% LIMITED TO ___________ effectively connected in relation to a US trade or business

30% E&P

US TAXATION OF FOREIGN CORPS Income NOT effectively connected with U.S. trade or business TAXED AT ____% the payor must withhold and _______ the tax

30% remit

EXPATRIATION TO AVOID US TAXATION Tax avoidance purpose is presumed if either: Average annual net income tax for _________ preceding taxable years > $___________ (in 2017) Net worth as of that date is $_______________ or more

5 years 162,000 2 million

CONTROLLED FOREIGN CORPORATIONS CFC is any foreign corp. where > ______% of total __________________ is owned by US S/H on any day of the tax year

50% voting power/value

INDIRECT FOREIGN TAX CREDIT formula

Actual or constructive dividend ---------------------------- Undistributed E & P X Post-1986 foreign taxes

FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT (FIRPTA) US real property interest is any ________- interest in real property in the US AND any interest in a ____________-

DIRECT domestic corp

FOREIGN TAX CREDIT LIMITATIONS Limit is designed to prevent _______ taxes from being credited against ______ taxes on U.S.-source taxable income

FOREIGN US

FOREIGN TAX CREDIT LIMITATIONS FORMULA LESSOR OF:

Foreign-source taxable income ------------------------------- Total taxable income x US TAX foreign taxes actually paid OR FTC

OUTBOUND TRANSFERS Transfer of trade or business property generally qualifies for deferral of gain or loss transfer of "tainted/hot" (ord. income) assets triggers immediate recognition of: U.S. depreciation and other recapture potential must be recognized to the extent of:

GAIN but not loss gain realized

FOREIGN CURRENCY TRANSACTIONS an individual ___________ a QBU but a trade/business conducted by a taxpayer _________ a QBU

IS NOT May be (IS)

INTERNATIONAL TAX TREATIES provisions generally OVERRIDE the treated called for in the

Internal Revenue Code

Treaty shopping

Investing through a corporation created in a treaty country, when the majority of its shareholders are not residents of such treaty country

FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT (FIRPTA) NRAs must pay tax equal to at least the:

LESSOR OF: 1. 26% (or 28%) of AMTI 2. Regular U.S. rates on net real property gain for the year

SOURCING OF INCOME sale or exchange of property Generally, the ________ of ________ property determines the source of any income derived from the property

LOCATION REAL

INTERNATIONAL TAX TREATIES The U.S. has developed a _____________________ as the starting point for negotiating income tax treaties with other countries

Model Income Tax Convention

EXPATRIATION TO AVOID US TAXATION Also applies to ____________ who lost U.S. citizenship within preceding 10 year period if principal purpose was avoidance of U.S. tax

NRAs

ALLOCATION AND APPORTIONMENT OF DEDUCTIONS § 482 gives the IRS the power to ____________ income, deductions, credits or allowances between or among related persons when:

RE-ALLOCATE 1. necessary to prevent the EVASION OF TAXES 2. to reflect income more clearly

SOURCING OF INCOME sale or exchange of property income, gain, or profit from the sale of PERSONAL property is sourced according to the

RESIDENCE OF THE SELLER

SOURCING OF INCOME sale or exchange of property Income or gain attributable to an office or fixed place of business maintained in the U.S. by a nonresident is ____________ source income

U.S.

US TAXATION OF NON-RESIDENT ALIENS Non-resident alien income EFFECTIVELY connected with U.S. trade or business this income is taxed at the same rates as ___________ citizens deductions related to the business CAN/CANNOT be claimed?

US CAN

EXPORTED PROPERTY sell US produced goods and services abroad all income is taxed in the __________ to the _____________ taxpayer UNLESS taxpayer is deemed to have a foreign business presence there

US US

US TAXATION OF FOREIGN CORPS BRANCH PROFITS TAX if a foreign operates through a US subsidiary (a domestic corp) The income of the subsidiary is taxable by the ______ when _______ Also subject to a ______________ tax when repatriated (returned as dividends to the foreign parent)

US earned withholding

INTERNATIONAL TAXATION Inbound taxation the U.S. taxation of __________-source income earned by ______- taxpayers

US foreign

US TAXATION OF FOREIGN CORPS Income EFFECTIVELY connected with U.S. trade or business income is taxed at same rates as _________ deductions CAN/CANNOT offset income

US corps can

INDIRECT FOREIGN TAX CREDIT available to?

US corps for dividends received (actual and constructive) from foreign corps

SOURCING OF INCOME dividend income Dividends received from domestic corps. are ___________ income Generally, dividends paid by a foreign corp. are ___________ income

US source foreign source

SOURCING OF INCOME sale or exchange of property Income from the sale of PURCHASED INVENTORY is sourced based on

WHERE THE SALE TAKES PLACE

NON-RESIDENT ALIEN INDIVIDUALS (NRA) AN INDIVIDUAL WHO IS NOT

a citizen or resident of the US

ALLOCATION AND APPORTIONMENT OF DEDUCTIONS interest expense allocated and apportioned to

all activities and property regardless of the specific purposes for incurring the debt

SOURCING OF INCOME sale or exchange of MANUFACTURED property When the seller has produced the inventory property, Income must be ________

apportioned between the country of production and the country of sale normally 50/50 allocation is used

For purposes of the foreign tax credit, taxes accrued are translated at what exchange rate?

