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Chapter 9 presentation Chapter 9 presentation Presentation Transcript

  • Chapter 9 Taxation of International Transactions
  • The Big Picture (slide 1 of 3)
    • VoiceCo, a domestic corporation, designs, manufactures, and sells specialty microphones for use in theaters.
    • All of its activities take place in Florida
      • But, it ships products to customers all over the United States.
    • When it receives some inquiries about its products from foreign customers, VoiceCo decides to test the foreign market and places ads in foreign trade journals.
      • Soon it is taking orders from foreign customers.
  • The Big Picture (slide 2 of 3)
    • VoiceCo is concerned about its potential foreign income tax exposure.
    • Although it has no assets or employees in the foreign jurisdictions, it now is involved in international commerce and has many questions.
      • Is VoiceCo subject to income taxes in foreign countries?
      • Must it pay U.S. income taxes on the profits from its foreign sales?
      • What if VoiceCo pays taxes to other countries?
        • Does it receive any benefit from these payments on its U.S. tax return?
    View slide
  • The Big Picture (slide 3 of 3)
    • Suppose that VoiceCo establishes a manufacturing plant in Ireland.
      • VoiceCo incorporates the Irish operation as VoiceCo-Ireland, a foreign corporation.
      • Ireland imposes only a 12.5% tax on VoiceCo-Ireland’s profits.
    • So long as VoiceCo-Ireland does not distribute profits to VoiceCo, will the profits escape U.S. taxation?
    • What are the consequences to VoiceCo of being the owner of a so-called controlled foreign corporation?
    • Does it have any reporting requirements with the IRS?
    • Read the chapter and formulate your response.
    View slide
  • Overview of International Taxation (slide 1 of 2)
    • The U.S. taxes U.S. taxpayers on “worldwide” income
    • The U.S. allows a Foreign Tax Credit to be claimed against the U.S. tax to reduce double-taxation (U.S. and foreign) of the same income
  • Overview of International Taxation (slide 2 of 2)
    • For foreign taxpayers, the U.S. generally taxes only income earned within its borders
    • The U.S. taxation of cross-border transactions can be organized in terms of:
      • Outbound taxation
        • Refers to the U.S. taxation of foreign-source income earned by U.S. taxpayers
      • Inbound taxation
        • Refers to the U.S. taxation of U.S.-source income earned by foreign taxpayers
  • U.S. Taxation of Cross-Border Transactions
  • The Big Picture – Example 2 Double Taxation
    • Return to the facts of The Big Picture on p. 9-2.
    • Assume that VoiceCo operates an unincorporated manufacturing branch in Singapore.
    • This branch income is taxed in the U.S. as part of Voice-Co’s worldwide income and also in Singapore.
      • Without the foreign tax credit to mitigate this double taxation, VoiceCo would suffer an excessive tax burden and could not compete in a global environment.
  • The Big Picture – Example 3 Inbound Taxation
    • Return to the facts of The Big Picture on p. 9-2 .
    • VoiceCo’s major competitor is a Swiss-based foreign corporation with operations in the United States.
    • Although not a U.S. person, the Swiss competitor is taxed in the United States on its U.S.-source business income.
    • If the Swiss competitor could operate free of U.S. tax, VoiceCo would face a serious competitive disadvantage.
  • International Tax Treaties (slide 1 of 3)
    • Tax treaties exist between the U.S. and many other countries
      • Provisions generally override the treatment called for under the Internal Revenue Code or foreign tax statutes
      • Generally provide taxing rights for the taxable income of residents of one treaty country who have income sourced in the other treaty country
  • International Tax Treaties (slide 2 of 3)
    • Tax treaties generally:
      • Give one country primary taxing rights, and
      • Require the other country to allow a credit for the taxes paid on the twice-taxed income
    • Which country receives primary taxing rights usually depends on
      • The residence of the taxpayer, or
      • The presence of a permanent establishment
        • Generally, a permanent establishment is a branch, office, factory, workshop, warehouse, or other fixed place of business
  • International Tax Treaties (slide 3 of 3)
    • Most U.S. income tax treaties reduce withholding on certain items of investment income
      • e.g., Treaties with France and Sweden reduce withholding on dividends to 15% and on certain interest to zero
      • Many new treaties (e.g., with the United Kingdom and Australia) provide for no withholding on dividend payments to parent corporations
    • The U.S. has developed a Model Income Tax Convention as the starting point for negotiating income tax treaties with other countries
  • Sourcing of Income (slide 1 of 9)
    • Interest income
      • Interest income from the U.S. government, the District of Columbia, from U.S. corp. and from noncorporate U.S. residents is treated as U.S. source income
      • Exceptions
        • Certain interest received from a U.S. corp. that earned ≥ 80% of its active business income from foreign sources over the prior 3 year period is treated as foreign-source income
        • Interest received on amounts deposited with a foreign branch of a U.S. corp. is treated as foreign-source income if the branch is engaged in the commercial banking business
  • Sourcing of Income (slide 2 of 9)
    • Dividend income
      • Dividends received from domestic corps. are sourced inside the U.S.
