This presentation will cover general international tax and transfer pricing topics.

1. International Tax and Transfer
Pricing Topics
Jason Rauhe, CPA
February 9, 2016

2. 2
AGENDA
• General U.S. Tax Principles
• Income Tax Treaties
• Foreign Tax Credit
• General International Tax Filing Requirements
• Transfer Pricing Overview
• Foreign Bank Account Reporting / Foreign
Account Tax Compliance Act (“FATCA”) Overview

3. 3
General US Tax Principles

4. 4
JURISDICTION TO TAX
Source Jurisdiction
• Residents and nonresidents alike
are taxed on income from
economic activity within a
particular (sourced) country
Residence Jurisdiction
• All income accruing to
residents of a country,
regardless of source, is subject
to tax by that country

5. 5
STATUTORY FRAMEWORK
Who is a U.S. Person?
• U.S. citizens
• Green card holders (lawful
permanent residents)
• Residents for income tax purposes
 “Substantial presence” test
– Generally, 31 current days, plus 183 days in
current and prior two years
• Domestic corporation / partnership /
estate / trust
 Based on place of incorporation /
organization – U.S. state

6. 6
STATUTORY FRAMEWORK
Who is a Foreign Person?
• Anyone who is not a U.S. person
 Non-U.S. citizen
 Non-green card holder
 Does not satisfy “substantial presence test”
• Foreign corporation / partnership
(organized outside the U.S.)
• Foreign estate/trust
• Foreign government

7. 7
STATUTORY FRAMEWORK
U.S. Persons
• What income is taxed?
 U.S. person is taxed on worldwide income wherever sourced
 Does not matter where U.S. citizen lives
• How is income taxed?
 Net taxable income
 Progressive rates
 Double taxation avoidance
 Foreign tax credit (or deduction)

8. 8
STATUTORY FRAMEWORK
Foreign Persons
• What income is taxed?
 U.S.-sourced income that is:
– “ECI” — income “effectively connected” with
U.S. “trade or business”
– “FDAP” — “fixed, determinable, annual, or
periodic gains, profits, and income”
– Interest, dividends, rents, royalties, wages,
salary
– Gain on sale of U.S. real property

9. 9
U.S. TAX DEFERRAL
• U.S. shareholders of nonresident corporations are not subject
to U.S. taxation until distributions are received from the
corporation as a dividend
• Deferral benefit is the greatest when foreign tax on income of
the foreign corporation is low or none

10. 10
ANTI-DEFERRAL REGIMES
U.S. shareholders might be subject to U.S. tax even if income is
not actually distributed by the FC to the shareholder
• Foreign corporations
 Controlled Foreign Corporation (CFC) — Subpart F Income
– U.S. control required
 Passive Foreign Investment Company (PFIC)
– Income Test: 75% or more of gross income is passive
– Asset Test: 50% or more of a corporation’s assets are passive
– U.S. control NOT required

11. 11
FOREIGN CORPORATIONS
CONTROLLED
Definition
• A foreign corporation in which:
 More than 50% either
– Total combined voting power of all classes of
stock entitled to vote, or
– Total value of the stock
 Is owned by U.S. shareholders
 On any day of the foreign corporation’s
taxable year

12. 12
FOREIGN CORPORATIONS
CONTROLLED
U.S. Shareholders – a U.S. Person Who:
• Owns 10% or more voting power of all classes of stock, or
• Holds direct, indirect or constructive ownership

13. 13
SUBPART F
• Designed to prevent deferral of portable income
• Directed at two basic types of income:
 Passive investment income
 Income derived from dealings with related entities
• Applies to income derived by a CFC and is not country-specific
• Eligible for foreign tax credit

14. 14
SUBPART F
• Subpart F – income is included in income of U.S. shareholder
in year earned rather than when distributed
• §956 Income – earnings of CFC invested in U.S. property
treated as distribution
 Includes most loans to U.S. shareholders
 Applies when U.S. shareholder pledges stock as loan security
• Basis in CFC stock is adjusted for inclusion and distributions
• Not considered dividends, so not eligible for reduced
“qualified” tax rate or DRD deduction

