5.6 - International Tax Issues Flashcards
Under this tax system, a nation only taxes its citizens and residents on income earned inside its borders:
Territorial tax system
This is when taxation is based on whether a person is actually present in the country and deriving income from within its borders:
Source-country taxation
Countries that are members of the organization for economic cooperation and development (OECD) employ what tax system?
Territorial-style tax system
Under a worldwide tax system, primary mechanism for mitigating double taxation is the:
Foreign tax credit
The foreign tax credit limitation is calculated by:
Pre-credit U.S. tax on total taxable income X (the lesser of foreign taxes paid OR foreign source income / total taxable income)
The foreign tax credit limitation must be applied separately to each of the following categories of income:
Passive income (dividends, interest, rents, royalties)
General income (active business income)
Foreign branch income
Global intangible low-taxed income
Under a territorial tax system, the primary mechanism for mitigating double taxation is:
Participation exception OR dividends-received deduction
Allows the taxpayer to exempt foreign income from taxation:
Allows the taxpayer to offset dividend income from foreign sources with a deduction:
Participation exemption
Dividends-received deduction
A us corporation is allowed to exempt 100% of foreign-source divided payments from us taxation if
It owns 10% or more of the corporation
When a us person invests abroad, it is considered a :
The income earned outside us borders is generally referred to as:
Outbound transaction
Foreign source income
The us has two anti-deferral regimes:
Passive foreign investment company regime
Controlled foreign corporation rules/sub part F regime
A foreign entity is a passive foreign investment company (PFIC) if :
75% or more of the corporations gross income is passive
OR
50% or more o the corporations total assets are passive
The controlled foreign corporation rules (Subpart F) are intended to curb the behavior of:
Shifting income to low-tax jurisdictions to avoid US tax
A foreign corporation is considered a controlled foreign corporation (CFC) and therefore subpart F rules apply to it, if:
More than 50% of its stock is owned by US shareholders
When both PFIC and Subpart F rules apply to a corporation, what happens?
Subpart F rules supersede the PFIC rules
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.
DEF qualifies as both a PFIC and CFC, therefore Subpart F rules supersede and apply
A minimum tax imposed on certain low-taxed income that is intended to reduce the incentive to relocate CFCs to low-tax jurisdictions:
GILTI tax
What is the deduction amount for the GILTI tax?
50%
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.
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
Each us shareholder of a CFC must include in income their pro rata share of:
Subpart F income
And
Earnings invested in US property
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.
Q1 = 0
Q2 = 1,000,000
Q3 = 1,000,000
Q4 = 1,000,000
Total = 3,000,000 / 4 = 750,000
The CFCs untaxed earnings are divided into two groups:
- Cash/cash equivalents, which are taxed at 15.5%
- All other earnings, which are taxed at 8%
Us shareholders can elect to pay the transition tax in 8 installments over 8 years pursuant to the following schedule:
Year 1 = 8%
Year 2 = 8%
Year 3 = 8%
Year 4 = 8%
Year 5 = 8%
Year 6 = 15%
Year 7 = 20%
Year 8 = 25%
The base erosion and anti abuse tax (BEAT) is imposed on who?
Large US corporations with gross receipts of $500 million or more with a significant amount of deductible payments to related foreign affiliates
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:
37.5%
A foreign person with a us trade or business must file:
Form 1120-F us income tax return
There are two types of withholding tax regimes for non business income:
- Fixed, determinable, annual, or periodic incom (FDAP)
- Foreign account tax compliance act of 2010 (FATCA)
Deals with the withholding on foreign persons investment type income:
FDAP (Foreign, determinable, annual, or periodic income)
Deals with withholding tax on foreign entities for failure to provide information to US recipients. It’s purpose is to combat tax evasion.
FATCA (Foreign account tax compliance act)
A foreign person is considered a resident in the US if he or she :
- Has a green card
- Spent at least 31 days during the current year in the US AND at least 183 days for a 3 year period prior
What is the weighted average calculation used for calculating the 183 days rule for the substantial presence test
Days in current year X 1
Days in preceding year X 1/3
Days in next preceding year X 1/6
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.
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
The mark to market tax regime is imposed on covered expatriates who renounce their us citizenship and satisfy one of the following 3 test:
- Tax liability test: net income tax liability for 5 preceding years exceeds 178,000 threshold
- Net worth test: net worth $2 million or more
- Compliance test: failed to comply with US federal tax obligations for 5 preceding years
All property of a covered expatriate is treated how?
As sold with a gain arising.
A $767,000 exclusion is allowed
Can elect to defer payment of tax attributable to property deemed sold
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.
7,000,000 - 250,000 -767,000 = 5,983,000 long term capital gain
Expatriate entities fall into one of two categories for us tax purposes:
- Continue to be treated as US corporation if: former U.S. shareholders own 80% or more of interest in the new foreign parent
- 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
Bilateral income tax conventions entered into by the United States and a foreign country:
Tax treaties
