Chapter 25

Question 1

Overview of International Taxation (slide 1 of 3)

Answer 1

• The U.S. taxes U.S. taxpayers on “worldwide” income
• The U.S. allows a Foreign Tax Credit (FTC) to be claimed against the U.S. tax to reduce double-taxation (U.S. and foreign) of the same income

Question 2

Overview of International Taxation (slide 2 of 3)

Answer 2

• Tax reform provisions adopted in 2017 were designed to accomplish several goals
– Likely to increase competitiveness of U.S. businesses that operate in multiple countries
• The most significant objectives include
– Move toward a territorial system of taxation for U.S. businesses
– Provide incentives for U.S. businesses to locate jobs in the U.S. and repatriate foreign profits back to the U.S.
– Prevent U.S. entities from shifting taxable income into low-tax-rate countries

Question 3

Overview of International Taxation (slide 3 of 3)

Answer 3

• For foreign taxpayers, the U.S. generally taxes only income earned within its borders
• The U.S. taxation of cross-border transactions can be organized in terms of:
– Outbound taxation
• Refers to the U.S. taxation of foreign-source income earned by U.S. taxpayers
– Inbound taxation
• Refers to the U.S. taxation of U.S.-source income earned by foreign taxpayers

Question 4

International Tax Treaties(slide 1 of 3)

Answer 4

• Tax treaties exist between the U.S. and many other countries
– Provisions generally override the treatment called for under the Internal Revenue Code or foreign tax statutes
– Generally provide taxing rights for the taxable income of residents of one treaty country who have income sourced in the other treaty country

Question 5

International Tax Treaties (slide 2 of 3)

Answer 5

• Tax treaties generally:
– Give one country primary taxing rights
– Require the other country to allow a credit for the taxes paid on the twice-taxed income
• Which country receives primary taxing rights usually depends on
– The residence of the taxpayer, or
– The presence of a permanent establishment
• Generally, a permanent establishment is a branch, office, factory, workshop, warehouse, or other fixed place of business.

Question 6

International Tax Treaties (slide 3 of 3)

Answer 6

• Most U.S. income tax treaties reduce withholding on certain items of investment income
– For example, the treaty with Ireland reduces withholding on dividends to 15% and on interest to zero
– Many new treaties (e.g., with Japan and Australia) provide for a zero rate of withholding on dividend payments to foreign parent corporations
• The U.S. has developed a Model Income Tax Convention as the starting point for negotiating income tax treaties with other countries

Question 7

Sourcing of Income and Deductions

Answer 7

• The sourcing of income and deductions inside and outside the U.S. is important to both U.S. and foreign taxpayers:
– For example, foreign taxpayers generally are taxed only on income sourced inside the U.S., and
– For example, U.S. taxpayers receive relief from double taxation under the FTC rules based on their foreign-source income
• As a result, an examination of sourcing rules is often the starting point in addressing international tax issues

Question 8

Sourcing of Income (slide 1 of 9)

Answer 8

Interest Income
– Interest income from the U.S. government, the District of Columbia, from U.S. corporation and from noncorporate U.S. residents is treated as U.S. source income
– Exceptions
• Certain interest received from a U.S. corporation that earned 80% or more of its active business income from foreign sources over the prior 3 year period is treated as foreign-source income
• Interest received on amounts deposited with a foreign branch of a U.S. corporation is treated as foreign-source income if the branch is engaged in the commercial banking business

Question 9

Sourcing of Income (slide 2 of 9)

Answer 9

•Dividend Income
– Dividends received from domestic corporations are sourced inside the U.S.
– Generally, dividends paid by a foreign corporation are foreign-source income
• Exception: If 25% or more of foreign corporation’s gross income is effectively connected with a U.S. trade or business for the 3 tax years immediately preceding dividend payment, that percentage of the dividend is treated as U.S.-source income

Question 10

Sourcing of Income(slide 3 of 9)

Answer 10

•Personal Services Income
–Sourced where the services are performed
–A limited commercial traveler exception to avoid being classified as U.S.-source income applies to non-resident aliens in the U.S. 90 days or less during the tax year if
• U.S. compensation does not exceed $3,000.
• The services are performed on behalf of:
– A non-U.S. enterprise not engaged in a U.S. trade or business, or
– An office or place of business maintained in a country outside the U.S. by an individual who is a citizen or resident of the U.S., a domestic partnership, or a domestic corporation

