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CPA: Regulation > Multijurisdictional Tax Issues > Flashcards

Multijurisdictional Tax Issues Flashcards

1
Q

What is the tax credit that mitigates double taxation of worldwide income?

A

Foreign Tax Credit

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2
Q

What is the tax system where you are only taxed in the country where income is earned?

A

Territorial Tax System

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3
Q

Who is still taxed as a territorial tax system?

A
  • Income from selling goods and services overseas

- Profits and losses from branch operations in foreign jurisdictions

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4
Q

What does an “outbound transaction” refer to?

A

The taxation of foreign source income by US taxpayers

Income earned “out” of the U.S.

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5
Q

What does an “inbound transaction” refer to?

A

The taxation of U.S. source income by non-U.S. Taxpayers.

Income earned “in” the U.S. by non-U.S. taxpayers

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6
Q

How is foreign income taxed under the worldwide income structure?

A

Taxed in U.S. & foreign jurisdiction.

Then, qualifies for foreign tax credit.

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7
Q

What is a Controlled Foreign Corporation?

A

More than 50% of voting power is owned by U.S. shareholders. Each shareholder individually must own 10% or more to count towards the 50%.

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8
Q

What happens to NON-subpart F income in a Controlled Foreign Corporation?

A

Not taxed until distributed.

100% deduction after TCJA - move to territorial taxation

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9
Q

What is subpart F income for a Controlled Foreign Corporation?

A

It is income that is taxed to the U.S. shareholders even if it is not distributed.

(taxed as a “constructive dividend”)

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10
Q

New tax law from TCJA for 10% owned foreign affiliates

A

100% deduction for US Corporations for foreign source portion of dividends received from the earnings and profits of 10% owned foreign affiliates. (completely offsets the income from the foreign subsidiary)

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11
Q

Rules to qualify for 100% deduction of dividend from 10% foreign-owned affiliate

A
  • Must have owned stock in the foreign affiliate for at least 1 year
  • Must be at least 10% owned
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12
Q

What are the tax rates for “Deemed Repatriation” required to be reported on 2017 tax returns?

A

-Taxed at 8% except for cash distributions which are taxed at 15.5%

(goal is to bring offshore money home because they are going to be taxed on it anyway - in future, 100% deduction)

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13
Q

Deemed repatriation - how long does a corporation have to repay?

A

Can pay over 8 years with most of the tax being paid in the last 3 years. Repayment will be a tax issue through 2025.

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14
Q

How far can any foreign tax credit carryback and carryforward?

A

1 year backward, 10 year forward

“1 FTC 10”

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15
Q

What is the tax rate on previously un-repatriated earnings of a foreign subsidiary if not previously taxed in the United States?

A

8%

15.5% - cash

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16
Q

Going forward, how are earnings of a foreign subsidiary taxed?

A

100% deduction (because taxed in the territory where earned)

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17
Q

To minimize the risk of an IRS audit regarding transfer pricing, the corporation can agree to what?

A

Safe Harbor transfer pricing through and Advance Pricing Agreement with the IRS

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18
Q

How is the foreign tax credit calculated?

A

The lower of the foreign tax paid or this calculation:

Foreign Source Taxable Income /
Worldwide Taxable Income

x US Tax Paid

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19
Q

The foreign tax credit is computed separately for what 4 different types of income?

A
  • Active business income
  • Portfolio income
  • Income from foreign branches
  • Intangible income
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20
Q

Foreign Income Exclusion is for what type of income?

A

EARNED INCOME (only) that was earned in a foreign location. Approximately $104,000 is exempt from US tax.

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21
Q

If an employer provides and employee with free housing while in Japan, is that taxable to the employee?

A

No, it is tax exempt.

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22
Q

Individual taxpayers who have foreign taxes on portfolio income can take a foreign tax credit of what amount without any calculation?

A

$300 / $600

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23
Q

Foreign currency exchange gains/losses as a business from normal transactions result in what type of income?