15. 15
PREVIOUSLY TAXED INCOME
SUBPART F:
• Prevents double taxation that could occur upon an actual
distribution from a CFC
• Excludes from gross income any actual distributions of
earnings previously taxed as Subpart F income or
investments in U.S. property
• Foreign exchange gain or loss is recognized when actual
distribution occurs

16. 16
Income Tax Treaties

17. 17
PERMANENT ESTABLISHMENT
Taxation of Business Profits
General treaty rule:
Profits of a foreign corporation from
U.S. activities are taxable if it carries
on business in the U.S. through a
permanent establishment (PE). If
so, the profits may be taxed by the
U.S., but only to the extent they are
attributable to that PE.

18. 18
PERMANENT ESTABLISHMENT
PE – Specific Inclusions, U.S. Model, Article 5
• PE includes:
 Place of management, branch office, factory or workshop
 Place where natural resources are extracted (e.g., mine, oil or gas well,
quarry)
 Building site, construction or installation project that lasts longer than 12
months
 Drilling rig or ship used to explore for natural resources if that activity
lasts longer than 12 months

19. 19
PERMANENT ESTABLISHMENT
PE – Specific Inclusions, U.S. Model, Article 5
• PE does not include:
 Use of facilities solely to store, display or deliver goods belonging to enterprise
 Maintenance of a stock of goods solely for purpose of storage, display, delivery
or processing by another enterprise
 Maintenance of a fixed place of business solely to purchase goods or collect
information
 Maintenance of a fixed place of business solely for the purposes of carrying out
other activity of a “preparatory or auxiliary” nature (e.g., advertising)

20. 20
Foreign Tax Credit

21. 21
FOREIGN TAX CREDIT BASICS
• The purpose of the Foreign Tax Credit is to mitigate double
taxation
 Foreign income taxed at the higher U.S. or non-U.S. tax rate
• The foreign tax credit is generally available to:
 U.S. citizens
 Domestic corporations

22. 22
FOREIGN TAX CREDIT BASICS
• The Foreign Tax Credit is elective
 Taxpayers can choose on an annual basis to either claim the foreign tax
credit or claim a tax deduction for foreign taxed paid
• In any given tax year, taxpayers must either credit or
deduct all foreign taxes
 No partial credit and partial deductions permitted in the same tax year

23. 23
FOREIGN TAX CREDIT BASICS
What taxes are credible?
• Only income or excess profits taxes (essentially income
taxes) are credible
• Tax must resemble U.S. income tax (Reg. § 1.901-2)
• Penalties, fines, interest, custom duties, VAT, capital and
asset taxes do not qualify for the credit
• Tax payment must also be compulsory to be credible for U.S.
federal tax purposes
• During compliance process, foreign tax returns should be
requested and maintained in order to support the foreign tax
credit claimed upon audit

24. 24
SEPARATE BASKETS
FOREIGN TAX CREDIT LIMITATION:
• Under IRC § 904(d), the credit limitation must be
determined separately for foreign taxes on each
separate limitation category (basket)
• For taxable years beginning after December 31, 2006,
there are only two baskets:
 General category income
 Passive category income

25. 25
MISCELLANEOUS ITEMS
FOREIGN TAX CREDIT:
• Excess foreign tax credits can be carried backwards and
forward
 One-year carry-back
 10-year carry-forward
• AMT foreign tax credit calculated separately

26. 26
DCT FOREIGN TAX CREDITS
§902
• Withholding – tax deemed paid by income recipient even
though payment could be made by withholding agent
• Income tax on compensation
• Income tax paid on business profits of flow-through entity
(e.g., branch, partnership)

