Mac 841 - International Taxation

Front 1

Different tax treatments -

______ - ___ persons generating profits _____.
_______ - ____ persons generating profits _____.

Must always consider -
1. What person to tax?
2. What income to tax?

2 Basic Tax systems
1. ______ system - tax world-wide income
2. ______ system - tax income earned in co.

Back 1

outbound - US; abroad;
inbound - foreign; in US;

1. Global system
2. Worldwide system

Front 2

US tax system
1. _____ system for "Foreign persons"
- 30% FDAP withholding or ECI
2. _____ system for "US Persons"

"US Persons" are:
1. ______

2. ______ - DEFINED:

i. Not a citizen
ii. US resident - prove by either:
A. "______" test
B. "________" test
- if in US for
a. >= 31 days of CY, and
b. >= 183 days of last 3 years (weighted - formula??)
Exceptions:
-Exempt persons (______), Medical emergencies (______), Transient (______)


3. _______ (where actually _____) & partnerships

Back 2

Territorial; Global;

1. US Citizens
2. Resident Aliens;
A. Green card test
B. Substantial presence test

(#daysCY + 1/3#daysCY-1 + 1/6#daysCY-2)
-Ambassadors; Coma victims; Flight Attendant;

3. Domestic corporations; incorporated.

Front 3

If US individual taxed in foreign co, and US then DOUBLE tax. Ergo, the US has a Worldwide system with a credit. *Exception: __________ - limit 92,400 in 2010 & _________ - for foreign co.

_________ - US MNCs should face same tax burden regardless of investment (US vs. Abroad).

__________ - US MNCs should face same tax burden as their foreign / local competition (US vs. For. Co)

Foreign profits of DomCo are taxed immediately if earned directly by DomCo (________ or ________ abroad). However, if set up as _______, not taxed until ______. WAIT! How to determine if foreign entity is a flow through or a corp? ____ corporations are _____ treated as foreign corps (similar foreign structures to corp). Otherwise, US Business Entities can select tax classification for ______ by the ________ rules. (corp or flow through?)

Back 3

Foreign Earned Income Exclusion & Housing Allowance

Capital Export Neutrality;
Capital Import Neutrality;

foreign branch or flow thru;
foreign corporation; repatriation;

Per se corporations; always;

US TAX purposes; check the box rules;

Front 4

Sourcing of Income:

Goal is to categorize as Foreign Source Income (FSI) or US Source Income (USSI).

Step 1: Determine source
Step 2: Apply rule

- Interest: Interest Income is _____ if paid on obligation of:
-_______
-_______
-_______
OTHERWISE, foreign source.
Exceptions:
- ____ Rule: Interest is foreign source if ____ of debtors gross income is from __________ for last 3 yrs. If related corp. pro rata share of ____'s % of income from foreign business.
- ___________ - Interest is _____ if paid on deposits with foreign ____ of US corp.

Ex: US Corp derived 90% of income from foreign biz from 06-08. Corp pays interest to:
- US citizen - $15,000
- UK related sub. - $20,000.
Sourcing?

Back 4

USSI;
-Dom Corp.
-US resident;
-Federal government;

-80/20 Rule; >= 80%; active foreign business; payor's;
-Foreign banking branches; FSI; branch;

US citizen - all FSI
UK sub - $18,000 FSI, $2,000 USSI

Front 5

Sourcing:

-Dividends: if US Corp, then ____, if For Co, then ____.
Exception: If For Co derives >= ___% of Gross Income from ___, then _____ dividends are USSI.
Ex: Brazil Co pays $10,000 in divs. & derives 50% of gross from ECI. Source?

- Services: Compensation for personal services received in US is ____ and For County is ____.
Exception - De Minimus rule: certain income earned by foreigners in the US can be considered FSI if
1. Stay is _____
2. Amount earned is ______.
3. Works for qualified foreigner
MOST TAX TREATIES INCREASE THIS GREATLY

Back 5

USSI; FSI; 25%; ECI; pro rata;

Ex: $5,000 USSI, $5,000 FSI.

USSI; FSI; <= 90 days, <=$3000

Front 6

Sourcing:

-Rental income - from leasing property is USSI if ________, and vice versa.

-Royalties - from licensing intangibles are USSI if intangible is ______ & vice versa.