Question 11

Sourcing of Income (slide 4 of 9)

Answer 11

•Rents and Royalties
– Income received for tangible property (rents) is sourced in country in which rental property is located
– Income received for intangible property is sourced in the country in which the property is used
• For example, patents, copyrights, and secret processes and formulas

Question 12

Sourcing of Income (slide 5 of 9)

Answer 12

•Sale or Exchange of Property
– Generally, the location of real property determines the source of any income derived from the property
– Income from sale of personal property depends on several factors, including:
• Whether the property was produced by the seller
• The type of property sold (e.g., inventory or a capital asset)
• The residence of the seller

Question 13

Sourcing of Income (slide 6 of 9)

Answer 13

•Sale or Exchange of Property (continued)
– Generally, income, gain, or profit from the sale of personal property is sourced according to the residence of the seller
– Income from the sale of purchased inventory is sourced based on where the sale takes place

Question 14

Sourcing of Income (slide 7 of 9)

Answer 14

• Sale or Exchange of Property (continued)

* When the seller has produced the inventory, the income is sourced to the country in which the assets were produced

Question 15

Sourcing of Income (slide 8 of 9)

Answer 15

•Sale or Exchange of Property (continued)
• Income from the sale of personal property other than inventory is sourced at the residence of the seller unless:
– Gain on the sale of depreciable personal property
• Sourced according to prior depreciation deductions
– Any excess gain is sourced the same as the sale of inventory
– Gain on the sale of intangibles
• Sourced according to prior amortization
• Contingent payments are sourced as royalty income

Question 16

Sourcing of Income (slide 9 of 9)

Answer 16

•Sale or Exchange of Property (continued)
– Gain attributable to an office or fixed place of business maintained outside the U.S. by a U.S. resident is foreign-source income
– Income or gain attributable to an office or fixed place of business maintained in the U.S. by a nonresident is U.S.-source income
• Special rules apply to transportation and communication income

Question 17

Allocation and Apportionment of Deductions (slide 1 of 4)

Answer 17

• Deductions and losses must be allocated and apportioned between U.S.- and foreign-source income
– Deductions directly related to an activity or property are allocated to the activity or property
• Then, deductions are apportioned between statutory and residual groupings
– A deduction not definitely related to any class of gross income is ratably allocated to all classes of gross income
• Then apportioned between U.S.- and foreign-source income

Question 18

Allocation and Apportionment of Deductions (slide 2 of 4)

Answer 18

• Interest expense
– Allocated and apportioned to all activities and property regardless of the specific purpose for incurring the debt
– Allocation and apportionment is based on the tax book value of assets
• Special rules apply in an affiliated group setting

Question 19

Allocation and Apportionment of Deductions (slide 3 of 4)

Answer 19

•  Special rules apply to:
– Research and development expenditures
– Certain stewardship expenses
– Legal and accounting fees
– Income taxes
– Losses

Question 20

Allocation and Apportionment of Deductions (slide 4 of 4)

Answer 20

•§482 gives the IRS the power to reallocate income, deductions, credits or allowances between or among related persons when
– Necessary to prevent the evasion of taxes, or
– To reflect income more clearly

Question 21

Foreign Currency Transactions(slide 1 of 4)

Answer 21

• May be necessary to translate amounts denominated in foreign currency into U.S. dollars
• Major tax issues related to foreign currency exchange include:
– Character of gain/loss (capital or ordinary)
– Date of recognition of gain/loss
– Source of foreign currency gain/loss

Question 22

Foreign Currency Transactions(slide 2 of 4)

Answer 22

• Important concepts related to tax treatment of foreign currency exchange transactions include:
– Foreign currency is treated as property other than money
– Gain/loss is considered separately from underlying transaction
– No gain/loss is recognized until a transaction is closed

Question 23

Foreign Currency Transactions(slide 3 of 4)

Answer 23

•Functional currency approach under ASC 830 is used for tax purposes
– All income tax determinations are made in taxpayer’s functional currency
– Taxpayer’s default functional currency is the U.S. dollar

Question 24

Foreign Currency Transactions(slide 4 of 4)

Answer 24

• A qualified business unit (QBU) operating in a foreign country uses that country’s currency as its functional currency
– QBU is a separate and clearly identified unit of a taxpayer’s trade or business (e.g., a foreign branch)
– An individual is not a QBU but a trade or business conducted by a taxpayer may be a QBU

