International Taxation

De minimis exception to source rule for compensation for personal services

(non-inflation-adjusted amount) 1. Nonresident alien in US less than 90 days 2. AND less than $3000 for work on behalf of foreign person/entity not engaged in USTB OR Nonresident alien serving as crew of foreign vessel

Continued application of old deferral regime

- US citizen/resident alien/corporation owns less than 10% of foreign corporation that is not a passive foreign investment company - greater than 10% ownership, if SH is US citizen or resident alien

Residence-based taxation

- depends on country's relationship to taxpayer (citizen or resident) - residence country has primary taxing jurisdiction as a matter of international law

Source-based taxation

- depends on country's relationship to transaction or property

Resident of contracting state USMT Art. 4

- determined under the laws of that contracting state by reason of citizenship, domicile, or residence; place of management, place of incorporation etc. - where a resident of both states, tiebreaker provisions apply: where created/organized (USMT 2006) or neither (USMT 2016)

Tax on worldwide income for US persons

- outbound tax regime - US entities/individuals exporting/licensing/rendering services or other business activity outside of the US

US business entity classification: check the box 301.7701-3(a)

1. 2+ members --> corporation or partnership 2. Single owner --> corporation or disregarded entity

Special statutory source rules

1. 50% income from international transportation involving vessels/aircraft if beginning OR ending in the US (863(c)) 2. Sourcing for space/ocean activities depends on identity of person deriving income (863(d)) 3. International communications by US persons sourced 50/50; foreign source by foreign persons unless attributable to US office (863(e))

Exceptions to asset method for allocating/apportioning interest deductions

1. Allocate interest deductions for qualified nonrecourse indebtedness solely to income generated by property related to borrowing (TR 1.861-10T(b)(1)) 2. Allocate deductions for integrated financial transactions to income generated by investment (TR 1.861-10T(c)) 3. Special computation

US real property interests

1. Any interest in real property (897(c)(1)(A)(i)) 2. Any interest in any US real property holding corporation (i.e. stock) (897(c)(1)(A)(ii))

Purposes of tax treaties

1. Avoid double taxation (promote international trade) 2. Information-sharing 3. Mutual agreement procedures

Exceptions to withholding requirement

1. Bank deposit interest (1441(c)(10)) 2. Portfolio interest (1441(c)(9)) 3. Payor of an item of income other than personal services effectively connected with USTB and included in gross income under 871(b)(2) 4. Payments to foreign corporations engaged in USTB if IRS determines that there is an undue administrative burden and collection of tax will not be jeopardized

Deductions on effectively connected income

1. Business deductions 2. Qualified business income deduction 3. Interest deductions 4. Personal deductions but NOTE: BEAT (59A)

Types of income affected by treaty

1. Business income (not personal service) 2. Personal service income 3. Nonbusiness income 4. Capital gains 5. Other income

US persons

1. Citizens and resident aliens 2. US corporations 3. US partnerships 4. US trusts and estates

IRS approaches to treaty shopping

1. Corporation as conduit of foreign SH 2. Anti-treat shopping rules in the Code (e.g. branch profits tax) 3. Anti-conduit regulations 4. Limitation on benefits provisions (USMT Art. 22)

Responsibilities of withholding agent

1. Determine existence of withholding obligation 2. Withholding agent liable for tax 3. Reporting and certification requirements to avoid withholding responsibility

Exceptions to 877A covered expatriates 877A(g)(1)(B)

1. Dual citizen at birth who is still citizen of other country and resident of US for less than 10/15 previous years OR 2. Relinquished US citizenship before 18 1/2 and resident of US for less than 10/15 previous years

USMT approach to withholding taxes

1. Elimination of tax on interest (11) where foreign person is resident of treaty country and meets LOB provisions 2. Elimination of tax on royalties (12) where foreign person is resident of treaty country and meets LOB provisions 3. Reduced tax on dividends to 15% (portfolio rate) unless foreign SH recipient is a corporation that owns at least 10%, then 5% (direct ownership rate) (10) OR may be exempt altogether - branch profits tax limited to 5% 4. No tax on pensions/annuities/social security/alimony

Withholding in respect of compensation income

1. Employees: engaged in USTB; taxed under business taxation regime 2. Independent contractors: 30% withholding requirement (unless a student --> 14%)

Unilateral devices against double taxation

1. Exemption/territorial source system 2. Credit system 3. Deduction system

Allocation of compensation income

1. Facts and circumstances (R 1.861-4(b)(1)(i)) (applies to entities and independent contractors) OR 2. Time basis (R 1.861-4(b)(2)(i)) (applies to anyone but always employees ((b)(2)(ii)))

Subpart F income

1. Foreign base company income 2. Income from certain insurance activities 3. Certain international boycott-related income 4. Certain illegal bribes/kickbacks/other payments to government officials/employees/agents 5. Income from certain ostracized foreign countries

Exceptions to US inbound regime based on foreign policy considerations

1. Foreign government exempt on income from investment activities UNLESS engaged in a commercial enterprise (892) 2. Employee of government or international organization; foreign government employee engaged in similar services with reciprocal treatment in foreign country; UNLESS employee of commercial enterprise (893)