-Gains from selling Real Property: In US, USSI (vice versa)

Back 6

located in the US;

used in the US;

Front 7

Sourcing:

Gain from Selling Personalty: Gain is USSI to ______ & FSI to _______. The general rule however has little application

* Does not apply to _______.
* ________ is sourced based on source of previous _____ deductions.
* Applies to most investment holdings.

Depreciation Recapture Ex: Equip with Original Price $10, A/B $2, US deductions $5, For deductions $3, Selling price $11, 'Title Passage' in Canada. Source of $9 gain?

Back 7

US Residents; Non residents;

*inventory;
*Depreciation recapture; depreciation;

Sales Price $11
A/B ($2)
Gain $9

For deduction recapture = $3 FSI
US deduction recapture = $5 FSI
Gain - title passage = $1 FSI.

Front 8

Gain from selling personalty - Inventory

Depends upon activities of seller:
1. _______-______ - tax rules treat as if only 1 economic activity involved: ____ - based on where ___ occurs (________)

2. _____-___ - 2 economic activities: ________ (&___(b) income).
a. ____ Method - 50% of _____ from _____ is sourced based on where produced. Afterwards need ____ factor which is ______________ / _________. Production assets are assets used to produce inventory ______*****. If some produce inventory for sale home & abroad, ____ based on ____. Excludes cash, inventory, receivables, etc. 50% of GP from exports for sales w title passage abroad. Afterwards need ____ factor which is _____________ / _________. "Export sale" - goods produced in US and sold for use abroad.

Do example in notes.

Back 8

Purchase-Resell; selling; sale; title passage;

Produce-Sell; Producing & Selling; 863(b);

50/50; Gross Profit; Exports; production; Average adjusted basis of foreign production assets / Average adjusted basis of all production assets; for sale abroad; prorate; sales;

sales; export sales where title passes abroad / total export sales;

Front 9

Gain from selling personalty - Inventory:

Independent Factory Price: Alternate to the 50/50 Method. Use when have good estimate of separation of portion of GP related to sales & production. IE. DomCo has $25 CoGS manufactures in US, sells to unrelated foreign distributor for $40 & to foreign retailer for $60. Source of retailer $35 profit?

Back 9

$15 USSI, $20 FSI

Front 10

Allocation & Apportionment:

- Importance for US persons:
US persons pay tax on USSI & FSI. Deductions are apportioned against these two. These affect US taxpayer's foreign tax credit:

(FS _______ / WW ________) x US tax before FTC (WW ____ x US tax rate).

- Importance for Foreign persons:
Foreign persons are taxed on ECI (___ basis) & FDAP (____ basis - no _______).

Back 10

Taxable income; Taxable income; Taxable income

Net; Gross; deductions

Front 11

Allocation & Apportionment:

What to do when need to source a deduction:

Step 1 - allocation rules
- Allocate deductions related to a _________ to that class (Example?)
- Allocate deductions related to __________ based on gross income in each class (Example?)

Step 2 - Apportion deduction based on reasonable factual relationship. Cookie example?

Do example in notes.

INTEREST APPORTIONMENT

Back 11

specific gross income class; EX: DomCo sells cookies & cigarettes in US & abroad. Deduction for cookie salesperson allocated to gross income from cookies

all gross income classes; EX: Accounting department fro Cookie / Cigarette Co, allocate deductions pro rata to the 2 departments based on relative gross income.

You can apportion cookie deductions based on gross income from US cookie sale vs. foreign. OR you can apportion based on # of cases sold in US vs. foreign.

Front 12

Foreign Tax Credits

FTC is lesser of ______ & _______.

"Creditable taxes" -
a. Must be a tax - not ____, but ______
b. Must be an income tax - pass 3 tests:
i. _____ test - must be transaction that triggers US taxation
ii. _______ test - must be on gross receipts or method not greater than FMV
iii. ______ - must permit recovery of significant costs/expenses of gross income.
c. Can be a ________ "in lieu of" an income tax.
** Cannot be a ____ tax: Host country charges tax only if creditable in US.
** Must meet holding period for dividends (greater than __ days, within 30 day period starting 15 days before ex-div. date)

Example: Domco - $200 foreign profit, $300 US profit. US tax rate = 35%. Foreign = 30%. US tax liability?

