Module 5: Multi-Jurisdictional Tax Issues

Question 1

When would transfer pricing issues exist?

Answer 1

When a US-based taxpayer shares costs w/ an affiliate that either:

1. is not subject to the US income tax
2. does not file a consolidated income tax return w/the US based taxpayer

Question 2

What types of organizations does the IRS have authority to adjust upward or downward the gross income/deductions b/w or among in order to prevent evasion of taxes or to clearly reflect the income of 2+ orgs?

Answer 2

The orgs may be members of an affiliated group that file a consolidated US tax return

Question 3

What can a corporation claim foreign income taxes paid as?

Answer 3

Either a deduction or a credit, at the option of the corp.

Question 4

What is an Advance Pricing Agreement Program (APA)?

Answer 4

A binding contract b/w the IRS and the taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer filed its return for a covered year consistent with the agreed transfer pricing method

Question 5

What is a section 482 study?

Answer 5

Based upon allowable pricing methods set forth by the IRS and is completed by the time the taxpayer filed the fed. income tax return

Taxpayer must determine that the prices for controlled transactions and controlled transfers are in accordance with the allowable pricing methods and that the use of such method was reasonable

Question 6

What is a “request for competent authority”

Answer 6

A request by the taxpayer that the IRS and taxing officials in the other jurisdiction together determine the appropriate transfer price so that the taxpayer group is not taxed twice on the same income

Question 7

What is nexus?

Answer 7

The minimum level of contact a taxpayer may have with a jurisdiction to be subject to its tax

Question 8

How is the apportionment factor calculated?

Answer 8

By averaging the factor of sales, payroll, and property (average) for a specific state

These factors are the ratio of:

1. Total sales, payroll, or property in a specific state to
2. Total sales, payroll, or property everywhere

Question 9

If US source income is paid to a nonresident alien, how much US tax withholding is the payment subject to?

Answer 9

30%

Question 10

How will a multistate corporation treat its nonbusiness income?

Answer 10

The corporation will allocate nonbusiness income to the state where it should be taxed

Question 11

How will a multistate corporation treat its business income?

Answer 11

The corporation will apportion its business income based on the extent of the corporation’s activities and property within a state

Question 12

What does IRC Sec. 482 and 6662(e)(3) provide the IRS with?

Answer 12

The authority to:

1. adjust the income and deductions (including COGS) of affiliated orgs. to prevent evasion of taxes or to clearly reflect income; and
2. Impose penalties w/respect tot those adjustments

Question 13

Controlled taxpayer (subsidiary)

Answer 13

Any one of 2+ taxpayers owned or controlled directly or indirectly by the same interests

Question 14

Uncontrolled taxpayer

Answer 14

Any one of 2+ taxpayers not owned or controlled directly or indirectly by the same interests

Question 15

Controlled

Answer 15

Any kind of control, direct or indirect, whether legally enforceable or not, and however exercisable or exercised, including control resulting from actions of 2+ taxpayers acting in concert or with common goal

Question 16

Taxpayer (for purposes of IRS’s authority to make adjustments w/respect to controlled transactions)

Answer 16

Any person, org, or business, whether or not subject to any tax imposed by the IRC

Question 17

Controlled transaction/transfer

Parent <=> sub. or sub <=> sub

Answer 17

Any transaction or transfer between 2+ members of the same group of controlled taxpayers

Question 18

Uncontrolled transaction

Company <=> Customer

Answer 18

Transaction b/w 2+ taxpayers that are not members of the same group of controlled taxpayers

Question 19

Uncontrolled comparable

Answer 19

Uncontrolled transaction or uncontrolled taxpayer that is compared, under any applicable pricing methodology, with a controlled transaction or with a controlled taxpayer

Question 20

What are the various standards of comparability (applicable pricing methodologies)?