Question 25

Foreign Branch Currency Exchange Treatment

Answer 25

• When foreign branch operations use a foreign currency as functional currency – Compute profit/loss in foreign currency – Translate into U.S. dollar using average exchange rate for the year • Exchange gains/losses are recognized on remittances from the branch – Gain/loss is ordinary – Sourced according to income to which the remittance is attributable

Question 26

Distributions From Foreign Corporations

Answer 26

• Included in income at exchange rate in effect on date of distribution – No exchange gain/loss is recognized • Deemed dividend distributions under Subpart F are translated at average exchange rate for tax year – Exchange gain/loss can arise when an actual distribution of this previously taxed income is made

Question 27

Foreign Taxes

Answer 27

• For purposes of the foreign tax credit, taxes accrued are translated at the average exchange rate for the tax year – An exception to this rule requires translation at the rate taxes were actually paid

Question 28

U.S. Persons With Foreign Income(slide 1 of 2)

Answer 28

• U.S. taxpayers often “internationalize” gradually over time – A U.S. business may begin exploring foreign markets by exporting its products abroad, then – Licensing its products to a foreign manufacturer, or – Entering into a joint venture with a foreign partner • If entry into foreign markets is successful, the U.S. business may create a foreign subsidiary and move a portion of its operations abroad by establishing a sales or manufacturing facility

Question 29

Export Property (slide 1 of 2)

Answer 29

• The easiest way for a U.S. enterprise to engage in global commerce is simply to sell U.S.-produced goods and services abroad • The U.S. tax consequences of simple export sales are straightforward – All such income is taxed in the United States to the U.S. taxpayer

Question 30

Export Property (slide 2 of 2)

Answer 30

• Whether foreign taxes must be paid on this export income depends on – The laws of the particular foreign jurisdiction, and – Whether the U.S. taxpayer is deemed to have a foreign business presence there • Often called a “permanent establishment” • In many cases, such export income is not taxed by a foreign jurisdiction

Question 31

Foreign Tax Credit(slide 1 of 3)

Answer 31

• Foreign tax credit (FTC) provisions are designed to reduce the possibility of double taxation – Allows a credit for foreign income taxes paid • Credit is a dollar-for-dollar reduction of U.S. income tax liability – The FTC is subject to an overall limitation • May result in some form of double taxation on income where the U.S. tax rates are lower than those of the countries in which the income is earned

Question 32

Foreign Tax Credit (slide 3 of 3)

Answer 32

• A separate FTC is computed for each of four types of taxable income (“baskets”) – The FTC baskets include the following types of income • Active, business income • Portfolio income, like dividends and capital gains • Income from foreign branches • Certain intangible income (discussed later)

Question 33

Cross-Border Asset Transfers

Answer 33

• As part of “going international,” a U.S. taxpayer may decide to transfer assets outside the U.S • Tax consequences of transferring assets to a foreign corporation depend on – The nature of the exchange – The assets involved – Income potential of the property – Character of the property in the hands of the transferor or transferee

Question 34

Outbound Transfers(slide 1 of 2)

Answer 34

• Similar to exchanges of assets for corporate stock of a domestic corporation, realized gain/loss may be deferred on certain outbound capital changes, moving corporate business outside the U.S. – Starting a new corp outside the U.S. – Liquidating a U.S. subsidiary into an existing non-U.S. subsidiary – Others

Question 35

Outbound Transfers (slide 2 of 2)

Answer 35

• Transfer of trade or business property generally qualifies for deferral of gain or loss – Transfer of “tainted” assets triggers immediate recognition of gain but not loss – In addition, U.S. depreciation and other recapture potential must be recognized to the extent of gain realized

Question 36

Inbound and Offshore Transfers

Answer 36

• U.S. persons involved in an inbound or offshore transfer involving stock of a controlled foreign corporation (CFC) – Generally, recognize dividend income to the extent of their pro rata share of previously untaxed E & P of the foreign corporation, or – Enter into a gain recognition agreement with the IRS that may allow income to be deferred

Question 37

Tax Havens

Answer 37

• A tax haven is a country where either locally-sourced income, or residents of the country, are subject to no or low host-country taxation – A tax haven can be created by an income tax treaty – Investing through a corporation created in a treaty country, when the majority of its shareholders are not residents of such treaty country, is known as “treaty shopping”

