Multinational Tax Planning

Question 1

what is a territorial tax system v a worldwide tax system

Answer 1

1. territorial-taxes only income earned within its borders

2. worldwide - taxes all pretax income of its citizens, no matter where it is earned

Question 2

Why does the US want to tax foreign subs of US businesses in a similar fashion as foreign competitors

Answer 2

the US does not want to put these subs at a disadvantage to competitors - want to encourage international business while making sure taxes are not avoided entirely

Question 3

What are mechanisms the US uses to prevent tax avoidance by shifting income to foreign countries

Answer 3

Subpart F rules
transfer pricing rules
earnings stripping via intercompany debt

Question 4

what are subpart F rules

Answer 4

income earned by a controlled foreign corporation (CFC) that is subpart F is subject to an annual tax in the US even if not repatriated

Question 5

what do transfer pricing rules prevent

Answer 5

income being transferred from one segment of a company to another in a lower tax jurisdiction

Question 6

How do companies use earnings stripping via intercompany debt

Answer 6

companies will shift interest income by issuing debt to related parties not subject to US taxes - rules prevent a certain level of interest to be paid/accrued in this way

Question 7

What are the ways a US company can organize its foreign operations, explain the difference

Answer 7

• foreign branch - US company owns the asset of the sub directly, subject to ANNUAL US taxation
• foreign (sub) corporation - the US company transfers assets to foreign sub and owns stock in the foreign sub, taxed in US when income repatriated

Question 8

Why is the US not considered a “pure” worldwide tax system

Answer 8

foreign subsidiary income can be deferred for tax purposes, the company reflected in GAAP is not the same as the company reflected on the tax return

Question 9

why would a company elect to use the FTC over simply deducting foreign taxes from taxable income

Answer 9

the FTC offers a dollar-for-dollar reduction of US tax where as the deduction will equal the foreign taxes paid times the US tax rate (double taxed)

Question 10

what are the components of the gross FTC

Answer 10

• direct foreign tax credit - taxes paid in the current period
• indirect foreign tax credit - taxes paid in previous period that may be creditable upon repatriation

Question 11

how do you compute annual FTC limit

Answer 11

(foreign source income included in US tax return)/(worldwide foreign source income) * US tax on worldwide income
OR foreign source income included in US ret
* t (statutory rate)

Question 12

2 shortcuts for determining ATCF for foreign subs

Answer 12

1. if tf td = total tax

2. if tf>td => tf = total tax

Question 13

what is an excess FTC limit position

Answer 13

company has not reached its FTC limit, so additional foreign taxes paid would be eligible for a tax credit

Question 14

what is an excess FTC credit position

Answer 14

company has more tax credit than the limit allows, not all FTC can be used in the current period

Question 15

what do companies in FTC credit positions have the incentive to do

Answer 15

• increase capacity to use existing FTC

- increase share of foreign source income, often done by repatriating income from low tax countries

Question 16

what are the carryback/carryforward rules for FTC

Answer 16

1 year back, 10 years forward

Question 17

how is the deemed FTC calculated

Answer 17

Div Repatriated/Accum Undist E&P

* post 1986 foreign income taxes pool (foreign income taxes paid less amounts prev credited)

Question 18

what is cross-crediting

Answer 18

US allows corporations to aggregate foreign taxes across countries and compute foreign tax credit

Question 19

how do we calculate accumulated E&P

Answer 19

foreign income earned - foreign taxes paid

E&P is reduced for dividends paid