Answer 20

1. Comparable Uncontrolled Price (CUP)
2. Comparable Uncontrolled Transaction (CUT)
3. Resale Price:
4. Cost Plus
5. Comparable Profits Method

Question 21

Comparable Uncontrolled Price (CUP)

Answer 21

Only for tangible property

Based upon reference to published market data

Question 22

Comparable Uncontrolled Transaction (CUT)

Answer 22

Only for intangible property (regarding royalty payments)

Question 23

Resale price

Answer 23

Tangible property only

Question 24

Cost plus

Answer 24

Tangible property only

Question 25

Comparable Profits Method

Answer 25

Based upon operating margin, gross margin, return on assets, or return on capital

Question 26

What are the 3 transfer pricing issues?

Answer 26

When a US-based taxpayer transfers, sells, purchases, or leases tangible property or intangible property; enters into loan agreements or service contracts; or shares costs w/ an affiliate that either: 1. is not subject to the US income tax 2. does not file a consolidated income tax return w/the US based taxpayer

Question 27

The adjustments include the ability of the IRS to do what?

Answer 27

1. Modify the basis of assets | 2. Require taxpayer to recognize income w/respect to otherwise tax-free transaction

Question 28

How could a taxpayer avoid the "substantial valuation misstatement" and "gross valuation misstatement" penalties?

Answer 28

If any one of the following circumstances apply: 1. Section 482 study based on allowable pricing methods 2. Section 482 study not based on allowable pricing methods 3. Transactions solely b/w foreign corporations

Question 29

What are some activities that may trigger nexus in a state in which a company operates?

Answer 29

1. Owning/leasing tangible personal or real property 2. Sending employees into the state for training or work 3. Soliciting sales in a state 4. Providing installation, maintenance, etc., to customers w/in a state 5. Accepting/rejecting sales orders within the state, or accepting returns

Question 30

Foreign branch | Foreign tax now; Federal tax now

Answer 30

- Unincorporated foreign entity that is viewed as an extension of the domestic corporation - Not a separate legal entity - Earnings from branch taxed by foreign host country as well

Question 31

Foreign subsidiary | Foreign tax now; Federal tax later

Answer 31

- Separate legal entity, incorporated under the laws of foreign host company - Subsidiary profits taxed by host country - Income not taxed until earning brought back to US in form of dividend

Question 32

Sources of income from within the US

Answer 32

1. Interest 2. Dividends 3. Personal services 4. Rents and royalties 5. Disposition of US real property interest 6. Sale/exchange of inventory property 7. Underwriting income 8. SS benefits 9. Guarantees

Question 33

Categories of foreign income

Answer 33

1. Passive 2. General 3. Sec. 901(j) - income earned from activities in sanctioned countries 4. Certain income resourced by treaty 5. Foreign source lump-sum distribution from a pension plan

Question 34

How is the Foreign Tax Credit limitation calculated by category?

Answer 34

Pre-credit US tax on total taxable income X (Separate category foreign income/Total taxable income)

Question 35

What is the credit amount allowed for each category?

Answer 35

The lesser of the limitation for the category or the foreign taxes related to that category

Question 36

What are the subpart F rules of the IRC designed to do?

Answer 36

Prevent US shareholders of a controlled foreign corp (CFC) from deferring income recognition and US tax until earnings are distributed

Question 37

What do the subpart F rules trigger?

Answer 37

Immediate recognition of CFC subpart F income, included on a pro rata basis on the s/h's tax returns and treated as deemed dividend taxed at ordinary rates

Question 38

CFC (Controlled Foreign Corp)

Answer 38

Foreign corp with 50% or more of its stock owned by US s/h's on any day of the year

Question 39

Passive Foreign Investment Company (PFIC)

Answer 39

Foreign corp with 75% of gross income is passive income or at least 50% of average assets held by such corps are the type that produce passive income

Question 40

What are the ways shareholder of PFIC are taxed?

Answer 40

1. Qualifying electing fund (QEF) 2. Mark-to-market rules 3. Excess distribution rules

Question 41

What would a foreign person generally include?

Answer 41

- Nonresident alien individual - Foreign corp - Foreign partnership - Foreign trust - Foreign estate - Any other person that does not meet the definition of US person - Foreign branch of US financial institution - US branch of foreign corp/partnership