average exchange rate for the tax year

SOURCING OF INCOME personal services income COMMERCIAL TRAVELER EXCEPTION to avoid: applies to: IF:

being classified as US source income NON-resident ALIENS in the US 90 days or less during the tax year US compensation is NOT OVER $3,000

Tax Haven DEF

country where either locally-sourced income, or residents of the country, are subject to no or low host-country taxation

DISTRIBUTIONS FROM FOREIGN CORPORATIONS included in income at what exchange rate in effect on gain/loss in exchange recognized?

date of distribution NO

US TAXATION OF NON-RESIDENT ALIENS income not "effectively connected" with US trade or business includes: ____% tax generally is withheld by payors of the income Eliminates problems of assuring payment by ___________________

dividends, interest, rents, royalties, certain compensation, premiums, annuities, and other fixed, determinable, annual or periodic (FDAP) income 30% non-residents

FOREIGN TAX CREDIT designed to reduce: allows a credit for? (doolar for dollar reduction of US income tax liability) can it be direct or indirect? FTC is elective, meaning you take the SMALLER of:

double taxation foreign income taxes paid can be BOTH direct and indirect foreign taxes paid or FTC

US TAXATION OF FOREIGN CORPS Income NOT effectively connected with U.S. trade or business U.S.-source capital gains: ______________ from Federal income tax

exempt

US TAXATION OF NON-RESIDENT ALIENS Capital gains NOT effectively connected with the conduct of a U.S. trade or business are ________ from tax, as long as the NRA individual was not present in the United States for 183 days or more during the taxable year

exempt

RESIDENCY TESTES FOR NON-CITIZENS GREEN CARD TEST An individual is considered a resident of the U.S. on the ______ day of the tax year in which he or she is physically present in the U.S. ______ the card is issued Residency status remains in effect until the card is _________ or the individual has abandoned permanent resident status

first after revoked

SOURCING OF INCOME sale or exchange of property Gain attributable to an office or fixed place of business maintained outside the U.S. by a U.S. resident is ______ source income

foreign

INTERNATIONAL TAXATION Outbound taxation the U.S. taxation of __________-source income earned by ______- taxpayers

foreign US

CURRENCY EXCHANGE TREATMENT When foreign branch operations use a foreign currency as functional currency you should: Compute profit/loss in __________ currency Translate into _____________ using _____________ rate for the year

foreign US dollars average exchange rate

INDIRECT FOREIGN TAX CREDIT foreign corps pay taxes in ________________ When foreign corp remits dividends to U.S. corp, the income is subject to tax in the ____________________

foreign country US

US PERSONS WITH FOREIGN INCOME If entry into foreign markets is successful, the U.S. business may create a ______________ and move a portion of its operations abroad by establishing a sales or manufacturing facility

foreign subsidiary

FOREIGN CURRENCY TRANSACTIONS --------------- approach under SFAS 52 is used for tax purposes taxpayer's default functional currency?

functional currency US dollar

INDIRECT FOREIGN TAX CREDIT Corporations choosing the FTC for deemed-paid foreign taxes must _________ dividend income by the amount of _______________________ taxes

gross up deemed paid taxes

Tax haven can be created by:

income tax treaty

INTERNATIONAL TAX TREATIES Most U.S. income tax treaties reduce withholding on certain items of _________- income

investment

SOURCING OF INCOME rents and royalties Income received for tangible property (rents) is sourced in country in which rental property is ______________ Income received for intangible property is sourced in the country in which the property is _____________

located used (patents, copyrights, secret formulas, etc)

INTERNATIONAL TAX TREATIES purpose?

minimize double taxation and to figure out what credits people receive

ALLOCATION AND APPORTIONMENT OF DEDUCTIONS A deduction not definitely related to any class of gross income is allocated by: then apportioned between:

ratably allocating to ALL classes of gross income US and foreign source income

FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT (FIRPTA) Gains and losses __________-- by NRAs and foreign corps on U.S. real property interests Treated as _______________ connected with the conduct of a U.S. trade or business

realized effectively

FOREIGN CURRENCY TRANSACTIONS qualified business unit (QBU) is a

separate and clearly identified unit of a taxpayer's trade or business (foreign branch)

INTERNATIONAL TAX TREATIES generally give 1 country primary _________ require the other country to allow a credit for _________ income

taxing rights double taxed

DIRECT FOREIGN TAX CREDIT available to who? NOT available to who?

taxpayers who pay/incur a foreign income tax US corporations operating in foreign countries by a foreign subsidiary

FOREIGN CURRENCY TRANSACTIONS qualified business unit (QBU) operating in a foreign country uses ______________________ as its functional currency

that country's currency

SOURCING OF INCOME Interest Income is US income if it's from

the U.S. government, the District of Columbia, from U.S. corp. and from non-corporate U.S. residents

ALLOCATION AND APPORTIONMENT OF DEDUCTIONS Deductions directly related to an activity or property are allocated to Then, deductions are apportioned between

the activity or property statutory and residual groupings

DISTRIBUTIONS FROM FOREIGN CORPORATIONS Deemed dividend distributions under Subpart F are translated at exchange rate? exchange gain/loss recognized?

the average rate for the tax year YES, when actual distribution is made

SOURCING OF INCOME personal services income sourced where?

the services are PERFORMED

INTERNATIONAL TAXATION For foreign taxpayers, the U.S. generally taxes only income earned __________

within US borders