Module 5: Multi-Jurisdictional Tax Issues Flashcards
When would transfer pricing issues exist?
When a US-based taxpayer shares costs w/ an affiliate that either:
- is not subject to the US income tax
- does not file a consolidated income tax return w/the US based taxpayer
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?
The orgs may be members of an affiliated group that file a consolidated US tax return
What can a corporation claim foreign income taxes paid as?
Either a deduction or a credit, at the option of the corp.
What is an Advance Pricing Agreement Program (APA)?
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
What is a section 482 study?
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
What is a “request for competent authority”
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
What is nexus?
The minimum level of contact a taxpayer may have with a jurisdiction to be subject to its tax
How is the apportionment factor calculated?
By averaging the factor of sales, payroll, and property (average) for a specific state
These factors are the ratio of:
- Total sales, payroll, or property in a specific state to
- Total sales, payroll, or property everywhere
If US source income is paid to a nonresident alien, how much US tax withholding is the payment subject to?
30%
How will a multistate corporation treat its nonbusiness income?
The corporation will allocate nonbusiness income to the state where it should be taxed
How will a multistate corporation treat its business income?
The corporation will apportion its business income based on the extent of the corporation’s activities and property within a state
What does IRC Sec. 482 and 6662(e)(3) provide the IRS with?
The authority to:
- adjust the income and deductions (including COGS) of affiliated orgs. to prevent evasion of taxes or to clearly reflect income; and
- Impose penalties w/respect tot those adjustments
Controlled taxpayer (subsidiary)
Any one of 2+ taxpayers owned or controlled directly or indirectly by the same interests
Uncontrolled taxpayer
Any one of 2+ taxpayers not owned or controlled directly or indirectly by the same interests
Controlled
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
Taxpayer (for purposes of IRS’s authority to make adjustments w/respect to controlled transactions)
Any person, org, or business, whether or not subject to any tax imposed by the IRC
Controlled transaction/transfer
Parent <=> sub. or sub <=> sub
Any transaction or transfer between 2+ members of the same group of controlled taxpayers
Uncontrolled transaction
Company <=> Customer
Transaction b/w 2+ taxpayers that are not members of the same group of controlled taxpayers
Uncontrolled comparable
Uncontrolled transaction or uncontrolled taxpayer that is compared, under any applicable pricing methodology, with a controlled transaction or with a controlled taxpayer
What are the various standards of comparability (applicable pricing methodologies)?
- Comparable Uncontrolled Price (CUP)
- Comparable Uncontrolled Transaction (CUT)
- Resale Price:
- Cost Plus
- Comparable Profits Method
Comparable Uncontrolled Price (CUP)
Only for tangible property
Based upon reference to published market data
Comparable Uncontrolled Transaction (CUT)
Only for intangible property (regarding royalty payments)
Resale price
Tangible property only
Cost plus
Tangible property only
Comparable Profits Method
Based upon operating margin, gross margin, return on assets, or return on capital
What are the 3 transfer pricing issues?
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:
- is not subject to the US income tax
- does not file a consolidated income tax return w/the US based taxpayer
The adjustments include the ability of the IRS to do what?
- Modify the basis of assets
2. Require taxpayer to recognize income w/respect to otherwise tax-free transaction
How could a taxpayer avoid the “substantial valuation misstatement” and “gross valuation misstatement” penalties?
If any one of the following circumstances apply:
- Section 482 study based on allowable pricing methods
- Section 482 study not based on allowable pricing methods
- Transactions solely b/w foreign corporations
What are some activities that may trigger nexus in a state in which a company operates?
- Owning/leasing tangible personal or real property
- Sending employees into the state for training or work
- Soliciting sales in a state
- Providing installation, maintenance, etc., to customers w/in a state
- Accepting/rejecting sales orders within the state, or accepting returns
Foreign branch
Foreign tax now; Federal tax now
- 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
Foreign subsidiary
Foreign tax now; Federal tax later
- 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
Sources of income from within the US
- Interest
- Dividends
- Personal services
- Rents and royalties
- Disposition of US real property interest
- Sale/exchange of inventory property
- Underwriting income
- SS benefits
- Guarantees
Categories of foreign income
- Passive
- General
- Sec. 901(j) - income earned from activities in sanctioned countries
- Certain income resourced by treaty
- Foreign source lump-sum distribution from a pension plan
How is the Foreign Tax Credit limitation calculated by category?
Pre-credit US tax on total taxable income X (Separate category foreign income/Total taxable income)
What is the credit amount allowed for each category?
The lesser of the limitation for the category or the foreign taxes related to that category
What are the subpart F rules of the IRC designed to do?
Prevent US shareholders of a controlled foreign corp (CFC) from deferring income recognition and US tax until earnings are distributed
What do the subpart F rules trigger?
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
CFC (Controlled Foreign Corp)
Foreign corp with 50% or more of its stock owned by US s/h’s on any day of the year
Passive Foreign Investment Company (PFIC)
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
What are the ways shareholder of PFIC are taxed?
- Qualifying electing fund (QEF)
- Mark-to-market rules
- Excess distribution rules
What would a foreign person generally include?
- 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
