5.6 - International Tax Issues

Question 1

Under this tax system, a nation only taxes its citizens and residents on income earned inside its borders:

Answer 1

Territorial tax system

Question 2

This is when taxation is based on whether a person is actually present in the country and deriving income from within its borders:

Answer 2

Source-country taxation

Question 3

Countries that are members of the organization for economic cooperation and development (OECD) employ what tax system?

Answer 3

Territorial-style tax system

Question 4

Under a worldwide tax system, primary mechanism for mitigating double taxation is the:

Answer 4

Foreign tax credit

Question 5

The foreign tax credit limitation is calculated by:

Answer 5

Pre-credit U.S. tax on total taxable income X (the lesser of foreign taxes paid OR foreign source income / total taxable income)

Question 6

The foreign tax credit limitation must be applied separately to each of the following categories of income:

Answer 6

Passive income (dividends, interest, rents, royalties)
General income (active business income)
Foreign branch income
Global intangible low-taxed income

Question 7

Under a territorial tax system, the primary mechanism for mitigating double taxation is:

Answer 7

Participation exception OR dividends-received deduction

Question 8

Allows the taxpayer to exempt foreign income from taxation:

Allows the taxpayer to offset dividend income from foreign sources with a deduction:

Answer 8

Participation exemption

Dividends-received deduction

Question 9

A us corporation is allowed to exempt 100% of foreign-source divided payments from us taxation if

Answer 9

It owns 10% or more of the corporation

Question 10

When a us person invests abroad, it is considered a :
The income earned outside us borders is generally referred to as:

Answer 10

Outbound transaction
Foreign source income

Question 11

The us has two anti-deferral regimes:

Answer 11

Passive foreign investment company regime
Controlled foreign corporation rules/sub part F regime

Question 12

A foreign entity is a passive foreign investment company (PFIC) if :

Answer 12

75% or more of the corporations gross income is passive
OR
50% or more o the corporations total assets are passive

Question 13

The controlled foreign corporation rules (Subpart F) are intended to curb the behavior of:

Answer 13

Shifting income to low-tax jurisdictions to avoid US tax

Question 14

A foreign corporation is considered a controlled foreign corporation (CFC) and therefore subpart F rules apply to it, if:

Answer 14

More than 50% of its stock is owned by US shareholders

Question 15

When both PFIC and Subpart F rules apply to a corporation, what happens?

Answer 15

Subpart F rules supersede the PFIC rules

Question 16

Company ABC is a 12% owner in foreign corporation, DEF, whose primary source of income is investments. The other shareholders of DEF include 6 us persons owning 10% and a foreign person who owns 28%. Determine the tax treatment of ABCs investment in DEF.

Answer 16

DEF qualifies as both a PFIC and CFC, therefore Subpart F rules supersede and apply

Question 17

A minimum tax imposed on certain low-taxed income that is intended to reduce the incentive to relocate CFCs to low-tax jurisdictions:

Answer 17

GILTI tax

Question 18

What is the deduction amount for the GILTI tax?

Answer 18

50%

Question 19

Hughes corp (US Corp) owns 15% of EFM corp (a CFC). EKMs net income for year 1 is 1,500,000 and its adjusted basis of its intangible property at the end of each quarter is:
1,000,000 Q1
1,250,000 Q2
1,225,000 Q3
1,150,000 Q4
Determine Hughes GILTI tax inclusion and deduction.

Answer 19

1,000,000 + 1,250,000 + 1,225,000 + 1,150,000 = 4,625,000 / 4 quarters = 1,156,250
1,156,250 X 10% = 115,625 avg. depr. Tangible property
1,500,000 - 115,625 = 1,384,375 EKMs Net Income

1,384,375 X 15% = 207,656 Hughes GILTI Inclusion
207,656 X 50% = 103,828 GILTI deduction

Question 20

Each us shareholder of a CFC must include in income their pro rata share of:

Answer 20

Subpart F income
And
Earnings invested in US property

Question 21

A CFC with no prior US property investments makes a $1 million loan to its US parent in the second quarter of year 1. Determine the corporations increase in earnings invested in US property in year 1.