Question 38

Controlled Foreign Corporations (slide 1 of 4)

Answer 38

• To minimize current tax liability, taxpayers often attempt to defer the recognition of taxable income – One way to do this is to shift the income-generating activity to a foreign entity that is not within the U.S. tax jurisdiction • A foreign corporation is the most suitable entity for such an endeavor • Because of the potential for abuse, Congress has enacted various provisions to limit the availability of deferral

Question 39

Controlled Foreign Corporations (slide 2 of 4)

Answer 39

• Certain types of income generated by a controlled foreign corporation (CFC) are currently included in income by U.S. shareholders without regard to actual distributions, including: – Pro rata share of Subpart F income – Increase in earnings that the CFC has invested in U.S. property

Question 40

Controlled Foreign Corporations (slide 3 of 4)

Answer 40

•Subpart F Income includes the following –Insurance income (§ 953) –Foreign base company income (§ 954) –Illegal bribes •U.S. shareholders include in gross income their pro rata share of the CFC’s increase in investment in U.S. property for the taxable year –Property generally includes • U.S. real property, • Debt obligations of U.S. persons, and • Stock in certain related domestic corporations –The CFC must have sufficient E & P to support a deemed dividend

Question 41

Controlled Foreign Corporations (slide 4 of 4)

Answer 41

• A CFC is any foreign corporation in which more than 50% of total voting power or value is owned by U.S. shareholders on any day of tax year – U.S. shareholder is a U.S. person who owns (directly or indirectly) 10% or more of voting stock of the foreign corp

Question 42

Movement Toward a Territorial System (slide 1 of 4)

Answer 42

• Effective in 2018, C corps. are allowed a limited version of territorial taxation, while also being encouraged to repatriate any profits accumulated from past tax years – A dividend received deduction (DRD) of 100% is allowed for amounts paid to a U.S.-parent C corp. from E & P of a non-U.S., “10%-owned” subsidiary • This rule exempts from U.S. taxation the foreign-source profits that underlie the dividend payment (thereby resembling a territorial taxing system), and • It encourages the return of cash accumulations to the U.S. economy

Question 43

Movement Toward a Territorial System (slide 2 of 4)

Answer 43

•The DRD is allowed even if the foreign affiliate is not a CFC of the U.S. parent –Subpart F pass-through constructive dividends do not qualify for the DRD –To qualify for the DRD, the U.S. parent must have owned the stock of the offshore affiliate for at least one year •In addition, any recognized gain on the sale or disposition of stock of a 10%-owned CFC by a U.S. shareholder is treated as dividend income and triggers the DRD, to the extent of the transferor’s share of unrepatriated, untaxed E & P of the corporation

Question 44

Movement Toward a Territorial System (slide 3 of 4)

Answer 44

•One-Time 2017 Transition Tax – Included in the 2017 Subpart F income of C corps. with unrepatriated E & P was the U.S. parent’s share of the untaxed, unrepatriated post-1986 E & P of its 10%-owned foreign subsidiaries, measured typically as of the end of 2017 – This E & P was subjected to a tax rate of 15.5% (8% if the E & P was distributed in a form other than cash) • The tax was payable immediately, or by election the payment could be spread out over eight years • No foreign tax credit was allowed against the one-time tax liability

Question 45

Movement Toward a Territorial System (slide 4 of 4)

Answer 45

• Additional Tax on Intangible Income •For tax years beginning after Dec. 31, 2017, a U.S. shareholder is required to include in gross income its foreign-sourced intangible income –Taxed at an effective rate of 10.5% • This is not subpart F income, but taxed in a similar manner • Does not include effectively connected income or subpart F income –Foreign tax credits are allowed for this tax, but limited to 80% of foreign taxes paid with no carryover for the excess

Question 46

U.S. Taxation of Nonresident Aliensand Foreign Corporations

Answer 46

• Generally, nonresident alien individuals (NRAs) and foreign corps. are subject to U.S. taxation – On U.S.-source income and – Foreign-source income when that income is effectively connected with the conduct of a U.S. trade or business

Question 47

Nonresident Alien Individuals

Answer 47

• Nonresident alien (NRA) —an individual who is not a citizen or resident of the U.S. – Citizenship is determined under the immigration and naturalization laws of the U.S. • The citizenship statutes are broken down into two categories: – Nationality at birth or – Through naturalization