      • Generally, dividends paid by a foreign corp. are foreign-source income
        • Exception - If ≥ 25% of foreign corp.’s income is effectively connected with a U.S. trade or business for the 3 tax years immediately preceding dividend payment, that percentage of the dividend is treated as U.S.-source income
  • Sourcing of Income (slide 3 of 9)
    • Personal services income
      • Sourced where the services are performed
      • A limited commercial traveler exception applies to non-resident aliens in the U.S. 90 days or less during the tax year
        • If U.S. compensation does not exceed $3,000 and the services are performed for a non-U.S. enterprise not engaged in a U.S. trade or business, the income is not U.S. source
  • Sourcing of Income (slide 4 of 9)
    • Rents and Royalties
      • Income received for tangible property (rents) is sourced in country in which rental property is located
      • Income received for intangible property (royalties) is sourced where property producing the income is used
  • Sourcing of Income (slide 5 of 9)
    • Sale or exchange of property
      • Generally, the location of real property determines the source of any income derived from the property
      • Income from sale of personal property depends on several factors, including:
        • Whether the property was produced by the seller
        • The type of property sold (e.g., inventory or a capital asset)
        • The residence of the seller
  • Sourcing of Income (slide 6 of 9)
    • Sale or exchange of property (cont’d)
      • Generally, income, gain, or profit from the sale of personal property is sourced according to the residence of the seller
      • Income from the sale of purchased inventory is sourced based on where the sale takes place
  • Sourcing of Income (slide 7 of 9)
    • Sale or exchange of property (cont’d)
      • When the seller has produced the inventory property
        • Income must be apportioned between the country of production and the country of sale
        • 50/50 allocation is used unless taxpayer elects to use the independent factory price or the books and records method
  • Sourcing of Income (slide 8 of 9)
    • Sale or exchange of property (cont’d)
    • Income from the sale of personal property other than inventory is sourced at the residence of the seller unless:
      • Gain on the sale of depreciable personal property
        • Sourced according to prior depreciation deductions
          • Any excess gain is sourced the same as the sale of inventory
      • Gain on the sale of intangibles
        • Sourced according to prior amortization
        • Contingent payments are sourced as royalty income
  • Sourcing of Income (slide 9 of 9)
    • Sale or exchange of property (cont’d)
      • Gain attributable to an office or fixed place of business maintained outside the U.S. by a U.S. resident is foreign-source income
      • Income or gain attributable to an office or fixed place of business maintained in the U.S. by a nonresident is U.S.-source income
    • Special rules apply to transportation and communication income
  • Allocation and Apportionment of Deductions (slide 1 of 4)
    • Deductions and losses must be allocated and apportioned between U.S.- and foreign-source income
      • Deductions directly related to an activity or property are allocated to classes of income
        • Then, deductions are apportioned between statutory and residual groupings
      • A deduction not definitely related to any class of gross income is ratably allocated to all classes of gross income
        • Then apportioned between U.S.- and foreign-source income
  • Allocation and Apportionment of Deductions (slide 2 of 4)
    • Interest expense
      • Allocated and apportioned to all activities and property regardless of the specific purpose for incurring the debt
      • Allocation and apportionment is based on either FMV or tax book value of assets
        • Special rules apply in an affiliated group setting
  • Allocation and Apportionment of Deductions (slide 3 of 4)
      • Special rules apply to:
        • Research and development expenditures
        • Certain stewardship expenses
        • Legal and accounting fees
        • Income taxes
        • Losses
  • Allocation and Apportionment of Deductions (slide 4 of 4)
    • §482 gives the IRS the power to reallocate income, deductions, credits or allowances between or among related persons when
      • Necessary to prevent the evasion of taxes, or
      • To reflect income more clearly
  • The Big Picture – Example 9 Apportionment Of Interest Expense
    • Return to the facts of The Big Picture on p. 9-2.