Situations when a foreign tax credit may be claimed

1. Foreign income tax 2. In lieu of tax 3. Subpart F tax 4. GILTI tax

Relinquishment of US citizenship 877A(g)(4)

1. Formal renunciation 2. Signed statement of voluntary relinquishment after act of expatriation 3. Certificate of loss of nationality 4. Cancellation

Foreign tax credit limitations

1. General limit (904(a)) 2. By basket (904(d)) Carryforward of excess credits 10 years and carryback 1 year (904(c)) UNLESS GILTI (904(d)(1)(A))

Resident aliens

1. Green card test 2. Substantial presence test 3. First year election

Substantial presence test 7701(b)(1)(A)(2)(ii)

1. Individual in the United States for at least 31 days during testing year AND 2. 183 during testing year and previous two years using weighted formula (current x 1, previous x 1/3, pre-previous 1/6) UNLESS closer connection exception applies - considered resident alien as of first day of physical presence

FDAP income

1. Interest 2. Dividends 3. Rents 4. Salaries 5. Wages 6. Premiums 7. Annuities 8. Compensations/remunerations/emoluments (871(a), 881(a)) Can be annual/periodic income even if not paid annually/periodically (R 1.1441-2(b)(1)(ii)) (e.g. paid all at once)

US real property interest

1. Interest in real property located in the United States (897(c)(1)(A)) 2. Certain leasehold interests, options to acquire real property, and associated personal property (897(c)(6)(A), (B)) 3. Stock in US corporation UNLESS not a US real property holding corporation (897(c)(1)(A)(ii)) during shorter of previous 5 years or period stock held US real property interest does not include stock traded on established securities market unless > 5% owned (897(c)(3))

Untaxed items of US-source interest not effectively connected

1. Interest on certain bank accounts (871(i)(2)(A), 881(d)) 2. Portfolio interest (871(h), 881(c)) on obligations in registered form (871(h)(2)(B)) UNLESS - paid by US (c) to an individual/entity owning 10%+ of (c) (871(h)(3), 881(c)(3)(B)) - interest received by controlled foreign corporation (881(c)(3)(C)) - certain contingent interest payments (871(h)(4), 881(c)(4)) 3. Interest paid by 80-20 corporations (NOT ANYMORE) (871(h)(2)(B))

Anti-treaty shopping approaches

1. Judicial doctrines 2. Administrative authority 3. LOB provisions 4. Anti-conduit regulations

Closer connection exception 7701(b)(3)(B)

1. Less than 183 days in current year 2. Tax home in foreign country (principal place of business) AND 3. Closer connection (R 301.7701(b)-2(c))

Special rules for former US citizens/residents

1. Mark to market regime 877A 2. Immigration law prohibiting entry when citizenship surrendered with principle purpose of tax evasion

First year election 7701(b)(1)(A)(iii)

1. Not resident alien under green card or substantial presence tests in election year 2. Or in prior year 3. Resident of United States under substantial presence in following year 4. Present for 31 days during election year AND 5. Present for 75% of days during testing period - may be able to take deductions against investment income

Factors in closer connection R 301.7701(b)-2(d)

1. Permanent home 2. Family 3. Belongings 4. Organizations 5. Banking 6. Business activities 7. Driver's license 8. Voting 9. Residence on formal documents

Effect of tax treaties on double taxation

1. Preclude/limit US taxation of certain items of US-source income earned by foreign residents 2. Preclude/limit foreign taxation of foreign-source income earned by US citizens abroad

When tax is likely to reach net gain in the normal circumstances in which it applies

1. Realization requirement: tax imposed upon or subsequent to realization event (R 1.901-2(b)(2)) 2. Gross receipts requirement: starting point for calculation must be actual gross receipts (R 1.901-2(b)(3)) 3. Net income requirement: foreign tax allows recovery of significant actual costs/expenses attributable to gross receipts under reasonable principles OR some other method that approximates or exceeds actual costs/expenses (R 1.901-2(b)(4))

Foreign tax actually paid/compulsory

1. Receipt required for foreign tax payment (R 1.905-2(a)(2)) 2. Not compulsory to the extent payment exceeds foreign tax liability

Information-sharing

1. Residence country in a better position to impose vertical equity 2. Tax authorities enabled to talk directly

Special non-statutory source rules

1. Scholarships/prizes/award sourced based on payor except US person to foreign person to study outside US is foreign source (R 1.863-1(d)) 2. Alimony formerly treated like interest; repealed by TCJA 3. Banking and financial services assessed under facts and circumstances - akin to payment for assuming credit risk treated like interest

Exemptions for certain personal services

1. Services of a governmental nature 2. Payments received by students/trainees in FT education/training that do not exceed $10,000/year 3. Entertainers/sportsmen only taxed if gross receipts exceed $30,000/year 4. Tax may be imposed on fees to directors of US (c) who is a resident of treaty partner and renders US services 5. Ships/aircraft in international traffic taxed by residence country only