Question 48

Residency Tests for Non Citizens(slide 1 of 2)

Answer 48

• Green Card Test: – An individual is considered a resident of the U.S. on the first day of the tax year in which he or she is physically present in the U.S. after the card is issued – Residency status remains in effect until the card is revoked or the individual has abandoned permanent resident status

Question 49

Residency Tests for Non Citizens (slide 2 of 2)

Answer 49

•Substantial Presence Test: –This mathematical test applies to people in the U.S. without a green card • An individual in the U.S. 183 days during the year is a resident for the year for tax purposes • Also a taxpayer in the U.S. for 183 days in the past three years (using a specified weighting formula) is taxed as a resident –Exceptions apply to the substantial presence test for • Commuters from Mexico and Canada who work in the U.S. • Foreign government-related individuals (e.g., diplomats) • Qualified teachers • Trainees and students, and • Certain professional athletes

Question 50

U.S. Taxation of Nonresident Aliens (slide 1 of 2)

Answer 50

• Non-resident alien income not “effectively connected” with U.S. trade or business – Includes dividends, interest, rents, royalties, etc – 30% tax generally is withheld by payors of the income • Eliminates problems of assuring payment by nonresidents, determining allowable deductions, and, in most instances, the filing of tax returns by nonresidents

Question 51

U.S. Taxation of Nonresident Aliens (slide 2 of 2)

Answer 51

• Capital gains not effectively connected with the conduct of a U.S. trade or business are exempt from tax, as long as the NRA individual was not present in the United States for 183 days or more during the taxable year • Non-resident alien income effectively connected with U.S. trade or business – This income is taxed at the same rates applicable to U.S. citizens – Deductions related to the business may be claimed

Question 52

U.S. Taxation of Foreign Corporations(slide 1 of 2)

Answer 52

• Income not effectively connected with U.S. trade or business – Taxed at 30% as described above for individuals – The payor must withhold and remit the tax• U.S.-source capital gains – exempt from Federal income tax if not effectively connected with conduct of U.S. trade or business

Question 53

U.S. Taxation of Foreign Corporations (slide 2 of 2)

Answer 53

• Income effectively connected with U.S. trade or business – This income is taxed at the same rates applicable to U.S. corporations – Deductions can offset the income

Question 54

Foreign Investment in Real Property Tax Act

Answer 54

•Gains and losses realized by NRAs and foreign corporations on U.S. real property interests (USRPI) –Treated as effectively connected with the conduct of a U.S. trade or business •NRAs individuals must pay tax equal to at least the lesser of–26% (or 28%) of AMTI –Regular U.S. rates on net real property gain for year •Withholding provisions –Any purchaser or agent acquiring a USRPI from a foreign person must withhold 10% of amount realized on disposition

Question 55

Expatriation to Avoid U.S. Taxation (slide 1 of 2)

Answer 55

• U.S. tax applies to U.S.-sourced income of persons who relinquished their U.S. citizenship within 10 years of deriving that income – Only applies if person gave up citizenship to avoid U.S. tax

Question 56

Expatriation to Avoid U.S. Taxation (slide 2 of 2)

Answer 56

• Also applies to NRAs who lost U.S. citizenship within preceding 10 year period if principal purpose was avoidance of U.S. tax • Tax avoidance purpose is presumed if either: – Average annual net income tax for five preceding taxable years is more than $165,000 (in 2018) – Net worth as of that date is $2 million or more

Question 57

When dealing with U.S. taxation of cross-border transaction, outbound taxation refers to the U.S. taxation of foreign-source income earned by U.S. taxpayers. True False

Answer 57

True The U.S. taxation of cross-border transactions can be organized in terms of "outbound" and "inbound" taxation. The U.S. taxation of foreign-source income earned by U.S. taxpayers is referred to as outbound taxation

Question 58

One of the objectives of the 2017 tax law is to move toward a worldwide system of taxation for U.S. businesses. True False

Answer 58

False One of the objectives of the 2017 tax changes was to move toward a territorial system of taxation for U.S. businesses.

Question 59

If there is a conflict between the treaty and the law, the law will always prevail. True False

Answer 59

False If there is a conflict, preference is given to whichever is newer, the treaty or the law; this is known as the later in time rule.

