Ch11: TaBS, Foreign Tax Credits Flashcards
U.S. EBT, Worldwide Income
US-sourced Income + foreign-sourced Income
U.S. Worldwide Tax Liability
[under FTC]
[(US Tax Liability after FTC) + (FTC)]
domestic-sourced income + dividend after repatriation = deemed-paid-credit
Foreign Tax Credit Limitation
The U.S. will allow an FTC to the extent of the amount of the U.S. corporation’s U.S. tax liability on its foreign-sourced income.
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 Limitation = [Foreign-sourced income] x [U.S. tax rate]
Country-by-country Limitation
Reduces the ability of firms to mix high and low tax rate income together to maximize foreign credits.
Baskets of Income, General and Passive
If foreign income is divided between the general and passive income:
- the FTC for each basket is calculated separately
- the minimum between each basket’s foreign income tax liability and each basket’s foreign taxes paid;
FTC = min.[(FsInc x foreign income tax), foreign taxes paid] - subtract each basket’s FTC from U.S. EBT to get to U.S. tax liability after FTC
Transfer Pricing
The prices at which goods are transferred between related entities.
Section 482
Transactions between related parties must be priced as if the goods or services being sold were being sold to arm’s length parties.
Advance Pricing Agreements, APA
Agreements used to mitigate the uncertainty underlying transfer-pricing regulations.
The firm would submit transfer pricing methodology to IRS; if it’s approved, the firm’s transfer pricing should not be challenged if it adheres to the agreement.
Withholding taxes
Because foreign investors are not subject to normal U.S. income tax, withholding taxes are levied on their:
dividends
interest
rents
royalties