Per se corporations

1. State law corporations 2. Certain foreign entities listed in regulations (R 301.7701-2(b))

Present inclusions even where participation exemption may apply

1. Subpart F rules 2. GILTI

Bilateral devices against double taxation

1. Tax treaties 2. Other international agreements

Special source rule for fringe benefits R 1.861-4(b)(2)(ii)(D)

1. Training/education/local transportation --> principal place of work 2. Reimbursement --> where tax imposed 3. Hazard/hardship duty --> hazard zone 4. Moving expense reimbursement --> new principal place of work

Exceptions to withholding requirements under FIRPTA

1. Transferor furnishes affidavit stating transferor is not a foreign person; with taxpayer identification number (1445(b)(2)) 2. Disposition of interest in US corporation if corporation furnishes affidavit that it has not been a US real property holding corporation during five year or shorter base period (1445(b)(3)) 3. Transferee received qualifying statement from IRS that transferor is exempt from tax (1445(b)(4)) 4. Transferee to use property as a resident and amount received does not exceed $300,000 (1445(b)(5)) 5. Disposition of shares of class of stock regularly traded on established securities market (1445(b)(6))

Treaty process

1. Treasury Department has exclusive authority to negotiate; President signs 2. Foreign Relations Committee approves treaty 3. 2/3 Senate approves treaty 4. Countries exchange instruments of ratification

Model treaties

1. US Model Treaty (updated 2016) 2. OECD (updated 2017) 3. UN (updated 2017)

Situations in which FTC applies

1. US corporation with foreign branch (v. subsidiary) 2. Individual earnings 3. Withholding taxes 4. Earnings through a partnership or S(c)

US trust 7701(a)(30)(E)

1. US court exercises primary supervision over administration AND 2. 1+ US fiduciaries with authority to control substantial decisions of trust

US business entity classification: default rules 301.7701-3(b)

1. US eligible entity treated as partnership (2+) or disregarded entity (1) 2. Foreign eligible entity treated as: - partnership with 2+ members, at least 1 with limited liability - corporation, if all have limited liability - disregarded entity if single owner without limited liability

Exceptions to presence in United States

1. Unexpected, not preexisting medical conditions (7701(b)(3)(D)) (but considered intended date of departure R 301.7701(d)(b)(3) 2. Exempt individuals including foreign-government representatives; teachers/students/trainees; charity athletes on tournament days (7701(b)(5)) 3. Regular commuters on commuting days, transit between two foreign points less than 24 hours, crew members temporarily present unless engaging in some other trade or business (7701(b)(7))

Participation exemption

100% deduction for foreign-source portion of dividend received from specified 10% owned foreign corporation by a US corporation that is a US shareholder (not included in income under Subpart F or GILTI) (245A)

FACTA

30% withholding tax imposed on dividends/interest/other payments from foreign financial institutions UNLESS they provide information with respect to US account holders

General foreign tax credit limitation

= (foreign source taxable income/ww income) x US tax on ww income before credit

DEA where no change in net equity

= ECEP

DEA where decrease in net equity

= ECEP + (decrease in US net equity) (884(b)(2)) only to extent of prior years' accumulated ECEP (884(b)(2)(B)) Excess money sent home

DEA where increase in net equity

= ECEP - [increase in US net equity] Some amount reinvested in the US (884(b)(1))

Permanent establishment

A FPB (physical location) through which business is carried on, such as place of management/branch/office/factory/place of extraction, UNLESS 12-month safe harbor for certain building sites applies and not including: 1. Preparatory/auxiliary activities 2. Use of facilities solely for storage/display/delivery 3. Or for processing by another enterprise 4. Or for purchasing or collecting information (USMT 5)

Permanent establishment through agency relationship

A dependent agent with authority to conclude contracts that are binding on the enterprise will constitute a PE even without an FPB unless activities are such that they would not constitute a PE if performed by the principal No PE through independent agent, such as a broker or general commission agent, or other agent of independent status

Foreign tax credit

A dollar for dollar exclusion against US income taxes for foreign income taxes paid on foreign income

Creditable taxes

A tax that has a predominant character within US meaning of income tax which is actually paid and is a compulsory payment

Business activity test

Active conduct of business v. normal supervisory functions of an investor: whether activities of business were material factor in realization of income/gain/loss (R 1.864-4(c)(3)(i), 864(c)(2)(B))

USTB of partnerships

Activities of each partner attributed to all (875(1)) Gain or loss realized by foreign partner from disposition of interest in US partnership is effectively connected to USTB

Reasonable housing expenses

Actual housing expenses (capped at 30% x $105,900 [2019]) - floor amount (16% x $105,900 [2019])

Capital-import neutrality

All firms operating in the same country taxed at the same rate (consistent with territorial approach)

Undistributed foreign earnings

All foreign corporation's undistributed earnings except for income effectively connected with USTB + dividends received from 80%-owned US corporation (245A(c)(3))