Back 12

Creditable taxes; FTC limitation;

voluntary; compulsory
i. Realization;
ii. Gross receipts;
iii. Net income;

foreign withholding tax;
soak-up;
15;

FTC limit= 200/500*(500*.35)=70
FTC = lesser of 70 and 60 (.30 * 200)
US tax liability = (500 * .35) - 60= 115
Excess limit

Front 13

FTC:

Excess Limit position: caused when _____ ETR &lt; ___ ETR. This causes residual US tax. Solution: ____ using ______.


Excess Credit position: caused when _____ ETR > ___ ETR. This causes no residual US tax. This can be carried back _____ and forward _______. Solutions: Increase _____. Reduce foreign taxes in foreign country. ____-_____.

Increase FSI - this increases numerator of FTC limitation - portion of TI characterized as FS. (ie. transfer title to overseas, reduce foreign apportionment).

Cross-crediting - blending low tax and high tax income to the extent possible.

Back 13

Foreign; US; delay taxes; repatriation;

Foreign; US; 1 year; 10 years; FSI; Cross-crediting;

Front 14

FTC:

Restrictions on cross-crediting (and thus restrictions on eliminating excess credits)
FTC is calculated separately by income type (ie. ____).
-Pre-2007, there were __ baskets of income.
-2007 & beyond, there are only __: _____ & ______.

Cross-crediting _____ baskets is permitted. Cross-crediting _____ baskets is not permitted. Both baskets have their own 904 FTC limit and carryover periods.

Passive Income basket - dividends, most interest, non-business rent/royalties

General Limitation: manufacturing/service income, business rent/royalty income, shipping, financial services income.

Back 14

baskets; 8; 2; Passive; Residual/General Limitation;

within; between;

Front 15

FTC:

Restrictions on cross-crediting:

Foreign subs FSI is not subject to US tax until ______, ie. paid out in dividend, interest, etc.. to parent. Don't want sketchy cross-crediting..

CFC Lookthru - **Foreign ____ income, "_______" (more to come) receive from "_________" is allocated between baskets via a look-thru rule. Dividends are pro-rated between baskets based on foreign subs underlying ____.

10-50 Company look through:
______ income (NOT OTHER ____ income) US CORPORATIONS receive from 10-50 companies is allocated among baskets. 10-50 company is 10-50% owned by _____ US Corporation.

What basket do dividends from a less than 10% company go to?

What about non-dividend passive income?

Back 15

repatriation;

passive; "US shareholders"; controlled foreign corporations; earnings & profit;

Dividend; passive; non-CFC;

passive; passive;

Front 16

FTC:

Creditable taxes include 901 FIT & 903 Withholding taxes in lieu of FIT. But ALSO 902 - FOREIGN TAXES paid by _________ (____)

Deemed Paid Taxes (DPT)
Only _______ are eligible to treat ___ as creditable. This DomCo must receive _____ from _______. Ownership requirements:
-_____ ownership of 10% at each ___.
-_____ ownership of 5% in each ___.
(ie. each sub must own 10% of additional sub. Parent must own 5% of all.)

DPT = (______ from Foreign Sub / Post 1986-____ of ______) * Post 1986-________.

Do example in notes.

LEARN MORE FROM BOOK

Back 16

foreign subsidiaries; DPT;

domestic corporations; DPT; dividend; foreign subsidiary;
-Direct; link;
-Indirect; sub;

Dividends; E&P of foreign sub; foreign income tax;

Front 17

Anti-deferral provisions

Generally, foreign subs FSI is not subject to US tax until repatriation. DomCo gets FTC for actual and DPT. However, "________" of ____ are subject to tax on tainted CFC income when earned.

CFC - Foreign corporation in which "________" together own more than ____ of the vote or value.

"________" - a US person (indivdual/corporation) owning at least ____ of the voting power in a foreign corp.

Example in notes

Back 17

"US Shareholders"; CFCs

"US Shareholders"; 50%;

"US Shareholder"; 10%;

Front 18

If Foreign sub passes CFC test, what are 'tainted earnings' and who is taxed on them?

Who - __________

What - Constructive Dividends consist of _________ (depends on how earned) and _________ (depends on how invested).