    • Assume that VoiceCo generates U.S.-source and foreign-source gross income for the current year.
    • VoiceCo’s assets (tax book value) are as follows.
      • Assets generating U.S.-source income $18,000,000
      • Assets generating foreign-source income 5,000,000
      • $23,000,000
    • VoiceCo incurs interest expense of $800,000 for the current year. Using the tax book value method, interest expense is apportioned to foreign-source income as follows.
      • $5,000,000 (foreign assets)
      • $23,000,000 (total assets) X $800,000 = $173,913
  • Transfer Pricing Example (slide 1 of 2)
  • Transfer Pricing Example (slide 2 of 2)
  • Foreign Currency Transactions (slide 1 of 4)
    • May be necessary to translate amounts denominated in foreign currency into U.S. dollars
    • Major tax issues related to foreign currency exchange include:
      • Character of gain/loss (capital or ordinary)
      • Date of recognition of gain/loss
      • Source of foreign currency gain/loss
  • Foreign Currency Transactions (slide 2 of 4)
    • Important concepts related to tax treatment of foreign currency exchange transactions include:
      • Foreign currency is treated as property other than money
      • Gain/loss is considered separately from underlying transaction
      • No gain/loss is recognized until a transaction is closed
  • Foreign Currency Transactions (slide 3 of 4)
    • Functional currency approach under SFAS 52 is used for tax purposes
      • All income tax determinations are made in taxpayer’s functional currency
      • Taxpayer’s default functional currency is the U.S. dollar
  • Foreign Currency Transactions (slide 4 of 4)
    • A qualified business unit (QBU) operating in a foreign country uses that country’s currency as its functional currency
      • QBU is a separate and clearly identified unit of a taxpayer’s trade or business (e.g., a foreign branch)
      • An individual is not a QBU but a trade or business conducted by a taxpayer may be a QBU
  • Foreign Branch Currency Exchange Treatment (slide 1 of 2)
    • When foreign branch operations use a foreign currency as functional currency
      • Compute profit/loss in foreign currency
      • Translate into U.S. dollar using average exchange rate for the year
  • Foreign Branch Currency Exchange Treatment (slide 2 of 2)
    • Exchange gains/losses are recognized on remittances from the branch
      • Gain/loss is ordinary
      • Sourced according to income to which the remittance is attributable
  • Distributions From Foreign Corporations
    • Included in income at exchange rate in effect on date of distribution
      • No exchange gain/loss is recognized
    • Deemed dividend distributions under Subpart F are translated at average exchange rate for tax year
      • Exchange gain/loss can arise when an actual distribution of this previously taxed income is made
  • Foreign Taxes
    • For purposes of the foreign tax credit, taxes accrued are translated at the average exchange rate for the tax year
      • An exception to this rule requires translation at the rate taxes were actually paid
        • If paid within 2 years of accrual and differ from accrued amount due to exchange rate fluctuations, no redetermination is required
        • Otherwise, where taxes paid differ from amount accrued, a redetermination is required
  • The Big Picture – Example 13 Apportionment Of Interest Expense
    • Return to the facts of The Big Picture on p. 9-2 .
    • Assume that VoiceCo operates a foreign branch.
    • Foreign taxes attributable to branch income amount to 5,000K (a foreign currency).
      • The taxes are paid within two years of being accrued.
      • The average foreign exchange rate for the tax year to which the foreign taxes relate is .5K:$1.
      • On the date the taxes are paid, the rate is .6K:$1.
    • No redetermination is required, and VoiceCo reports foreign taxes of $10,000 for purposes of the foreign tax credit.