Interest deductions on effectively connected gross income

Allocated on the basis of adjusted bases of assets (TCJA) (864(e)(2)) - limitation on business interest deduction (163(j))

Special rule for production and sale of inventory property

Allocated on the basis of production activities regardless of passage of title (TJCA) (863(b)(2)) BUT income from any sale of personal property including inventory attributable to US office is US source (865(e)(2))

Passive foreign investment company

Alternative tax mechanism under PFIC 1297

Compensation income as effectively connected

Always (US source) (864(c))

Foreign-source portion of dividend received

Amount of dividend x (undistributed foreign earnings/total undistributed earnings) (245A(c)(1))

Taisei Fire & Marine Insurance Co. v. Commissioner

An agent of independent status requires economic (entrepreneurial risk) OR legal (comprehensive control of day-to-day activities) dependence

Subpart F rules

Anti-deferral regime for certain abuse-prone types of income, requiring present inclusion in gross income of US corporation

Covered expatriate 877A(g)(2)

Any citizen who relinquishes citizenship or long-term resident in 8 of preceding 15 years who ceases to be a lawful permanent resident with: 1. Average annual net income tax liability for previous five years is greater than $168k 2. Net worth greater than 2M on the date OR 3. Fails to meet certification requirements

US account holders

Any financial account which is held by one or more specified US persons or US-owned foreign entities

Transferee

Any person, foreign or domestic, that acquires a US real property interest by purchase, exchange, gift or other transfer

US estate 7701(a)(30)(D)

Anything other than foreign estate; estate is foreign estate if taxed similarly to nonresident alien individual considering: - location of estate assets - country under whose law estate is administered - nationality/residence of executor/decedent/beneficiaries

Withholding mechanism

Applies to all persons having control of any item of income (1441(a), 1442(a)-(c)) to which withholding applies (871, 881); withhold 30% (1441(b))

Apportionment

Apportioning income in each class between US and foreign source (R 1.861-8(a)(4)) based on factor (TR 1.861-8T(c)(1))

Income attributable to PE of partnership or trust

Attribute to partners (general or limited) or beneficiaries as if each had a PE

Allocation

Attributing deductions to some class of gross income (R 1.863-8(a)(3))

Asset method for allocating/apportioning interest expenses

Average total assets within grouping for tax year (TR 1.861-9T(g)(1)(i)), computed based on book or FMV value of assets at beginning and end of year ((g)(2)(i)) unless an exception applies

Base erosion

Base eroding payments to a related foreign entity; expenses qualifying for deductions; for some reason not taxed to foreign entity, over total deductible expenses

Bona fide resident 911

Based on taxpayer intent considering facts and circumstances (US citizens only)

Amount of FTC

Basic amount (foreign income/war profits/excess profits taxes (901(a), (b)) subject to FTC limitation (904)

Income attributable to permanent establishment

Business profits that the PE might be expected to make if it were in a distinct/independent enterprise engage din the same/similar activities under the same/similar conditions + gains from sale of personal property attributable to PE + gains from disposition of establishment (USMT 7) EXCEPT for some personal services income

Tax treatment of capital gains of foreign persons under Code

Capital gains realized by foreign persons from sale or disposition of assets not effectively connected with USTB generally not taxed, UNLESS realized by nonresident alien present in US for at least 183 days during taxable year (871(a)(2))

Hybrid entity

Characterized as a corporation in one jurisdiction and as a transparent entity in another Reverse hybrid: corporation under US law

US citizens

Citizens for immigration law purposes (R 1.1-1(c))

Foreign Account Tax Compliance Act

Compels disclosure of information by foreign financial institutions that will identify US persons engaged in evasive practices; in addition to withholding obligation

Boulez v. Commissioner

Compensation payments measured by record sales is compensation for services rather than a property interest in recordings themselves

Mutual agreement procedures

Competent taxing authorities work out double taxation issues

Tax for purposes of FTC

Compulsory payment under foreign authority's to levy taxes (R 1.901-2(a)(2)); excluding penalties/fines/interest/custom duties (R 1.901-2(a)(2)(i)); whether imposed by national government or political subdivision, but not in commercial capacity

Undistributed earnings

Computed as of close of taxable year without reduction for dividends distributed (245A(c)(2))

Capital-ownership neutrality

Conformity among international tax rules

Treaty shopping

Corporations formed to take advantage of tax treaties with the United States

Korfund Company v. Commissioner

Covenant not to compete represents a property interest where the right to do business is foregone

Credit system

Credit taxes paid to foreign country by citizens/residents - consistent with capital-export neutrality

Statutory source rule for debt guarantee fees

Debt guarantee fees paid by US person are US source; if paid by foreign person, US source if effectively connected with USTB (861(a)(9))

Deduction system

Deduct foreign taxes paid from taxable income and tax remainder at full rate - consistent with national neutrality - does not eliminate double taxation

Non-subpart F income

Deferral does not apply, but participation exemption will AFTER GILTI

Residence of seller for purposes of 865(a)

Depends on tax home Individuals: - principal place of business - abode in US --> US tax home (911(d)(3)) Any US(c), trust, estate 7701(a)(3)