Back 18

US Shareholders

Subpart F Income; Earnings invested in US Property;

Front 19

Subpart F Income

1. ________ income (___):

a. ___________ (___) income: essentially most passive income - dividends, interest, royalties, rent.
b. _______ income: Sales of _______ if meets the following requirements:
i. Personalty purchased from / sold to _______?
ii. Does buyer use/consume item _________? If yes & no, proportional part could be Subpart F
iii. Is item manufactured __________? What is manufacturing? - must pass one of 3 tests:
A. Substantial _____
B. Substantial _____
C. Substantial _____ (oversight)
Safe HARBOR (if don't meet these, still might OK): _____ greater than or equal to ____ of the CFC's CoGS. In NO event will packaging, etc.. be considered manufacture.
c. FBC services income
d. Full-inclusion rule

2. Certain insurance income

3. Others beyond scope of course

Back 19

Foreign Base company; FBC;

a. Foreign Personal Holding Company (FPHC);
b. FBC sales; personalty; related party; outside CFC's country; outside CFC's country; transformation; assembly; contribution; conversion costs; 20%;

Front 20

Subpart F Income exceptions:

De minimus rule: Subpart F income excludes ___ ____ income and insurance income if sum is less than the ______ of _______ OR _________

Full inclusion rule ("_______"):
Subpart F income includes ____ of CFC's income if FBCI and insurance income are greater than ____ of CFC's _______.

Elective high tax rule:
Subpart F income excludes all income subject to foreign tax greater than ___ of the tax collected using US rules and top US rate.

Back 20

all FBC; smaller; $1 million; 5% of gross income;

"De Maximus"; all; 70%; gross income;

90%

Front 21

Constructive dividends to CFC's: Earnings invested in US property:

What is US Property?
-_________
-_____ of US corporations if corp is ________ of the CFC or other related ___ corp
- _____ (or ________) to US persons if ________ of CFC or other related ___ corp.
- Right to use ______ in US.

Ex: Investment in stock of related US corp? Yes. Microsoft? No. Related Foreign Corp? No.

Only ______ in investments in US property can trigger constructive dividend. Use ______ to measure ____ and ___ year earnings invested in US property. USE ______ of assets less associated debts. The constructive dividends from this is limited to undistributed _________.

Back 21

-Tangible property located in the US
- Stock; "US Shareholder"; US
- Loan (Loan guarantee); "US Shareholder"; US
- intangible;

increase; quarterly average; current and prior; adjusted basis; undistributed E & P;

Front 22

Taxation of a Later Actual Dividend:

If after having to pay taxes on constructive dividends, the CFC makes an actual dividend distribution in a later year, the dividend is first traced to CFC's "________" (___). Distributions from PTI are ______ from income. Also, can increase _______ by lesser of _______ on PTI dividends OR prior year _______ from recognizing constructive dividend (if there is withholding tax on actual dividend, wouldn't get reimbursed otherwise).

Back 22

"Previously Taxed Income"; PTI; excluded; FTC limitation; withholding tax; excess limit;

Front 23

FDAP

US Source Income by Foreign persons that is _____, _____, ______ or ______. Includes the following:
- ________ (ie. interest, dividends, rents & royalties)
- _____, awards and gambling income. Also alimony.

Gross FDAP is subject to tax. No deductions are allowed. If FDAP income associated with trade/business, then ECI. Flat tax rate of ___ applies, but _______ are likely. This 'withholding' represents the ______, not an estimate like US TR.

Back 23

Fixed, Determinable, Annual, Periodic;

Investment Income;
Prizes;

30%; treaty reductions; final tax payment;

Front 24

(Big) Exceptions to Withholding on FDAP:

-___________

-__________: paid on ANY debt obligation, except if Foreigner owns greater than ____ of the payor. This exemption was granted because of _______, in other words, setting up a Sub is a tax friendly country for the receipt of interest. (Ex: M, a NRA, receives $10 of interest from IBM bonds and $10 from CD, $20 FDAP, but all exempt from US tax.)

- _____ from ______ companies: These US corps that derive greater than ___ of their income from ________; Portion of dividends excluded from US tax of foreign persons is the percentage of active foreign business income (ie. ____). Similar to 80/20 rule for interest (>80%, then all interest income is FSI)

- __________ - Election to treat US source income from RE as ___. Ie. can have ______.

- ___________ of Personalty - exempt from FDAP if NRA's present in US less than 183 days. Limited application because if taxpayer in US greater than 183 days, considered taxpayer's income is US source.

