Multi Jurisdictional Tax - Foreign Income

Question 1

Tax Systems

Answer 1

Worldwide Tax System: include all income on 1040 no matter where in the world it was earned
- get a foreign tax credit to mitigate damage from double taxation (only pay the difference from foreign tax to the US rate 21%)

Territorial Tax System: only country that taxes the transaction in the country in which the transaction occurs (taxation goes to territory)

Still under Worldwide:
- Business Income from US Taxpayers, generated by directly selling goods and services overseas – still Worldwide System
** Treaties always trump these **
- Foreign Branches

Outbound Transaction - foreign source income (earned OUTside of the US)
Inbound Transaction - US income by non US tax payers (earned INto the country)

Question 2

Foreign Tax Credit

Answer 2

• Calculation: Foreign Income / Total Worldwide Income x US tax paid = Foreign Tax Credit
• excess foreign tax credits can be carried back 1 year and forward 10 years
• separately for: active business income, portfolio income, income from foreign branches, intangible income

Question 3

Foreign Branch vs Foreign Subsidiary

Answer 3

US Persons, Corp, etc are taxed on ALL income earned anywhere in the world

Corp taxed on Branch (not separate legal entity)

Corp NOT taxed on Subsidiary until income is repatriated in form of dividends to parent company (separate legal entity from parent, even if owned by parent)