Cross Exam 1 chapter 2

Resident Alien

Lives in US but not a US citizen must meet one of 2 tests: -green card test -substantial presence test

Foreign-earned income exclusion

-Must be foreign source income that is *earned* (NOT investment income) -$120,000 To qualify, establish tax home in foreign country or be present in foreign country for 330 days in 12 month period

Distinguish between an outbound transaction and an inbound transaction from a U.S. tax perspective.

An outbound transaction occurs when a U.S. person engages in a transaction outside the United States or one that involves a non-U.S. person. An inbound transaction occurs when a non-U.S. person engages in a transaction within the United States or one that involves a U.S. person.

US citizen

Could be born in the US, born to a parent who is a US citizen, or naturalized

Robert is a citizen of Germany. He decides to come to the United States to open a car dealership in Chicago. Robert does not obtain a Green Card but procures a visa to work in the United States. He is physically present in the United States during the following periods: 20X1 (April 1 through July 30) 20X2 (June 1 through August 15) a) How is Robert classified in 20X2? Choose the correct classification and explain why it is correct.

Days present in 20X2: 30 + 31 + 15 = 76 Days present in 20X1: (30 + 30 + 30)/3 = 30 Total days present: 106 Robert is a nonresident alien because he does not meet the green card test or the substantial presence test.

Don Dealer ("Dealer") is a citizen of the United Kingdom. He decides to come to the United States to open a car dealership in Detroit. Dealer does not obtain a Green Card, but he procures a visa to work in the United States. He is physically present in the United States during the following periods: 20X1 (May 1 through August 30) 20X2 (August 1 through December 30) b) How will the US tax Dealer's income in 20X2? Choose the correct answer and explain why it is correct.

Dealer is taxed on his worldwide income because he is a resident alien

Nonresident aliens (NRA)

Does not live in US and is not a US citizen (or don't meet requirements of resident alien)

How does the US tax foreign activities of non-US persons?

Foreign citizens/corps: taxed only on income within the US

Will a country tax income with which it has no connection?

Generally, no.

How do tax treaties mitigate double taxation?

Host country does not tax taxpayers from home country and vice versa provides for exemption of certain types of income and/or lower withholdings

US corporations/partnerships

Incorporated/organized under the laws of a state in the US or DC

green card test

Non-US citizen holds a green card (permanent resident visa) at any time during the year

substantial presence test

Non-US citizen needs to be in US for at least 183 days first part: *Must* be present at least 31 days in the current year (any part of day = full day) second part: Formula: current year # of days + (1/3 * prior year days present) + (1/6 *second prior year days present) If equals or exceeds 183 days, are considered a resident alien must pass both tests International students exempt 5 years International teachers exempt 2 years

foreign corporations/partnerships

Not created/organized in US

Don Dealer ("Dealer") is a citizen of the United Kingdom. He decides to come to the United States to open a car dealership in Detroit. Dealer does not obtain a Green Card, but he procures a visa to work in the United States. He is physically present in the United States during the following periods: 20X1 (May 1 through August 30) 20X2 (August 1 through December 30) a) How is Dealer classified in 20X2? Choose the correct classification and explain why it is correct.

Present in 20X2: 31 + 30 + 31 + 30 + 30 = 152 Present in 20X1 : (31 + 30 + 31 + 30)/3 = 40.67 Total present = 192.67 Dealer is a resident alien under the substantial presence test

Participation Exemption

Qualified dividend received by US corporations from foreign corporations exempt

Robert is a citizen of Germany. He decides to come to the United States to open a car dealership in Chicago. Robert does not obtain a Green Card but procures a visa to work in the United States. He is physically present in the United States during the following periods: 20X1 (April 1 through July 30) 20X2 (June 1 through August 15) b) How will the US tax Robert's income in 20X2? Choose the correct answer and explain why it is correct.

Robert is taxed on only his U.S.-source income because he is not a US person ECI taxed at net amounts at graduated rates

What Subchapter of the IRC are international taxation laws found?

Subchapter N

Foreign tax credit

Take credit in amount of foreign tax paid limited to amount that taxpayer would pay in US

Territorial-based Jurisdiction (also known as source-based)

Taxing transactions that occur within the country (foreign income is tax exempt if this method is used) participation exemption is example of territorial-based legislation

What is nexus?

The criteria that jurisdictions use to assert the right to tax a person or transaction

What are the two categories of income that can be taxed by the United States when earned by a nonresident? How does the United States tax each category of income?

U.S. source income earned by a nonresident is classified as either effectively connected income (ECI) or fixed and determinable, annual or periodic income (FDAP). Income that is effectively connected with a U.S. trade or business is subject to net taxation (that is, gross income minus deductions) at the U.S. graduated tax rates. FDAP income, which is generally passive income such as dividends, interest, rents, or royalties, is subject to a withholding tax regime applied to gross income.

How do countries combat double taxation?

US (unilateral legislation): foreign tax credit, foreign earned income exclusion; participation exemption Bilateral legislation: tax treaties

How does the US tax foreign activities of US persons?

US citizens/US corporation (also US persons): taxed on *worldwide* income

How does a residence-based approach to taxing worldwide income differ from a source-based approach to taxing the same income?

Under a residence-based approach, a country taxes the worldwide income of the person earning the income. Under a source-based approach, a country taxes only the income earned within its boundaries.

Credit-based Jurisdiction (also known as residence-based)

all income earned by a citizen or resident or company incorporated in the country is subject to taxation in the country The country allows a credit for taxes paid to another country. Taxes on worldwide income but allows a foreign tax credit

home country

country a taxpayer is a citizen of

host country

country where taxpayer is living abroad

What is the central problem of international taxation?

double-taxation; home country and host country tax same transaction

US-source investment income

taxed on foreign persons Taxed on gross amounts at flat withholding rate of 30%

Effectively connected income (ECI)

taxed on foreign persons Trade or business income; taxed on net income at graduated tax rates

International taxation

the study of the coordinating the tax authority of sovereign countries