27. 27
TAX CREDIT
INDIRECT FOREIGN
(“Deemed Paid Credit”) - §901
• What taxes are credible?
• Income taxes paid by foreign corporations
• Who is eligible to take the credit on their U.S. tax return?
• Allowed to certain domestic corporations (10% ownership
requirement)
• Not allowed for individuals, partnerships or S corporations
• Allows for indirect foreign tax credit on dividends received
from foreign corporations, although tax is paid by the foreign
corporation, not the recipient

28. 28
TAX CREDIT
INDIRECT FOREIGN
(“Deemed Paid Credit”) - §902
• Calculation of Deemed Paid Credit:
 Dividend income received deemed to
have foreign taxes repatriated with it
 Determine the amount of a distributing
corporation’s pre-tax earnings attributable
to the dividend (IRC §78 “gross up”)
 Tax “pre-tax” earnings and allow credit

29. 29
TAX CREDIT
INDIRECT FOREIGN
§78 Gross-up
• Tax deemed paid and treated as income
• Not eligible for dividend received deduction

30. 30
General International
Filing Requirements

31. 31
FORM 5471/8865/8858
When and Where to File?
• Form 5471/8865/8858 is attached to the taxpayer’s income tax return and
is due when the income tax return is due, including extensions
• Type of form to be prepared:
Foreign corporation Form 5471
Foreign partnership Form 8865
Foreign disregarded entity Form 8858

32. 32
• A $10,000 penalty is imposed for each annual
accounting period of each foreign corporation for
failure to furnish the required information within the
time prescribed
 If the information is not filed within 90 days after the IRS has mailed a
notice of the failure to the U.S. person, an additional $10,000 penalty
(per foreign corporation) is charged for each 30-day period, or fraction
thereof, during which the failure continues after the 90-day period has
expired up to a maximum of an additional $50,000 penalty
FORM 5471/8865/8858
PENALTIES

33. 33
Transfer Pricing
Overview

34. 34
OVERVIEW
• Increased global scrutiny of related party transactions
• Transfer pricing regulations and penalties vary by country, as
well as documentation requirements
• Three branches of transfer pricing to reduce intercompany
transaction exposures and risks:
 Documentation / compliance
 Planning
 Controversy

35. 35
AUDIT TRIGGERS
• Certain intercompany Transactions:
Intangible property (e.g., technology,
patents, know-how)
Services (e.g., management,
engineering, G&A)
• Cost sharing arrangements (CSA)
• Losses earned for consecutive
years

36. 36
PRICING STRATEGIES
TRANSFER
Documentation
• First line of defense under audit
• Documentation rules vary by country
• Requirements, filing deadlines, language, method selection,
accepted comparable companies / transactions, etc.
• In general, reports will contain:
 Industry analysis
 Functional analysis (i.e., a detailed narrative of a company’s functions, assets
and risks)
 Economic analysis (i.e., a method used to test transaction, pertinent regulations
and benchmarking results

37. 37
PRICING STRATEGIES
TRANSFER
Compliance
• In the U.S., taxpayers:
 Must file Forms 5471 and 5472 for related party
transactions
 May need to file Form 8275 for disclosure
 Must report Uncertain Tax Positions (UTP) on
Schedule UTP
– Includes description of transaction and size of
associated reserve
– FIN48 documentation

38. 38
PRICING STRATEGIES
TRANSFER
Controversy
• Audit defense
• Dispute resolution
• APAs
• Competent authority
• Arbitration

39. 39
Foreign Back Account
Reporting Overview

40. 40
ACCOUNT (FBAR) — FinCEN
FOREIGN BANK
• Individuals and entities with a financial interest in or
signature authority over foreign accounts
• Must report via Form 114, if aggregate value in
foreign accounts exceeds $10,000
• Significant penalties can apply

41. 41
ACCOUNT (FBAR) — FinCEN
FOREIGN BANK
• New enacted due dates for Form 114
• For tax years beginning after December 31, 2015
 Form 114 will be due April 15
 Maximum extension for a six-month period ending October 15

42. 42
CONTACT ME
Jason Rauhe, CPA
Principal – Skoda Minotti
(248) 763-4711
jrauhe@skodaminotti.com