Question 60

Income tax treaties never reduce the interest withholding tax rates on interest income. True False

Answer 60

False Tax treaties always reduce the interest withholding rate.

Question 61

Amaury, a citizen of France with no trade or business activities in the United States, sells at a gain 200 shares of Google, Inc., a U.S. company. The sale takes place through Amaury's broker in Paris. How is this gain treated for U.S. tax purposes? a. It is U.S.-source income exempt from U.S. taxation. b. It is foreign-source income subject to U.S. taxation. c. It is U.S.-source income subject to U.S. taxation. d. It is foreign-source income not subject to U.S. taxation. e. None of these choices are correct.

Answer 61

D The residence of seller rule applies to the sale of personal property that does not fall under one of the exceptions. Consequently, Amaury's gain is foreign-source income and not subject to U.S. tax.

Question 62

The source of income received for the use of intangible property is the country in which the property is used. True False

Answer 62

True The source of income received for the use of intangible property (e.g., patents, copyrights, processes, and formulas) is the country in which the property is used.

Question 63

A qualified business unit (QBU) of a U.S. corporation that operates in England generally uses the U.S. dollar as its functional currency. True False

Answer 63

False A QBU usually uses the local currency as its functional currency.

Question 64

Foreign taxes accrued generally are translated at the year-end exchange rate. True False

Answer 64

False Foreign taxes accrued generally are translated at the average exchange rate for the tax year to which the taxes relate.

Question 65

ABC, Inc., a domestic corporation, purchases merchandise for resale from XYZ, Inc., a non-U.S. corporation, for 32,000P (a foreign currency). On the date of the purchase, 1P is equal to $1 U.S. At this time, the account payable is on the books for $32,000. On the date of payment by ABC, the exchange rate is 1.25P equals $1 U.S. ABC will record: a. A foreign currency gain of $6,400. b. A foreign currency loss of $6,400. c. No foreign currency gain or loss. d. A foreign currency loss of $25,600. e. A foreign currency gain of $25,600

Answer 65

A Correct. The foreign currency has been devalued in relation to the U.S. dollar, and ABC will pay XYZ $32,000P, which will cost ABC only $25,600 (32,000P/1.25). The foreign currency gain is $32,000 minus $25,600, which equals $6,400.

Question 66

Forest, Inc., a U.S. corporation conducts its overseas operations through its Turkish CFC, TreeCo. TreeCo's intangible income for the tax year totaled $8 million, on which it paid $500,000 Turkish income tax. These items did not constitute Subpart F income, and they were not effectively connected to Forest's U.S. businesses. Under these circumstances: a. An unused foreign tax credit of $10,000 can be carried over. b. Forest does not include the $8 million intangible income in its own gross income. c. The shareholders of Forest are liable for a tax of $840, 000. d. The shareholders of Forest can claim a foreign tax credit of $200.000. e. All of these choices are correct.

Answer 66

C Forest includes the $8 million intangible income in its own gross income for the year, and its shareholders are liable for a tax of $840,000 ($8 million × 10.5%). Against this amount, Forest's shareholders can claim an aggregate foreign tax credit of $400,000 ($500,000 foreign tax paid × 80% maximum credit), with no carryover of the remaining $100,000 foreign tax paid.

Question 67

Shifting income to countries where locally sourced income is subject to low levels of local taxation is an effective means of avoiding taxation. True False

Answer 67

True Such countries are called tax havens. Examples include the Bahamas, Ireland, the Netherlands, the Cayman Islands, and Bermuda. U.S. corporations shift sizable amounts of taxable income annually to these countries and effectively avoid taxation.

Question 68

How does the U.S. system of worldwide taxation mainly account for the problem of double taxation? a. Via the foreign tax credit. b. By signing tax treaties with other nations to ensure that the same income is not taxed twice. c. By making the rates so low that the impact of double taxation is negligible. d. By only taxing income generated directly on U.S. soil. e. None of these choices are correct.

Answer 68

A To mitigate double taxation, corporations can claim a foreign tax credit (FTC) for foreign income tax paid on income earned and subject to income tax in another country or a U.S. possession.