Asset use test

Direct relationship between asset and USTB (held to meet present needs) (R 1.864-4(c)(2)(iv)(a))

Untaxed items of US-source dividends not effectively connected

Dividends paid by 80-20 corporations no longer given special rule (871(h)(2)(B)) BUT consider participation exemption

US real property holding corporation

Domestic corporation with 1/2 value in real property (897(c)(2))

Cascading royalties problem

Each royalty payment would be defined by Code to be US-source income subject to withholding tax absent exemption by applicable treaty

Effectively connected E&P

Effectively connected income - 21% tax thereon Adjusted based on US net equity (adjusted basis of assets; compare beginning and end of year)

Deferred income as effectively connected

Effectively connected with USTB if it would have been in the year the transaction occurred, UNLESS property was formerly used in USTB (10-year taint) (864(c)(6), (c)(7))

Foreign earned income exclusion

Exclude $105,900 (2019) in foreign earned income and reasonable foreign housing expenses (not to exceed actual foreign earned income for the year) if: 1. Election made 2. Qualified individual (911)

Treatment of business income (not personal service) under treaty

Exempt in source country unless PE

Treatment of personal service income under treaty

Exempt in source country unless PE; exempt if employee, present less than specific number of days, compensated by nonresident employer w/o PE

Exemption/territorial source system

Exempt income earned abroad from taxation e.g. 911, participation exemption - consistent with capital-import and capital-ownership neutrality

International tax arbitrage

Exploitation of inconsistencies between tax rules of residence and source countries to obtain benefits

Commissioner v. Wodehouse

FDAP income is not income from which you would subtract basis to determine gain If it would have been FDAP but for lump sum payment, it is still FDAP

Special rule for interest expenses

Factually related to all income-producing activities (TR 1.861-9T(a)) Allocated and apportioned on the basis of assets (864(e)(2))

Office/FPB

Fixed facility where foreign individual or corporation engages in TB (R 1.864-7) Another's office may count if used sufficiently frequently (R 1.864-7(b)(2)) Includes the office of a dependent agent with authority to negotiate/conclude contracts on behalf of foreign principal or maintains stock/regularly fills orders (R 1.864-7(d))

Tax on non-business US-source income

Flat rate tax of 30% on US-source gross FDAP income (or income from contingent sale of intangible property) that is not effectively connected to USTB

Indirect foreign tax credits

For US SH of controlled foreign corporations, FTC may be available for foreign taxes paid or accrued by CFC properly attributable to inclusions under Subpart F/GILTI

When foreign corporation is not a qualified resident

Foreign corporation is NOT qualified if: 1. 50% or more of the value of stock is owned by individuals who are not residents of treaty country/US citizens or residents OR 2. 50% or more of income is used to meet liabilities to persons who are not residents of treaty country/US citizens or residents

Banking activities as USTB

Foreign persons deemed to be conducting USTB if engaged in specific activities (see regulations)

Tax on US trade or business income of foreign persons

Foreign persons taxed on net taxable income effectively connected with USTB (871(b)(1), 882(a)(1))

Trading in stocks/securities/commodities as USTB

Foreign persons trading on US market is not a USTB unless there is an office/FPB (864(b)(2)(A), (C)) With US broker, not a USTB unless there is an office/FPB (864(b)(2)(B))

Special rule where sales derived from office maintained by resident in foreign country

Foreign source if: 1. Attributable to office/FPB in foreign country 2. Income tax of at least 10% is actually paid to foreign country UNLESS inventory, royalties, depreciable personal property, sale of stock in an affiliate, or goodwill (865(e)(1)) US source if: 1. Attributable to office/FPB in US Including inventory unless sold for use outside US and foreign office materially participated in ale ((865(e)(2))

Soak up tax

Foreign tax conditioned on ability of taxpayer to claim a foreign tax credit at home (R 1.901-2(c)), whether written or administered as a soak-up tax

In lieu of tax

Foreign tax imposed as a substitute for and not an addition to a generally applicable income tax e.g. tax on gross income or withholding tax (903)

FACTA intergovernmental agreement Model 1

Foreign taxing authorities collect information from foreign institutions and share with IRS

Deferral

Formerly, US corporations operating through foreign subsidiary would not be taxed income until repatriated as dividend

Certain foreign source income as effectively connected

Generally not, except for income attributable to an office/FPB (864(c)(4)), including: 1. Rents/royalties in active conduct of TB (864(c)(4)(B)(i)) 2. Dividends/interest from active conduct of US banking business or received by US corporation trading in stocks/securities for its own account (864(c)(4)(B)(iii)) 3. All inventory produced within US regardless of passage of title (864(e)(2)), UNLESS sold for use outside US and foreign office materially participated in sale (R 1.864-6(b)(3)(i))

US approach to sourcing

Geographic locus of economic activity 7701(a)(9)

Determining tax liability of PE

Gross income - allowable deductions Income and losses from all PE's combined to determine US tax liability Taxed at US rates for effectively connected income