  • Tax Incentives For Exports (slide 1 of 2)
    • Prior tax law contained a special tax incentive for U.S. taxpayers exporting goods
      • Allowed U.S. taxpayers to exclude extraterritorial income (ETI) from U.S. taxation
    • The American Jobs Creation Act of 2004 repealed the ETI exclusion
  • Tax Incentives For Exports (slide 2 of 2)
    • The American Jobs Creation Act of 2004 created a new broad-based “domestic production activities deduction”
    • The domestic production activities deduction is equal to 9% of the taxpayer’s qualified production activities income subject to several limitations
      • Unlike the earlier ETI exclusion, the DPAD does not require exporting or any other activity outside the United States
  • Cross-Border Asset Transfers
    • Tax consequences of transferring assets to a foreign corporation depend on
      • The nature of the exchange
      • The assets involved
      • Income potential of the property
      • Character of the property in the hands of the transferor or transferee
  • Outbound Transfers (slide 1 of 3)
    • Similar to exchanges of assets for corporate stock of a domestic corporation, realized gain/loss may be deferred on certain outbound capital changes, moving corporate business outside the U.S.
      • Starting a new corp outside the U.S.
      • Liquidating a U.S. subsidiary into an existing non-U.S. subsidiary
      • Others
  • Outbound Transfers (slide 2 of 3)
    • Transfer of trade or business property generally qualifies for deferral of gain or loss
      • Transfer of “tainted” assets triggers immediate recognition of gain but not loss
      • In addition, depreciation and other recapture potential must be recognized to the extent of gain realized
  • Outbound Transfers (slide 3 of 3)
    • “ Tainted” assets include:
      • Inventory
      • Installment obligations and unrealized accounts receivable
      • Foreign currency
      • Property leased by the transferor unless the transferee is the lessee
  • Cross-border Mergers (slide 1 of 2)
    • The American Jobs Creation Act of 2004 created strict rules to deter owners from turning domestic entities into foreign entities
      • A domestic corp. or partnership continues to be treated as domestic if:
        • A foreign corp. acquires substantially all of its properties after March 4, 2003
        • The former owners of the U.S. corp. (or partnership) hold ≥ 80% of foreign corp.’s stock after transaction
        • The foreign corp. does not have substantial business activities in its country of incorporation
  • Cross-border Mergers (slide 2 of 2)
    • If former owners own at least 60% but less than 80% of new corp.
      • Foreign entity is treated as foreign
      • Corporate-level taxes imposed due to the transfer cannot be offset with NOLs, foreign tax credits, or certain other tax attributes
    • An excise tax is also imposed on the value of certain stock held by insiders during the 12-month period beginning 6 months before the date of inversion
  • Inbound and Offshore Transfers
    • U.S. persons involved in an inbound or offshore transfer involving stock of a controlled foreign corporation (CFC)
      • Generally, recognize dividend income to the extent of their pro rata share of previously untaxed E & P of the foreign corporation, or
      • Enter into a gain recognition agreement with the IRS that may allow income to be deferred
  • Controlled Foreign Corporations (slide 1 of 3)
    • Certain types of income generated by a controlled foreign corporation (CFC) are currently included in income by U.S. shareholders without regard to actual distributions including:
      • Pro rata share of Subpart F income
      • Increase in earnings that the CFC has invested in U.S. property
  • Controlled Foreign Corporations (slide 2 of 3)
    • Subpart F Income includes the following
      • Insurance income (§ 953)
      • Foreign base company income (§ 954)
      • International boycott factor income (§ 999)
      • Illegal bribes
      • Income derived from a § 901(j) foreign country
  • Controlled Foreign Corporations (slide 3 of 3)
    • To apply, foreign corp must have been a CFC for an uninterrupted period of 30 days or more during tax year
      • A CFC is any foreign corp in which > 50% of total voting power or value is owned by U.S. shareholders on any day of tax year
      • U.S. shareholder is a U.S. person who owns (directly or indirectly) 10% or more of voting stock of the foreign corp
  • U.S. Shareholder’s Income from CFC
  • Foreign Tax Credit
    • Foreign tax credit (FTC) provisions are designed to reduce the possibility of double taxation
      • Allows a credit for foreign income taxes paid
        • Credit is a dollar-for-dollar reduction of U.S. income tax liability
      • FTC may be “direct” or “indirect”
    • The FTC is elective
      • May take a deduction for foreign taxes paid or incurred rather than the FTC
  • Direct Foreign Tax Credit
    • Available to taxpayers who pay or incur a foreign income tax
      • Only person who bears the legal burden of the foreign tax is eligible for the direct credit
    • Direct credit is not available to a U.S. corporation operating in a foreign country through a foreign subsidiary
  • Indirect Foreign Tax Credit (slide 1 of 5)
    • The indirect credit is available to U.S. corporations for dividends received (actual or constructive) from foreign corporations
      • Foreign corp pays tax in foreign jurisdiction
      • When foreign corp remits dividends to U.S. corp, the income is subject to tax in the U.S.
