Ch10: TaBS, Multinational Tax Flashcards
Foreign Branch
Foreign branches are directly owned by their domestic corporations.
Income from foreign branches is subject to the domestic tax whether the income is repatriated domestically or not.
Branches are like partnerships: losses generated from branches can be deducted against other income, yet there is no limited liability.
Property, like cash, can be contributed to a branch without current taxation on the contribution’s appreciation.
Foreign Subsidiary
Foreign pretax income earned by a U.S. firm (domestic) is taxed on its U.S. tax returns (GAAP vs. Tax-reporting) only if the foreign income is repatriated as a dividend to the U.S.
If the entity is over 50% owned by its U.S. parent, then it’s a subsidiary and should be consolidated.
Foreign income earned by a U.S. firm is not reported on U.S. tax returns.
Foreign Tax Credit, FTC
To mitigate the impact of a U.S. corp’s foreign income getting taxed twice; once by the foreign country where it generates the income and again by the U.S., the U.S. will allow an FTC against taxes paid by U.S. firms to foreign countries.
If a U.S. corp. decides to take an FTC, it must gross up its foreign income to its amount before foreign income tax and before foreign withholding tax.
FTC is not given to foreign income that is not reported on U.S. tax returns.
Foreign Taxes Paid [Total]
(foreign withholding tax on dividends) + (foreign tax on income)
direct tax + indirect tax
Territorial Tax System
Domestic income is taxed only within the borders of the jurisdiction where it’s earned.
Worldwide Tax System
Domestic income is taxed on foreign-sourced income and domestic-sourced income.
Participation Exemption
Beginning in 2018: a 100% dividend-received-deduction can be applied to foreign-sourced income from foreign corporations that are at least 10% owned by a U.S. shareholder.
It effectively results in territorial taxation on the foreign-sourced income earned by the U.S. parent.
Trends impacting tax systems
- Globalization: the increase in cross-border commerce
- Importance of intangible assets: patents, intellectual property, etc.
- Capital mobility across borders
Subpart F Income
Passive income from a foreign subsidiary that is deemed to be repatriated, and therefore taxed, whether or not it’s actually repatriated, as it is earned.
Subpart F eliminates tax deferrals on “tainted” or passive income: U.S. taxation on tainted income includes:
Income from insurance Personal foreign passive income Foreign passive company sales income Foreign passive company service income Foreign passive company oil income
Controlled Foreign Corporation, CFC
A CFC is a foreign corporation that is at least 50% owned by a U.S. shareholder.
Foreign-sourced Income
foreign income includes:
income from foreign branches
repatriation from subsidiary
income deemed to be repatriated; subpart F income
It’s the foreign income before applying foreign income taxes and the foreign withholding taxes on the dividend.
Dividend before repatriation
foreign EBT x (1 - {foreign income tax})
Equal to the amount before foreign withholding taxes are deducted
Deemed-paid-credit
[indirect foreign tax]
[Dividend to be repatriated / foreign after-tax accumulated earnings] x foreign income taxes paid
foreign after-tax accumulated earnings
foreign NI before withholding taxes on dividends are applied
foreign withholding tax
[direct foreign tax]
the tax applied to the foreign income after foreign income tax was applied, assuming a portion or all of the foreign income after foreign income tax will be repatriated.