Subpart F regime

If a foreign corporation is a controlled foreign corporation, for purposes of certain bad income, foreign corporation is not respected as a separate entity resulting in a present inclusion in income for US SH as of last day of the year, regardless of distribution

Tax treatment of sale of inventory of foreign persons under the Code

If not related to USTB, not taxed unless taxpayer is engaged in unrelated USTB and 864(c)(3) applies

Source rule for gain from sale of stock in foreign affiliate

If sale is in foreign country where affiliate conducts TB and greater than 50% is from that TB over base period (3 years before year of sale), then income is foreign source (865(f))

Affect of treaty on branch profits tax

If treaty does not mention BPT, rate of tax shall be limited to US withholding rate for dividends (884(e)(2)) Application of treaty provision modifying BPT limited to qualified residents

Personal services as USTB

If within the US, then USTB (864(b)) UNLESS nonresident alien present less than 90 days and earning less than $3,000 working for foreign person/entity/office (864(b)(1))

USTB of trusts/estates

Imputed to beneficiary when effectively connected income is distributed (875(2))

Effect of agency arrangements

In an ordinary principal and agent relationship, an agent engaged in a USTB will be attributed to the principal

Tax on foreign persons

Inbound tax regime: tax on foreign individuals/entities doing business or investing in the United States

Untaxed items of US source wagering income not effectively connected

Income derived by nonresident alien from legal wagering transaction outside US in a pari-mutuel pool with respect to US horse or dog race

Effect of tax treaties on taxation of US business income

Income must be attributable to permanent establishment

Hybrid entity

Inconsistent business entity classification under US and foreign law

De minimis rule under treaties for nonresident aliens working temporarily in the US

Independent contractors not be taxed on compensation income derived from work in the US Employees can only be taxed by residence country if: 1. Present less than 183 days in the year services rendered 2. Remuneration not paid by a resident employer 3. Remuneration not borne by PE

Why give primary taxing rights to residence country?

Information available re expenses/deductions; taxed on net rather than gross basis with progressive marginal tax rates - source-based taxation is premised on information about the income rather than the taxpayer

Green card test 7701(b)(1)(A)(2)(i)

Lawful permanent resident under immigration law Once a green card older, resident alien until judicially or administratively to be abandoned or rescinded (R 301.7701(b)-1(b))

Attributable

Material factor in realization of income in the ordinary course of business (864(c)(5)) (significant contribution; essential economic element (R 1.864-6(b)(1))

Continental Trading Inc. v. Commissioner

Mere management of investments and collection of rents/dividends/interest is not a USTB

Controlled foreign corporation

More than 50% of voting power or value is owned by US SH on any day of the year (957) Corporate US SH will have Subpart F and GILTI inclusions (ordinary income); deemed to have paid foreign taxes atrributable (960); dividends received deduction 245A Individual SH does not get foreign tax credit or dividends received deduction

Management of real property as USTB

Must be beyond mere receipt of income/payment of incidental expenses to constitute USTB - election to treat income from real property as effectively connected to take advantage of deductions (871(d)(1))

Domestic corporation 7701(a)(4)

Nationality principle: where incorporated Incorporated under law of US/any state, including D.C.

Capital-export neutrality

Neutrality between US and foreign-source income before tax

National neutrality

Neutrality on total returns on capital between US and foreign investments

Tax treatment of sale of inventory of foreign persons under treaty

No US tax on US-source inventory sales not attributable to PE

Tax treatment of capital gains of foreign persons under treaty

Not attributable to PE, not subject to tax UNLESS arising directly/indirectly from ownership of real property

Transitional tax 965

One-time tax on accumulated earnings of foreign corporation at 15 1/2% for accumulated earnings in cash form and 8% for accumulated earnings in non-cash form; may be paid off at once or over a period of 8 years

Treatment of capital gains under treaty

Only taxed by country of residence except gains from personal property attributable to PE and gains from alienation of real property by US real property holding corporation

Effectively connected US source income

Other than FDAP --> residual force of attraction (862(c)(3)) UNLESS real estate election is made (R 1.871-10(b)(1)) FDAP --> need factual connection under asset use or business activity test (864(c)(2))

US shareholder for purposes of participation exemption

Owns directly or indirectly at least 10% voting power or value of foreign corporation, that is not a passive foreign investment company or a controlled foreign corporation - deduction not available to US citizens, resident aliens, s(c), trusts and estates or (c) with less than 10% ownership

Deferral principle

Parent companies are not taxed on the income of a foreign subsidiary until a dividend is received - consistent with capital-import neutrality

Source rule for inventory property

Passage of title test: situs of property when title transferred (861(a)(6), 862(a)(6), 865(b)) unless principal purpose of tax avoidance R 1.861-7(c) (courts reluctant to deviate, e.g. AD Green Export v. US)

Corporate inversions

Practice of relocating corporation's legal domicile to a lower tax country - US corporation with foreign subsidiaries taxed on direct income from anywhere; if reorganized with a foreign parent, do not include direct income from subsidiaries