  • Indirect Foreign Tax Credit (slide 2 of 5)
    • Foreign taxes are deemed paid by U.S. corporate shareholders in same proportion as dividends bear to foreign corp’s post-1986 undistributed E & P
      • Indirect FTC =
      • Actual or constructive dividend X Post-1986 foreign taxes
      • Post-1986 undistributed E & P
    • Corporations choosing the FTC for deemed-paid foreign taxes must gross up dividend income by the amount of deemed-paid taxes
  • Indirect Foreign Tax Credit (slide 3 of 5)
    • Example
      • Wren Inc, a domestic corp, receives a $120,000 dividend from Finch Inc, a foreign corp. Finch paid $500,000 of foreign taxes on post-1986 E & P totaling $1,200,000 (after taxes)
  • Indirect Foreign Tax Credit (slide 4 of 5)
    • Example (cont’d)— Wren’s deemed-paid foreign taxes for FTC purposes are $50,000
      • Cash dividend from Finch $120,000
      • Deemed-paid foreign taxes
      • $500,000 × $ 120,000 50,000
      • $1,200,000
      • Gross income to Wren $170,000
      • Wren must include $50,000 in gross income for the gross up adjustment if FTC is elected
  • Indirect Foreign Tax Credit (slide 5 of 5)
      • Only available if domestic corp owns 10% or more of voting stock of foreign corp
        • Credit is available for 2nd and 3rd tier foreign corps if 10% ownership requirement is met
        • Credit is also available for 4th through 6th tier foreign corps if additional requirements are met
  • Foreign Tax Credit Limitations (slide 1 of 4)
    • Limit is designed to prevent foreign taxes from being credited against U.S. taxes on U.S.-source taxable income
      • FTC cannot exceed the lesser of:
        • Actual foreign taxes paid or accrued, or
        • U.S. taxes (before FTC) on foreign-source taxable income, calculated as follows:
        • U.S. tax × Foreign-source taxable income
        • before FTC Total taxable income*
    • *Taxable income of an individual, estate, or trust is computed without any deduction for personal exemptions.
  • Foreign Tax Credit Limitations (slide 2 of 4)
    • Limitation can prevent total amount of foreign taxes paid in high-tax jurisdictions from being credited
      • Generating additional foreign-source income in low, or no, tax jurisdictions could alleviate this problem
      • However, a separate limitation must be calculated for certain categories (baskets) of foreign source income
  • Foreign Tax Credit Limitations (slide 3 of 4)
    • For tax years beginning after 2006, there are only two baskets:
      • Passive income, and
      • All other (general)
    • Any FTC carryforwards into post-2006 years are assigned to one of these two categories
  • Foreign Tax Credit Limitations (slide 4 of 4)
    • The limitations can result in unused (noncredited) foreign taxes for the tax year
      • Carryback period is 1 year
      • Carryforward period is 10 years
    • The taxes can be credited in years when the formula limitation for that year exceeds the foreign taxes attributable to the same tax year
      • The carryback and carryforward provisions are available only within a specific basket
  • Foreign Losses (slide 1 of 2)
    • May be able to offset foreign losses against U.S.-source income, reducing U.S. income tax due
    • If the foreign country in which loss is generated (sourced) taxes subsequent income from these foreign operations, the FTC could reduce or eliminate any U.S. tax on the income
      • To prevent this loss of revenue, overall foreign losses must be recaptured as U.S.-source income for FTC purposes
  • Foreign Losses (slide 2 of 2)
    • Foreign losses are recaptured by reducing the numerator of the FTC limitation formula by the lesser of:
      • The remaining unrecaptured overall foreign loss, or
      • 50% of foreign-source taxable income for the year
    • Unrecaptured losses are carried over indefinitely until recaptured
  • Alternative Minimum Tax FTC
    • For purposes of the alternative minimum tax (AMT), the FTC limitation is calculated as follows:
    • AMT FTC limitation =
    • Foreign-source AMTI × Tentative Minimum
    • Total AMTI Tax
    • Taxpayer may elect to use foreign-source regular taxable income in the numerator if it does not exceed total AMTI
  • U.S. Taxation of Nonresident Aliens and Foreign Corporations
    • Generally, nonresident alien individuals (NRAs) and foreign corps. are subject to U.S. taxation
      • On U.S.-source income and
      • Foreign-source income when that income is effectively connected with the conduct of a U.S. trade or business
  • Nonresident Alien Individuals
    • Nonresident alien (NRA)—an individual who is not a citizen or resident of the U.S.