Back 24

- Interest on Bank Deposits;

- Portfolio Interest; 10%; treaty shopping;

-Dividends from 80/20; 80%; active foreign business income; 80-100%;

- Income from US Real Estate; ECI; deductions

- Gains on sale of;

Front 25

FDAP exception: Gain on sale of Realty:

FIRPTA - Foreign Investment in Real Property Tax Act. When a foreigner disposes of a _____, gain treated as ECI instead of FDAP. Two types of USRPI:
1. _______
2. _______ that is a ___________.

What is a USRPHC?
A US OR Foreign Corp if greater than ____ of the ____ of its assets are "_____" (a separate definition of the term) at ______ during the _______ before disposition.

TEST if is USRPI:
1. ________ / (________ + ______ + _______) is greater than 50%;
2. Numerator: a. _______ b. 100% of the _______________ c. 0% of the ______________ d. Proportionate share of ___________

3. Denominator: same A, B, & C d. Proportionate share of the _____________ e. Actual Foreign Realty f. Other Business Assets.

EXCEPTION - NOT USRPHCs:
-____________
-____________
-____________

Back 25

US Real Property Interest (USRPI);

1. Direct holding is actual US real estate
2. Stock in a US Corporation; US Real Property Holding Corp (USRPHC);

50%; FMV; "USRPI" - different; anytime; 5 year period;

1. FMV of USRPI / (FMV of USRPI + FMV of Foreign Realty + FMV of Other Business Assets);

2. a. Actual US real estate;
b. 100% of the value of stock in non-controlled corps that are US or Foreign USRPHCs
c. 0% of the value of stock in non-controlled corps that are NOT US or Foreign USRPHCs
d. Proportionate share of the USRPI owned by US/Foreign partnerships or US/Foreign CONTROLLED corporation

3. A, B, & C above
d. Proportionate share of the TOTAL ASSETS owned by US/Foreign partnerships or US/Foreign CONTROLLED corporation

- Ownership of less than 5% of publically traded stock;
- Former USRPHCs that disposed of all USRPIs
- US controlled REITs

Front 26

To ensure collection of FIRPTA: buyer withholds / remits ___ of sales price - Penalty on buyer for not withholding. However, unlike FDAP withholding, this is only an ________

Back 26

10%; estimate of tax due;

Front 27

ECI - Income 'effectively connected' with a US Trade or business. When Foreign persons file a US tax return.
ie. must ______, must be ______, includes personal services. De Minimus exception applies again: Less than ___ days and less than ______.

Foreign Source Income - _____
USSI:
-Active business profits - ____
-Passive Investment Income:
a. ________ test - is it connected to assets of active business (ie Working Captial - not excess cash - earning interest)? If so then ____
b. _______ test - In business to create passive type income (ie. Mutual Fund Co)? If so, ____.

Back 27

seek profit; continuous/regular; 90 days; $3000; - no tax owed

NOT ECI; ECI;
a. Asset; ECI
b. Business Activities; ECI

Front 28

EVEN IF ECI exists, may NOT be subject to US tax. Treaties generally exempt business profits unless attributable to _____ (___).

PE is more substantive than a trade or business. 3 main forms:
1. ______ - exception - warehouses
2. ________ - employees routinely contract in principals name
3. Projects or business activities - such as construction, installation, mining, etc..

Back 28

Permanent Establishments (PEs)

1. Facilities
2. Dependent Agents

Front 29

IF foreign parent has branch in US, then only owe ECI, no FDAP because the 2 entities are the same. If foreign parent owns DomSub, then DomSub pays US tax, and upon repatriation to For Parent, ALSO FDAP.

TO be fair, US taxes foreign branches higher, called a _________ (____).

First take NET ___ and take out _____ to get ________. THEN add ______ in ______ and subtract ______ in US ______. This gives you __________ (___). To get BPT multiply by ___%

Example: ForCo has US store, ECI = $400,000. US Tax = 140,000. ForCo pays off $110,000 in branch debt. DEA for year? BPT?