Physical present test 911

Present for 330 days during 12 consecutive months (US citizens or resident aliens)

Tax home 911 qualified individual

Principal place of business for an individual unless abode is in the US

Tax-sparing credits

Provide credit for foreign taxes actually paid but also foreign income taxes that would have been paid, if not for tax holiday

Anti-conduit regulations

Recharacterization of multi-party financing transactions if appropriate to prevent avoidance of tax (7701(l))

Effect of treaty provisions on taxation of non-business US source income

Reduce or eliminate statutory withholding tax for some items of FDAP income not attributable to PE

Treatment of nonbusiness income under treaty

Reduce or eliminate withholding tax on certain investment income; change tax rate for source country (treaties do not serve as an independent means of imposing tax)

Business credits/deductions on effectively connected gross income

Reduced by deductions connected with effectively connected income (873(a), 882(c)(1)(A)), except for charitable deductions (882(c)(1)(B)) - credits may be available - no deductions for amounts paid or accrued in hybrid transactions or with hybrid entities (267A(c), (d))

Expanded tax base for BEAT

Regular taxable income + base eroding payments

USTB

Regular, continuous, considerable business, depending on facts and circumstances; activities central to derivation of profit (R 1.864-2(e))

Special rule for charitable expenses

Related to all US-source income (R 1.861-8(e)(12))

Indirect credit 902

Repealed by 2017 legislation

Relief from double taxation USMT 23

Residence country to provide relief to the extent there would otherwise be double tax (not much of a benefit than otherwise provided by Code)

Source of interest

Residence of debtor who pays interest at time of payment - method/place of payment irrelevant (R 1.861-2(a)(3))

Indirect credit 960

Retained/revised by 2017 legislation Applies to US corporation that is a US SH of controlled foreign corporation (owns directly/indirectly at least 10% of voting power or value) Tied to income inclusions under Subpart F/GILTI - individual may elect to be taxed under 951(a) and claim credit under 960 (also GILTI)

Source rule for deductions

Sourced based on source of income to which allocated/apportioned (861(b), 862(b), 863(a)) Where ratable division is in adequate --> facts and circumstances (R 1.861-8(a)(2))

Special rule for research/experimentation expenses

Standard Industrial Classification System: related to gross income from product categories

When foreign corporation is a qualified resident

Stock is primarily traded on established securities market in treaty country and wholly owned by a corporation in treaty country whose stock is so traded or if it is wholly owned subsidiary of US corporation with stock traded on established US securities market

Mark to market regime for covered expatriates 877A(a)(1)

Subject to income tax on net unrealized gain in property as if sold for FMV on day before expatriation/termination of residence, in excess of exemption amount ($725k in 2019) (877A(a)(3)) - may defer gain until disposal

Qualified individual for purposes of 911

Tax home in a foreign country AND 1. Bona fide resident OR 2. Physical presence requirement satisfied

GILTI

Tax imposed on excess return on intangibles with 10 1/2% deduction - foreign income taxes allocable to GILTI ~ 80% may be deemed paid by US corporation (FTC to apply) - no carryforward or carryback

US meaning of income tax for purposes of FTC

Tax is likely to reach net gain in the normal circumstances in which it applies (R 1.901-2(b)(1)) - including in lieu of taxes 2. Not a soak-up tax

Foreign Investment in Real Property Tax Act

Tax on net gains realized by nonresident alien/foreign corporation on dispositions of US real property interests; treated as if effectively connected with USTB (897(a)(1), 871(b), 882(a)) UNLESS disposition of stock of US real property holding corporation holds no property interest at the time of disposition and all US real property interests held in previous five years has been transferred for full gain (897(c)(1)(B))

US partnerships

Taxed depending on identity of partner in proportion to capital contributions

Technical taxpayer rule

The taxpayer on whom foreign law imposes legal liability for foreign tax is treated as having paid foreign tax for credit purposes, even if someone else actually remits

Branch profits tax

To equalize treatment between foreign corporations operating through a branch or US subsidiary, tax imposed on dividend equivalent amount at 30% (884(a))

Limitation on benefits

To obtain treaty benefits, a person must be a resident of treaty country and meet the limitation on benefits provision (22) by being a qualified person; having a legitimate business purpose; or, convince competent authorities

Nondiscrimination

Treaties often contain provisions providing that each country will not tax nationals of the other country more heavily than its own nationals in the same circumstances

2016 USMT expansion on limitation on benefits

Treaty benefits may be denied where foreign corporation enjoys: 1. Special tax regime in foreign country that provides preferential rates 2. Permanent reduction in tax base with respect to certain types of income OR 3. Preferential tax rate/permanent reduction in tax base for companies that do not operate TB in treaty country

Savings Clause

Treaty does not affect US taxation of its own citizens/residents as determined under USMT Art. 4 - not necessarily resident aliens

US net equity

US assets - US liabilities (884(c))

Exclusion from gross income for US persons to mitigate double taxation

US citizens and resident aliens living abroad may exclude from gross income an inflation-adjusted amount ($103,900 in 2019) if they meet certain eligibility requirements