      • Citizenship is determined under the immigration and naturalization laws of the U.S.
        • The citizenship statutes are broken down into two categories:
          • Nationality at birth or
          • Through naturalization
  • Residency Tests for Non Citizens (slide 1 of 3)
    • Green Card Test:
      • An individual is considered a resident of the U.S. on the first day of the tax year in which he or she is physically present in the U.S. after the card is issued
      • Residency status remains in effect until the card is revoked or the individual has abandoned permanent resident status
  • Residency Tests for Non Citizens (slide 2 of 3)
    • Substantial Presence Test:
      • This mathematical test applies to people in the U.S. without a green card
        • An individual in the U.S. 183 days during the year is a resident for the year for tax purposes
        • Also a taxpayer in the U.S. for 183 days in the past three years (using a specified weighting formula) is taxed as a resident
  • Residency Tests for Non Citizens (slide 3 of 3)
      • Exceptions apply to the substantial presence test for
        • Commuters from Mexico and Canada who work in the U.S.
        • Foreign government-related individuals (e.g., diplomats)
        • Qualified teachers
        • Trainees and students, and
        • Certain professional athletes
  • U.S. Taxation of Nonresident Aliens (slide 1 of 3)
    • Non-resident alien income not “effectively connected” with U.S. trade or business
      • Includes dividends, interest, rents, royalties, certain compensation, premiums, annuities, and other fixed, determinable, annual or periodic (FDAP) income
      • 30% tax generally is withheld by payors of the income
        • Eliminates problems of assuring payment by nonresidents, determining allowable deductions, and, in most instances, the filing of tax returns by nonresidents
  • U.S. Taxation of Nonresident Aliens (slide 2 of 3)
    • Capital gains not effectively connected with the conduct of a U.S. trade or business are exempt from tax, as long as the NRA individual was not present in the United States for 183 days or more during the taxable year
  • U.S. Taxation of Nonresident Aliens (slide 3 of 3)
    • Non-resident alien income effectively connected with U.S. trade or business
      • This income is taxed at the same rates applicable to U.S. citizens
      • Deductions related to the business may be claimed
  • U.S. Taxation of Foreign Corps (slide 1 of 4)
    • Income not effectively connected with U.S. trade or business
      • Taxed at 30% as described above for individuals
      • The payor must withhold and remit the tax
    • U.S.-source capital gains - exempt from Federal income tax if not effectively connected with conduct of U.S. trade or business
  • U.S. Taxation of Foreign Corps (slide 2 of 4)
    • Income effectively connected with U.S. trade or business
      • This income is taxed at the same rates applicable to U.S. corporations
      • Deductions can offset the income
  • U.S. Taxation of Foreign Corps (slide 3 of 4)
    • Branch profits tax
      • If a foreign corporation operates through a U.S. subsidiary (a domestic corp.)