Answer 21

Q1 = 0
Q2 = 1,000,000
Q3 = 1,000,000
Q4 = 1,000,000
Total = 3,000,000 / 4 = 750,000

Question 22

The CFCs untaxed earnings are divided into two groups:

Answer 22

1. Cash/cash equivalents, which are taxed at 15.5%
2. All other earnings, which are taxed at 8%

Question 23

Us shareholders can elect to pay the transition tax in 8 installments over 8 years pursuant to the following schedule:

Answer 23

Year 1 = 8%
Year 2 = 8%
Year 3 = 8%
Year 4 = 8%
Year 5 = 8%
Year 6 = 15%
Year 7 = 20%
Year 8 = 25%

Question 24

The base erosion and anti abuse tax (BEAT) is imposed on who?

Answer 24

Large US corporations with gross receipts of $500 million or more with a significant amount of deductible payments to related foreign affiliates

Question 25

A us corporation can get a deduction for a portion of its foreign derived intangible income (FDII) from transactions involving non-us persons located outside the US in the deduction amount of:

Answer 25

37.5%

Question 26

A foreign person with a us trade or business must file:

Answer 26

Form 1120-F us income tax return

Question 27

There are two types of withholding tax regimes for non business income:

Answer 27

1. Fixed, determinable, annual, or periodic incom (FDAP)
2. Foreign account tax compliance act of 2010 (FATCA)

Question 28

Deals with the withholding on foreign persons investment type income:

Answer 28

FDAP (Foreign, determinable, annual, or periodic income)

Question 29

Deals with withholding tax on foreign entities for failure to provide information to US recipients. It’s purpose is to combat tax evasion.

Answer 29

FATCA (Foreign account tax compliance act)

Question 30

A foreign person is considered a resident in the US if he or she :

Answer 30

1. Has a green card
2. Spent at least 31 days during the current year in the US AND at least 183 days for a 3 year period prior

Question 31

What is the weighted average calculation used for calculating the 183 days rule for the substantial presence test

Answer 31

Days in current year X 1
Days in preceding year X 1/3
Days in next preceding year X 1/6

Question 32

Esther, a UK citizen, stayed in the US for 122 days in each of the last three years. Determine whether Esther is treated as a US resident this year.

Answer 32

122 X 1 = 122 days
122 X 1/3 = 40.67 days
122 X 1/6 = 20.33 days
122 + 40.67 + 20.33 = 183 days ; yes treated as a us resident

Question 33

The mark to market tax regime is imposed on covered expatriates who renounce their us citizenship and satisfy one of the following 3 test:

Answer 33

1. Tax liability test: net income tax liability for 5 preceding years exceeds 178,000 threshold
2. Net worth test: net worth $2 million or more
3. Compliance test: failed to comply with US federal tax obligations for 5 preceding years

Question 34

All property of a covered expatriate is treated how?

Answer 34

As sold with a gain arising.
A $767,000 exclusion is allowed
Can elect to defer payment of tax attributable to property deemed sold

Question 35

Cathleen is a us citizen. She is the founder of a U.S. company. Her stock in the company is worth $7 million and her basis in the stock is $250,000. In 2022, Cathleen renounced her citizenship and moves to Bermuda. Assume that the gain exclusion for 2022 is $767,000. Determine Cathleen us tax consequences of his action.

Answer 35

7,000,000 - 250,000 -767,000 = 5,983,000 long term capital gain

Question 36

Expatriate entities fall into one of two categories for us tax purposes:

Answer 36

1. Continue to be treated as US corporation if: former U.S. shareholders own 80% or more of interest in the new foreign parent
2. Denied certain tax attributes such as net operating losses and foreign tax credits to offset investing gain if: former U.S. shareholders own 60% > x < 80% of interest in the new foreign parent

Question 37

Bilateral income tax conventions entered into by the United States and a foreign country:

Answer 37

Tax treaties