Foreign affiliate

US corporation owns 80% of voting power or value (865(i)(4))

Taxpayers that may claim FTC

US corporations, citizens, and resident aliens that make election (901(a)) for foreign taxes paid or accrued directly by the taxpayer

US SH for purposes of Subpart F

US person (citizen, resident alien, corporation, etc.) that owns directly or indirectly (including through attribution) at least: 1. 10% of the voting power of all classes of stock entitled to vote OR 2. 10% of the total value of all stock 3. AS of the last day of the year (951(b)) - include pro rata share of Subpart F income as ordinary income - actual distributions tax-free to the extent already taxed - basis in stock increased by amount included in gross income; reduced by tax-free distribution; special basis adjustment rules

Source rule for gain from sale of depreciable/amortizable tangible personal property

US source gain to the extent deductions properly allocated against US income 865(c) (recapture gain) - allocate if deductions against US and foreign source income - where gain is greater than deductions, inventory rules apply (865(c)(2))

Source of interest paid by partnership

US source if domestic or foreign partnership engaged in USTB (R 1.861-(2)(a)(2)) Unless foreign partnership predominantly engaged in TB outside US, in which case US-source interest payments only to extent paid by US business of partnership and allocable to income effectively connected with USTB (861(a)(1)(B))

Source of interest paid by noncorporate resident

US source if paid by US citizen/resident alien (R 1.861-2(a)(2)(i)) - NOT US citizen living abroad, if not a resident of US under substantial presence (301.7701(b)-1(a)) Foreign source if paid by nonresident or citizen abroad

Source of dividends

US source if paid by US corporation (861(a)(2)); foreign source if paid by foreign corporation (862(a)(2)) unless greater than 25% gross income of foreign corporation is effectively connected with USTB (average over 3 years) --> then US source is percentage of effectively connected gross income/total income (861(a)(2)(B))

Source of interest paid by corporation

US source if paid by US corporation, except for interest paid by foreign bank branches (861(a)(1)(B)(i)) Foreign source if paid by foreign corporation except for interest paid by any US branch (not necessarily a bank) (861(e))

Foreign earned income

Wages, salaries, and professional fees that are: 1. Foreign source: services rendered outside US 2. Earned income: from services performed by individual EXCEPT FOR - pensions - annuities - income received after close of first tax year following tax year in which services were performed - amounts paid by US or a US agency to an employee

Withholding mechanism for net gains from sale of real property (FIRPTA)

When a foreign person disposes of a US real property interest, transferee must withhold the lesser of 15% of the amount realized by the transferor on the disposition OR maximum tax liability of transferor and pay it to Treasury (1445) UNLESS disposition of personal residence for amount between $300k and $1M (10% withholding)

Double non-taxation

When income escapes taxation altogether from both the source and residence country due to inconsistent source rules

Double taxation

When income is taxed both in the source and residence country, due to the exercise of extraterritorial taxing jurisdiction by the source country

Rousku v. Commissioner

When profits are derived from TB in which personal services AND capital are material income-producing factors --> no more than 30% of taxpayer's share of net profits from business may be considered (911(d)(2)(B))

BEAT tax

Where US branch or subsidiary > $500m gross receipts/3 years has base erosion % > 3% in excess of regular income tax, 10% tax on expanded tax base (59A)

Excess credit situation

Where foreign tax rate is higher than US tax rate

Excess limitation situation

Where foreign tax rate is lower than US tax rate

FACTA intergovernmental agreement Model 2

Where local government does not prohibit, foreign institutions communicate directly with the IRS

Source rule for gain from sale of intangible property

Where price is fixed, residence of taxpayer (general rule 865(a)) Where price is contingent, treated as royalty income (865(d)(1)) If goodwill separate from other intangible property, where generated (865(d)(3)) - if deductions have been taken against intangible property other than goodwill, gain not exceeding deductions will be sourced according to allocated income (865(d)(4)(A), 865(c)(1))

Source rule for rents (tangible property)

Where property located (861(a)(4), 862(a)(4))

Source rule for sale of real property

Where property located (861(a)(5), 862(a)(5)) Gain from sale of US real property interests is US source

Source rule for royalties (intangible property)

Where property used (861(a)(4), 862(a)(4))

Source rule for compensation for personal services

Where services performed (861(a)(3), 862(a)(3)) e.g. foreign source commissions for securing purchase orders from foreign customers, even though paid in the US (Rev. Rul. 60-55) UNLESS de minimis exception

Effect of treaty on FIRPTA

While typically only residence country can tax, USMT 13 authorizes 897 ~ treaty override authority

Withholding in respect of partnerships

Withholding obligation imposed on share of partnership net income effectively connected with USTB and allocable to foreign partner

Amount realized

cash + FMV of property received and any liability assumed by transferee

General source rule for sale of personal property other than inventory

"Residence" of seller 865(a), except US citizen/resident alien not to be treated as nonresident with respect to any sale of personal property unless 10% income tax paid to foreign country