Question 69

Under the Foreign Investment in Real Property Tax Act (FIRPTA), gains realized by NRAs from the sale of U.S. real property interests are not subject to U.S. taxation. True False

Answer 69

False Under FIRPTA, 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 so engaged. Any direct interest in real property situated in the United States and any interest in a domestic corporation (other than solely as a creditor) are U.S. real property interests.

Question 70

Revoking one's U.S. citizenship is an effective means of avoiding taxation. True False

Answer 70

False U.S. taxation of U.S.-source income is required of individuals who relinquished their U.S. citizenship within 10 years of deriving that income if they gave up their citizenship to avoid U.S. taxation.

Question 71

Income tax treaties provide for lower withholding tax rates on interest income than the rate provided under U.S. statutory law. True False

Answer 71

True Tax treaties always reduce the interest withholding rate.

Question 72

The United States has developed a Model Income Tax Convention for negotiating income tax treaties. True False

Answer 72

True The United States has developed a Model Income Tax Convention as the starting point for negotiating income tax treaties with other countries.

Question 73

MadridCo, a foreign corporation, receives interest income of $100,000 from USCo, an unrelated domestic corporation. USCo has historically earned 52 percent of its income from foreign sources. What amount of MadridCo's interest income is U.S. source? a. $48,000. b. $100,000. c. $0. d. $52,000. e. None of these choices are correct.

Answer 73

C Interest income generally is sourced based on the residence of the payor. [§ 861(a)(1)] However, an exception exists when a U.S. payor meets the 80 percent foreign business requirement of § 861(a)(1)(A). If this test is met, the interest paid by a U.S. corporation is treated as foreign source. This test is not met in this case; thus, all of the interest is foreign source. An exception also exists for interest received on deposits with foreign branches of U.S. banks. [§ 861(a)(1)(B)]

Question 74

As an aid to reduce transfer pricing disputes, the IRS initiated the Advance Pricing Agreement (APA) program. True False

Answer 74

True As an aid to reducing pricing disputes, the IRS initiated the Advance Pricing Agreement (APA) program, where the taxpayer can propose a transfer pricing method for certain future cross-border transactions.

Question 75

A U.S. corporation owns a German corporation. The U.S. corporation receives a dividend (non-Subpart F income) of 75,000€. The average exchange rate for the year is $1US:.6€, and the exchange rate on the date of the dividend distribution is $1US: .80€. The U.S. corporation's exchange gain or loss is: a. $15,000 loss. b. $75,000 gain. c. $15,000 gain. d. There is no exchange gain or loss on an actual dividend distribution. e. None of these choices are correct.

Answer 75

D An actual distribution of E & P from a foreign corporation is included in gross income by the U.S. recipient at the exchange rate in effect on the date of distribution. Thus, no exchange gain or loss is recognized.

Question 76

The Code generally adopts the functional currency approach. True False

Answer 76

True The Code generally adopts the functional currency approach. For book and tax purposes, the currency of the economic environment in which the non-U.S. entity operates generally is used as the monetary unit to measure gains and losses.

Question 77

U.S. international tax provisions are only concerned with foreign persons earning U.S.-source income. True False

Answer 77

False U.S. international tax provisions are concerned primarily with two types of potential taxpayers: U.S. persons earning foreign-source income and foreign persons earning U.S.-source income.

Question 78

A nonresident alien with U.S.-source income effectively connected with a U.S. trade or business cannot take effectively connected deductions against that income. True False

Answer 78

False Effectively connected deductions can be taken.

Question 79

One criterion for determining whether a U.S. trade or business exists is the location of production activities. True False

Answer 79

True General criteria for determining whether a U.S. trade or business exists include the location of production activities, management, distribution activities, and other business functions.

Question 80

Dalmatian, Inc., is a controlled foreign corporation until April 12 of the calendar tax year (not a leap year) and earns $100,000 of Subpart F income. Neville, a U.S. citizen, owns 10 percent of its one class of stock for the entire year. How much does Neville include in gross income as a constructive dividend from Dalmatian for the tax year? a. $1,384. b. $2,767. c. $10,000. d. $0. e. None of these choices are correct.

