Ch 25

Question 1

Branch profits tax

Answer 1

A tax on the effectively connected earnings and profits of the U.S. branch of a foreign corporation. The tax is levied in addition to the usual ? 11 tax, in an amount equal to 30 percent of the dividend equivalent amount. Treaties can override the tax or reduce the withholding percentage. Earnings reinvested in the U.S. operations of the entity are not subject to the tax until repatriation.

Question 2

Controlled foreign corporation (CFC)

Answer 2

A non-U.S. corporation in which more than 50 percent of the total combined voting power of all classes of stock entitled to vote or the total value of the stock of the corporation is owned by U.S. shareholders on any day during the taxable year of the foreign corporation. For purposes of this definition, a U.S. shareholder is any U.S. person who owns, or is considered to own, 10 percent or more of the total combined voting power of all classes of voting stock of the foreign corporation. Stock owned directly, indirectly, and constructively is used in this measure.

Question 3

Dividend equivalent amount (DEA)

Answer 3

The amount subject to the branch profits tax, it is equal to the effectively connected earnings and profits of the U.S. branch of a foreign corporation, reduced/(increased) by an increase/(reduction) in U.S. net equity.

Question 4

Effectively connected income

Answer 4

Income of a nonresident alien or foreign corporation that is attributable to the operations of a U.S. trade or business under either the asset-use or the business-activities test.

Question 5

Foreign Investment in Real Property Tax Act (FIRPTA)

Answer 5

Gains and losses realized by NRAs and foreign corporations from the sale or other disposition of U.S. real property interests (USRPIs) are treated as effectively connected with the conduct of a U.S. trade or business even when those individuals or corporations are not actually engaged.

Question 6

Functional currency

Answer 6

The currency of the economic environment in which the taxpayer carries on most of its activities and transacts most of its business.

Question 7

Inbound taxation

Answer 7

U.S. tax effects when a non-U.S. person begins an investment or business activity in the United States.

Question 8

Nonresident alien (NRA)

Answer 8

An individual who is neither a citizen nor a resident of the United States. Citizenship is determined under the immigration and naturalization laws of the United States. Residency is determined under ? 7701(b) of the Internal Revenue Code.

Question 9

Outbound taxation

Answer 9

U.S. tax effects when a U.S. person begins an investment or business activity outside the United States.

Question 10

Qualified business unit (QBU)

Answer 10

A subsidiary, branch, or other business entity that conducts business using a currency other than the U.S. dollar.

Question 11

Subpart F

Answer 11

Identifies the current tax treatment of income earned by a controlled foreign corporation. Certain types of income are included in U.S. gross income by U.S. shareholders of such an entity as the income is generated, not when it is repatriated.

Question 12

Tax Act (FIRPTA

Answer 12

A U.S. citizen or resident who incurs or pays income taxes to a foreign country on income subject to U.S. tax may be able to claim some of these taxes as a deduction or a credit against the U.S. income tax. ?? 27, 164, and 901905.

Question 13

Tax haven

Answer 13

A country in which either locally sourced income or residents of the country are subject to a low rate of taxation.

Question 14

Tax treaty

Answer 14

An agreement between the U.S. State Department and another country, designed to alleviate double taxation of income and asset transfers and to share administrative information useful to tax agencies in both countries. The United States has income tax treaties with almost 70 countries and transfer tax treaties with about 20.

Question 15

Transfer pricing

Answer 15

The process of setting internal prices for transfers of goods and services among related taxpayers. For instance, what price should be used when Subsidiary purchases management services from Parent? The IRS can adjust transfer prices when it can show that the taxpayers were attempting to avoid tax by, say, shifting losses, deductions, or credits from low-tax to high-tax entities or jurisdictions. ? 482.

Question 16

Treaty shopping

Answer 16

An international investor attempts to use the favorable aspects of a tax treaty to his or her advantage, often elevating the form of the transaction over its substance (e.g., by establishing only a nominal presence in the country offering the favorable treaty terms).

Question 17

U.S. shareholder

Answer 17

For purposes of classification of an entity as a controlled foreign corporation, a U.S. person who owns, or is considered to own, 10 percent or more of the total combined voting power of all classes of voting stock of a foreign corporation. Stock owned directly, indirectly, and constructively is counted for this purpose.

Question 18

U.S. trade or business

Answer 18

A set of activities that is carried on in a regular, continuous, and substantial manner. A non-U.S. taxpayer is subject to U.S. tax on the taxable income that is effectively connected with a U.S. trade or business.