A

Ordinary income

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24
Q

Transfer pricing: How would a company try to set the transfer price if Company A sells to Company B.
Company A - 20% tax rate
Company B - 40% tax rate

A

Company would try to maximize the transfer price = higher cost to B = lower profits in the high tax rate country

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25
Q

Regarding transfer pricing, to minimize taxes the company should try to:

A

Maximize the transfer price in the jurisdiction having the lowest tax rate and therefore

the seller in the highest tax jurisdiction should have the highest cost.

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26
Q

What is an excise tax?

A

A tax based on quantity purchased rather than price.

Cigarettes, alcohol. Flat tax on luxury goods over $100,000.

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27
Q

What is an ad valorem tax?

A

An imposed tax. Paid annually. Based on value of intangible assets.

28
Q

A state or local tax imposed on a corporation for doing business in the state is known as:

A

FRANCHISE TAX

even if there is a loss, still have to pay it

29
Q

Which taxes are based on the value of property and paid each year?

A

Ad valorem taxes and Property taxes

30
Q

Are services generally subject to sales tax?

A

No

31
Q

Are wholesale purchases subject to sales tax? Give an example.

A

No. Ultimate consumer pays sales tax.

Deli manager buys tuna to make tuna fish = wholesale = not taxed

32
Q

In terms of state taxation -

What is a domestic corporation?

What is a foreign corporation?

A

Domestic - incorporated in state

Foreign - incorporated in another state BUT doing business in your state

33
Q

If a transaction has _____ within a particular state, that means that the state has the ability to tax the transaction.

A

NEXUS

34
Q

4 part Supreme Court test for NEXUS:

A

1) Must have SUBSTANTIAL nexus, clear enough to establish a tax
2) Fairly APPORTIONED in relation to other states
3) Law set up by state can’t DISCRIMINATE interstate commerce
4) Must be fairly related to the services that the STATE PROVIDES

35
Q

Examples of situations where NEXUS does NOT apply

A
  • Soliciting sales of tangible personal property when sales are approved and shipped outside of the state
  • Advertising
  • Determining reorder needs of customers in that state
  • Furnishing autos to sales staff who may be located in that state

-

36
Q

Does installation and repairs establish NEXUS in a state?

How about collection of delinquent accounts?

A

Alll establish NEXUS

37
Q

Does advertising in a particular state establish nexus?

A

NO

38
Q

How do states handle municipal bond interest received?

A

Most states tax even though exempt from Federal tax (unless purchased from that state).

Note: any expenses related to municipal bond purchases are usually deductible on state return

39
Q

How do most states handle the Dividends Received deduction?

A

Add back, not allowed for states

40
Q

How do states handle US Savings bond interest?

A

Opposite of Federal.

No tax on State return. Also note that expenses related to buying the bond are NOT deductible, since interest is not taxed.

41
Q

Is Federal tax deductible on the State return?

A

YES!

42
Q

Given Federal taxable income, what do you do with state taxes paid to get to state taxable income?

A

You add back because they were deducted from Federal return.

43
Q

For state income tax purposes, municipal bond interest is ____, and expenses related to municipal bonds such as a brokerage fee is ______.

A

Taxable, deductible

For state income tax purposes, municipal bond interest is taxable, and expenses related to municipal bonds such as a brokerage fee is deductible.

44
Q

Multi-state corporation: dividends received. What state has nexus?

A

Only the home state because it is non-business income.

45
Q

Multi-state corporation: Sale of inventory among several states. What state has nexus?

A

Apportioned based on sales.

46
Q

What items are considered non-business income?

A

Dividends, interest, rental income*.

*unless a real estate developer, etc.

47
Q

Can states collect sales tax from internet sales even the store has NO physical presence in the state?

A

Yes, as of 2018

“Wayfair Decision”

48
Q

What is the Wayfair decision?

A

With regard to sales tax, the U.S. Supreme Court decided that states may assert nexus even if the seller never had a presence in the state.

49
Q

Troy works for a US firm and earns wages of $75,000 while working in Egypt for 3 months. Foreign or domestic income?

A

Foreign. EARNED INCOME based on where it is earned.