Answer 80

B Not counting April 12, 101 days went by (31 + 28 + 31 + 11 = 101). $100,000 × 10% × (101 days/365 days) = $2,767.12

Question 81

Effective in 2018, C corporations are allowed a limited version of territorial taxation, while also being encouraged to repatriate any profits accumulated from past tax years. True False

Answer 81

True Effective in 2018, C corporations are allowed a limited version of territorial taxation, while also being encouraged to repatriate any profits accumulated from past tax years. A dividend received deduction (DRD) of 100 percent is allowed for amounts paid to a U.S.-parent C corporation from the earnings and profits (E & P) of a non-U.S., "10%-owned" subsidiary. This rule exempts from U.S. taxation the foreign-source profits that underlie the dividend payment (thereby resembling a territorial taxing system), and it encourages the return of cash accumulations to the U.S. economy.

Question 82

The process of setting internal prices for the transfers of goods or services between related companies, across tax jurisdictions.

Answer 82

Transfer pricing

Question 83

Bilateral agreements between the U.S. and another countries designed to alleviate double taxation of income and asset transfers, and to share administrative information useful to tax agencies in both countries.

Answer 83

Tax treaty

Question 84

A country where either locally sourced income or residents of the country are subject to zero or low levels of local taxation.

Answer 84

Tax haven

Question 85

When 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).

Answer 85

Treaty shopping

Question 86

The U.S. taxation of cross-border transactions can be organized in terms of "outbound" and "inbound" taxation. _____ taxation refers to the U.S. taxation of foreign-source income earned by U.S. taxpayers. _____ taxation refers to the U.S. taxation of U.S.-source income earned by foreign taxpayers.

Answer 86

- Outbound | - Inbound

Question 87

The Code generally adopts the functional currency approach.

Answer 87

True

Question 88

For purposes of the foreign tax credit, foreign taxes accrued generally are translated at the exchange rate at the end of tax year to which the taxes relate.

Answer 88

False

Question 89

In most cases, a qualified business unit (QBU) operating in a foreign country uses that country's currency as its functional currency.

Answer 89

True

Question 90

An actual distribution of E & P from a foreign corporation is included in gross income by the U.S. recipient at the exchange rate in effect on the date of distribution.

Answer 90

True

Question 91

A controlled foreign corporation (CFC) is any _____ corporation in which more than _____ 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 _____ shareholders on any day during the taxable year of the _____corporation.

Answer 91

- non-U.S. - 50 - U.S. - foreign

Question 92

For an entity to be a controlled foreign corporation (CFC), more than 50% of the total combined voting power of all classes of stock entitled to vote or the total value of the stock of the corporation must be owned by U.S. shareholders on any day during the taxable year of the foreign corporation.

Answer 92

True

Question 93

If each unrelated shareholder owned 10% of the foreign corporation, each of the shareholders would be U.S. shareholders and the corporation would be a CFC.

Answer 93

False

Question 94

For purposes of determining if a foreign corporation is a CFC, a U.S. shareholder is defined as a U.S. person who owns, or is considered to own, 20% or more of the total combined voting power of all classes of voting stock of the foreign corporation.

Answer 94

False

Question 95

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 credit against the U.S. income tax. §§ 27 and 901–905.

Answer 95

foreign tax credit (FTC)

Question 96

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

Answer 96

Outbound taxation

Question 97

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

Answer 97

Inbound taxation

Question 98

An agreement between the U.S. Department of State 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.

Answer 98

tax treaties

Question 99

The process of setting internal prices for transfers of goods and services among related taxpayers. For example, 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, for example, shifting losses, deductions, or credits from low-tax to high-tax entities or jurisdictions.

Answer 99

transfer pricing

Question 100

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

Answer 100

functional currency

Question 101

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

Answer 101

qualified business unit (QBU)

Question 102

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

Answer 102

tax haven

Question 103

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).

Answer 103

treaty shopping

Question 104

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.

Answer 104

controlled foreign corporation (CFC)

Question 105

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.

Answer 105

U.S. shareholder

Question 106

Certain types of income earned by a controlled foreign corporation that are included in U.S. gross income by U.S. shareholders of such an entity as they are generated, not when they are repatriated.

Answer 106

Subpart F income

Question 107

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.

Answer 107

nonresident alien (NRA)

Question 108

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.

Answer 108

U.S. trade or business

Question 109

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

Answer 109

effectively connected income

Question 110

Under the Foreign Investment in Real Property Tax Act, gains or losses realized by nonresident aliens and non-U.S. corporations on the disposition of U.S. real estate creates U.S. source income and are subject to U.S. income tax.

Answer 110

Foreign Investment in Real Property Tax Act (FIRPTA)