Chapter 10, International Taxation, Doupink, 2Nd Ed

Front 1

Describe the impact of taxes on international business decisions

Back 1

-Location of international investments
-What legal form the foreign operation should take
-Method of financing, debt or equity affected by taxation of interest and dividends

Front 2

Name and describe the two major types of taxes?

Back 2

1. Corporate income taxes-direct taxes on business income. Imposed by most governments and the tax rates vary from 0 percent in tax havens to over 40%.
2.Withholding taxes-taxes on dividends and some other amounts paid to foreign citizens.

Front 3

Talk about variation in corporate income tax rates

Back 3

-Significant variation in tax rates worldwide provides tax planning opportunity
-Some countries tax at different rates based on type of activity or nationality of owners
-Variation on how taxable income is computed/expenses deductible in one country may not be deductible in another.
-Worldwide trend toward reduced tax rates.
-Tax haven countries - 0% tax

Front 4

Talk about variation in withholding taxes.

Back 4

-Typically apply to dividend, interest, and royalty payments.
Vary across countries by type of payment and recipient.
-Variation in WH rates impact tax planning.
-High tax rate would encourage high debt financing rather then equity financing (thin capitalization)

Front 5

What is value added tax?

Back 5

-A substitute for sales taxes
-Added into the price of the product or service
-US does not have value added but it is common in the EU

Front 6

What is double taxation?

Back 6

-Two countries tax the same income
-Occurs when one country taxes the income earned by a foreign company in that country and same company's home government also taxes its foreign source income.
-Overlapping jurisdictions can result in triple taxation.

Front 7

What are the 2 approaches to tax jurisdiction on foreign source income?

Back 7

1.Worldwide approach - all income of a resident or company of a country is taxed by that country, regardless of where it is earned. More common.
2.Territorial approach - Only income earned in that country is taxed

Front 8

What are the 3 most common bases for taxation?

Back 8

1. Source-Countries tax income earned within their borders
2. Citizenship-Base taxes on income of citizens, regardless of source or where they reside.
3. Residence-Base taxes on income of country's residents regardless of source or citizenship.

Front 9

What is the US approach to basis for taxation?

Back 9

1. Taxes on the basis of source, citizenship, and residence.
2. Residence is defined by being a permanent resident.
3. In combination with the worldwide approach. (Permanent resident that does not live in the US is taxed on foreign source income)

Front 10

What are some solutions to double taxation?

Back 10

1. Country can adopt territorial approach, exempting foreign source income.
2.Allow domestic companies to deduct taxes paid to foreign governments.
3.Provide a tax credit to domestic companies for taxes paid to foreign governments.
-Most countries, including the US, use the deduction and credit approaches.

Front 11

Explain the US approach to Foreign Tax Credits

Back 11

-Allows companies to deduct all foreign taxes paid, or receive a tax credit for all foreign income taxes paid.
-Companies tend to take the tax credit.

Front 12

What is the overall FTC limitation?

Back 12

=(Foreign source taxable income/Worldwide taxable income)xUS taxes before FTC
1. FTC allowed is equal to the lower of:
--Actual taxes paid to the foreign government
--Amount of taxes that would have been paid if the income had been earned in the US

Front 13

What are the two FTC baskets?

Back 13

1. General Income
2. Passive Income

Front 14

What is the Indirect FTC?

Back 14

-US allows an indirect FTC on foreign taxes paid by a foreign subsidiary of the a US parent.
-The FTC is not allowed until the income of the subsidiary is taxed in the US
-The amount of income of a foreign subsidiary that is taxable in the US is the before tax "grossed up" dividend.
-US parent must own at least 10% of the voting stock.

Front 15

What are tax treaties?

Back 15

-Bilateral agreements regarding how individuals from one country are taxed on income earned in the other country.
-Their purpose is to alleviate double taxation problems
-Reducing double taxation helps facilitate international trade and investment
-Tax treaties also involve information sharing between governments that helps in domestic enforcement

Front 16

What is the OECD model treaty?

Back 16

-The basis for most bilateral treaties of developed countries
-The host countries only tax business profits of foreign companies associated with permanent establishments.
-Recommending withholding tax rates

Front 17

What is the US tax treaty model?

Back 17

-Zero % withholding tax for interest and royalties and 15% for dividend payments
-US has treaties in over 50 countries

Front 18

Describe the translation of foreign branch income

Back 18

-Net income is translated to US $ at the average exchange rate for the year.
-Taxed paid to the foreign government, translated at the exchange rate on the date, are then added (grossed up)
-When earnings are repatriated to the US, the difference between this amount and the translated net income is taxable foreign exchange gain or loss.

Front 19

How is foreign subsidiary income translated?

Back 19

-Dividends paid to the US parent are translated at the spot rate on the date of payment.
-Taxes deemed paid on the dividend translated at the spot rate are added. (grossed up)
-Translated amount of taxes deemed paid is used to determine the FTC.

Front 20

What are tax holidays?

Back 20

-An incentive used by a government that partially or completely exempts a taxpayer for a period of time
-Many Asian countries offer tax holiday's to foreign companies
-Offered to encourage foreign direct investment