Back 29

Branch Profits Tax (BPT)

ECI
(US Tax)
Effectively Connect E&P
- Increases in US net equity
+ Decreases in US net equity
Dividend Equivalent Amount
x 30%
BPT

400,000-140,000=260,000
260,000-110,000=150,000 - DEA
150,000 x .30 = 45,000 - BPT

Front 30

Repatriation to US Parent:
Dividends vs. Interest

Ex: For Parent owns Dom Sub. Sub's profit = $100. No US withholding on interest or divs. US TR=35%; For Tax rate = 20%
Tax Liabilities of interest vs. divs

Back 30

Interest - US TR
$100 profit
($100) interest
$0 TI

Interest - Foreign TR
$100
x .20
$20

Divs - US TR
$100 - profit
(0)
$100
x .35
$35 - US Tax

No For Tax.

Front 31

Deductibility of Interest in US

Allowed generally, but disallowed if all 5 criteria met:
1. US Corps ____ greater than ____
2. US Corp has ________
2. US Corp has ________ - ie. net interest expense > 50% of adjusted taxable income (cash flow)
4. Interest paid to related party
5. (some) Interest is exempt ________.

If all 5 met, disallowed interest = the ____ of "___________" or Related party interest ______________

Do problem in the notes.

Back 31

1. D/E ratio is; 1/5/1
2. net interest expense
3. excess interest expense

5. from US W/H

lesser; "excess interest expense"; considered exempt from US W/H.

Front 32

Transfer Pricing

Pricing of transactions between related parties. Risk of parties artificially shifting income to achieve tax benefits. Section that deals with transfer pricing: ____. Essentially gives the ______, and thus the ____ & regulations broad power to determine TPing. Overall standard: transfer prices must meet an "_______" standard. Consistent with prices charged by unrelated party.

Problem is that identical transactions for arms length standard are difficult to find, have to rely on comparable transactions.

Uncontrolled transactions must be sufficiently similar to controlled to provide reliable measure of arms-length. Five factors for Comparability:
1. ____________
2. ____________
3. ____________
4. ____________
5. ____________

Back 32

482; Treasury Secretary; IRS;

"arms length"

1. Functions performed
2. Contractual terms
3. Risks assumed
4. Economic and financial conditions
5. Nature of property / services transferred.

Front 33

Transfer pricing - try to identify a good comparison of prices between unrelated parties. Generally use the interquartile range - ________.

METHODS:
CUP - ____________ method. Most common is internal comparable (selling same item to unrelated party). Most of the time - best method. Can always adjust the transfer price based on increased risks, geography, other intangibles (brand), etc.. (ex: selling washing machines to unrelated party in France w brand name & related party in Canada without brand name)

RPM - __________ - typically for ______ - adds little value to product. Find gross profit margin from uncontrolled transaction of a similar item, use this for transfer price. (ex: GermanSub sells US Parents rain coats. GermanSub also sells rain boots from unrelated manfacturer. GP is 10% - use this).

Back 33

middle 50%;

Comparable Unrelated Price;

Resale price method; distributer;

Front 34

Cost Plus Method - applicable to manufacters selling output to related party for _______ followed by resale to unrelated party. Transfer price = _______ + appropriate GP. (US Parent sells furniture to MexSub for finishing & resale. Markup for furniture cos is 30%)

CPM _____________ - Get financial info, choose profit level indicator, find interquartile range of same indicator, adjust.

________ method - allocate based on relative contribution (difficult b/c everyone thinks they contribute the most - Pharma example - R & D making drug in UK, vs. Marketers in US selling drug - what makes drug popular?)

Regardless of method - ______ licenses must be "________" - in other words must make periodic adjustments (sell drug license to Sub, then find out it cures cancer. Can't use original transfer price).

Back 34

additional processing; production cost;

Comparable Profits Method.

Profit Split;

Front 35

Transfer Pricing penalties:

______ Valuation (___ penalty):
-Transactional: Price of value is __% or more (or __% or less) than the arm's length price
-Net Adjustment: Net Adjustment to TP exceeds the _____ of _______ or ___ of _______.

______ Valuation (___ penalty):
-Transactional: Price of value is __% or more (or __% or less) than the arm's length price
-Net Adjustment: Net Adjustment to TP exceeds the _____ of _______ or ___ of _______.

Back 35

Substantial; 20%; 200%; 50%; lesser; $10 million; 10% of gross receipts;

Gross; 40%; 400%; 25%; lesser; $20 million; 20% of gross receipts;