EARNED INCOME includes wages, Schedule C, employee benefits, 1099-MISC/NEC.

50
Q

Troy is a U.S. resident: While working in Egypt, Troy sells his car for a gain of $1200. How is this gain taxed and by who?

A

Capital gain, U.S. source income because not earned income.

Personal property sales based on the legal residence of the seller.

51
Q

Troy, U.S. resident, working in Egypt:

While working in Egypt for 3 months, Troy earns employee fringe benefits of $7,000. Who taxes?

A

Egypt.

Employee benefits considered EARNED INCOME. Earned income is Foreign Source if earned in a foreign country.

52
Q

While living in the U.S., Troy sells land to Edward, U.S. resident. The land is located in Germany. Who taxes?

A

Germany (foreign source).

Sales of Real Property based on the LOCATION of the real estate.

53
Q

What is the difference in taxation of a U.S. resident living overseas on the sale of real property vs. personal property?

A

Personal property: Domestic

Real property: Foreign Source (based on location of property)

54
Q

While living in the U.S., Troy collected gambling winnings of $5,000 from a Super Bowl wager with a resident from Japan. What country taxes.

A

Japan (foreign source)

Gambling winnings = UNearned income, therefore he was paid from Japan, taxed in Japan.

55
Q

Troy owns an apartment building in Columbia and receives $15,000 of rental income while living in the United States. What country taxes?

A

Columbia (Foreign Source)

Rental Income = Real Property

Real Property is taxed based on LOCATION.

56
Q

While living in Egypt, Troy (US resident) sells his condo in Florida to a buyer in New Zealand and makes a profit of $50,000. What country taxes.

A

US (domestic source income)

Real property = based on LOCATION of property! Florida = US source

57
Q

While working in the US, Troy loans money to a French resident, who pays interest of $300 on the loan. Which country taxes this income?

A

France (foreign source)

Unearned income.

Portfolio income is considered foreign source IF received from a foreign country.

58
Q

Unearned income is _____ source if received from a ______ resident.

A

Unearned income is FOREIGN source if received from a FOREIGN resident.

Interest, gambling winnings, etc.

59
Q

While working in the US, Troy receives $120 interest income from a Canadian bank.

A

Canada (Foreign source)

Unearned income received from a foreign source.

60
Q

Troy is working in Egypt for 3 months, receives rental income of $6200 from a Chinese firm that rents his Manhattan studio for 90 days.

A

US (Domestic income)

Rental income = real property

Real property taxed based on LOCATION OF PROPERTY.

61
Q

While living in the US, Troy earns $230 of dividend income from a South Korean Corporation.

A

South Korea (foreign source)

Portfolio income = unearned income

UNearned income is based on the location of the PAYER.

62
Q

How do you determine taxing jurisdiction with the sale of inventory?

A

See where the title transfers!

F.O.B. SHIPPING point: title transfers in the U.S. = U.S. Source income

F.O.B. DESTINATION: title transfers abroad = Foreign source income

63
Q

What form do you have to file if you own $10,000 or more at any time during the year in a foreign bank account?

A

Must file FinCen reporting or FBAR reporting

Foreign Bank Account Report is filed with the US Dept of Treasury.

Schedule B of the 1040.

64
Q

If a US firm earns a profit in a foreign country and pays 16% tax there, and then that same income is taxed in the US at a rate of 21%. Then, because of the Foreign Tax Credit, the US firms ends up only paying the difference of 5% to the US. Does this illustrate a WORLDWIDE or TERRITORIAL tax system?

A

Worldwide

65
Q

Subpart F income from Controlled Foreign Corporations - subject to Worldwide taxation or territorial?

A

Worldwide - will be taxed by the foreign jurisdiction AND the United States. Then, foreign tax credit will be applied.

66
Q

A US citizen sells his luxury sports car at a gain to a Russian citizen. Is the income considered foreign source or US source income?

A

U.S. source income.

Income from the sale of personal property is taxed based on the residence of the seller.

CPA: Regulation (24 decks)

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