        • The income of the subsidiary is taxable by the U.S. when earned
        • Also subject to a withholding tax when repatriated (returned as dividends to the foreign parent)
  • U.S. Taxation of Foreign Corps (slide 4 of 4)
    • Branch profits tax (cont’d)
      • In addition to the income tax imposed under § 882 on effectively connected income of a foreign corp., a tax equal to 30% of the dividend equivalent amount (DEA) is imposed
        • DEA is the foreign corp’s effectively connected earnings, adjusted for increases and decreases in the corp’s U.S. net equity (investment in U.S. operations)
      • The DEA is limited to current E & P and post-1986 accumulated E & P effectively connected, or treated as effectively connected, with the conduct of a U.S. trade or business
  • Foreign Investment in Real Property Tax Act (slide 1 of 4)
    • Gains and losses realized by NRAs and foreign corps on U.S. real property interests (USRPI)
      • Treated as effectively connected with the conduct of a U.S. trade or business
    • NRAs must pay tax equal to at least the lesser of
      • 26% (or 28%) of AMTI, or
      • Regular U.S. rates on net real property gain for the year
  • Foreign Investment in Real Property Tax Act (slide 2 of 4)
    • USRPI is any direct interest in real property situated in U.S. and any interest in a domestic corp
      • Applies unless taxpayer can establish that domestic corp was not a U.S. real property holding corp (USRPHC) during the shorter of:
        • Period taxpayer owned interest in corp, or
        • For 5 year period ending on date interest was disposed of
  • Foreign Investment in Real Property Tax Act (slide 3 of 4)
    • USRPHC is any corp (foreign or domestic) where FMV of corp’s USRPI is 50% or more of aggregate FMV of:
      • USRPIs
      • Interests in real property located outside U.S.
      • Any other assets used in a trade or business
        • Stock regularly traded on established securities market is not a USRPI if 5% or less is owned
  • Foreign Investment in Real Property Tax Act (slide 4 of 4)
    • Withholding provisions
      • Any purchaser or agent acquiring a USRPI from a foreign person must withhold 10% of amount realized on disposition
      • Higher withholding rates apply to certain entities
  • Expatriation to Avoid U.S. Taxation (slide 1 of 2)
    • U.S. tax applies to U.S.-sourced income of persons who relinquished their U.S. citizenship within 10 years of deriving that income
      • Only applies if person gave up citizenship to avoid U.S. tax
  • Expatriation to Avoid U.S. Taxation (slide 2 of 2)
    • Also applies to NRAs who lost U.S. citizenship within preceding 10 year period if principal purpose was avoidance of U.S. tax
    • Tax avoidance purpose is presumed if either:
      • Average annual net income tax for five preceding taxable years > $147,000 (in 2011)
      • Net worth as of that date is $2 million or more
  • Refocus On The Big Picture (slide 1 of 4)
    • Now you can address the questions about VoiceCo’s activities that were posed at the beginning of the chapter.
    • Simply selling into a foreign jurisdiction may not trigger any overseas income tax consequences
      • But, such income is taxed currently to VoiceCo in the United States.
  • Refocus On The Big Picture (slide 2 of 4)
    • When VoiceCo sets up an Irish corporation, it benefits from deferral because as a manufacturer it can avoid deemed dividends under Subpart F.
      • However, there may be passive-basket income earned by the Irish subsidiary.
      • VoiceCo must file Form 5471 to report on the activities of its foreign subsidiary.
      • If VoiceCo receives dividends from its foreign subsidiary, it can claim § 902 foreign tax credits (so-called indirect credits).
    • What are the foreign tax implications if VoiceCo ‘‘checks the box’’ on its foreign subsidiary?
      • The U.S. tax implications?
  • Refocus On The Big Picture (slide 3 of 4)
    • What If?
    • Suppose VoiceCo decides not to create a foreign subsidiary.
    • Instead, VoiceCo decides to license its design and manufacturing process to a local European musical instruments company for sales in Europe.
      • The European company pays VoiceCo a royalty equal to 25% of the sales price on all its sales of microphones based on VoiceCo’s design.
      • The royalty income is foreign-source income (as the underlying intangible property is exploited outside the United States).
  • Refocus On The Big Picture (slide 4 of 4)
    • What If?
    • The European country imposes a 5% withholding tax on all royalty payments to VoiceCo.
      • The royalties are part of its worldwide income and so are currently taxed to VoiceCo in the United States.
      • Will VoiceCo receive a foreign tax credit for the withholding tax?
    • If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:
    • Dr. Donald R. Trippeer, CPA
    • [email_address]
    • SUNY Oneonta