R5. International tax issues Flashcards
Worldwide tax system
vs.
territorial tax system
- US tax system is wordwide,
citizens are taxed in their worldwide income
territorial
- citizens taxed only on income wared inside the borders
Foreign tax credit
- double tax mitigation
= Lesser of
1. Foreign taxes paid
OR
2. Pre-credit US tax on total taxable income * (Foreign source income / total taxable income )
…………………………………….
- separate limitation calculations
1. passive category income (dividends, interest, rent, royalties)
2. General category income (active business income)
3. Foreign branch income
4. global intangible low-taxed income - Calculating the foreign taxed credit limitation by category
Lessor of 1. foreign tax paid OR 2. Pre-credit US tax total taxable income * (separate "category" foreign income / total taxable income )
Participation exemption or Dividend-received deduction
participation exemption
- exempt foreign income from taxation
dividends-received deductions (DRD)
- offset dividend income from foreign sources
- corp can take 100% dividend received deduction
- if owns 10% or more
- subject to holding period
- 1 year in last 2 years
Foreign Activities of US persons
Outbound transactions
- US person invests abroad
- foreign-source income
- US person includes: US citizen, resident alien, partnership, copr, trust and estates
** has anti-deferral rules
Anti deferral rules
- passive foreign investment company regime
- controlled foreign corporation rules/subpart F regime
- U.S. tax now n no DRD
- passive foreign investment company regime
- gross income OR asset test
- 75% of more gross income is passive
OR
- at least 50% of total assets are a passive asset
………………
- controlled foreign corporation(CFC) rules/subpart F regime
- made to curb shifting income to the low tax jurisdiction
- 50% of the stock is owned by US shareholders*
*US shareholders are any US person owning at least 10% of the stock
Global Intangible low-taxed income tax
- minimum tax
- relocate CFCs to low-tax jurisdictions
- after determining Subpart F income, must determine if they are subject to GILTI
- can deduct 50% of GILTI income
income (10% of average asset) -------------------------------------- XXXX *%owned -------------------------- GILTI
50% of GILTI is deductible
Earnings invested in U.S property
- deter US taxpayers from repatriating non-Subpart F earnings from CFC through LOAN and investment in US n a tax free manner
previously taxed income
- exclude distribution that were previously taxed ( subpart F, GILTI inclusion, or an investment in US property)
Transition tax
- territorial-style system by allowing DRD
- one-time deemed repatriation tax
- to US shareholders who own 10% or more
15.5% to cash & cash equivalents ( the profits that are never reinvested)
8% to all other earnings ( profit that was reinvested)
Tax payments
&
BEAT
base erosion and anti-abuse tax
tax payments: eight installments over eight years
…………………………………..
base erosion and anti-abuse tax
- min tax on large US corp (gross receipts of at least $500m) with significant amount of deductible payments related to foreign affiliates
- 5% 2018, 10% 2019-2025, 12.5% for 2026 or later
- 10% BEAT tax will begin to apply when payments to foreign affiliates exceed taxable income by more than 10%
Foreign-derived intangible income deduction
- new deduction for certain export activities
- US corp can get deduction for a proportion of its foreign-derived intangible income (FDII)
- involving non-us person located outside the US
- deduction amount is 37.5%
U.S activities of foreign persons ( Inbound transactions )
foreign person -anyone who is not US person-
- taxed on income derived in the US
- business income
- engaged in US trade or biz
- file 1120-F
- US sub instead of the branch then file as US corp - Non-business Income
- 30% withholding
- foreign person investment-type income (FDAP)
……………….
- foreign entities for failure to provide info to US recipients. ( FATCA)
- 30% withholding
Foreign person as US resident for tax purpose
- Green card test
- Substantial presence test
- at least 31 days in the current year AND
- at least 183 days for 3 year period, applying a weighted average :
current year days * 1
immediate preceding year * 1/3
next preceding year * 1/6
Expatriation
U.S (out) –> Foreign country (in)
- Mark - to -Market Regime for Individuals
- covered expatriates who renounce their US citizens & satisfy 1 of 3 test:
1) tax liability test: avg annual net income tax liability for five preceding taxable years exceeds indexed threshold ($172k for 2021)
2) Net worth test: net worth of $2m or more on date of expatriation
3) Compliance test: individual failed to comply with US federal tax obligations for five preceding taxable years
Cal of tax:
- all property treated as sold - any gain taken into account in taxable year of deemed sale
-$744k exclusion (2021) is allowed
- expatriates entity rules for corporations
- expatriated entity
- one of two categories for US - Continue to be treated as US corp IF former US shareholders own 80% or more interest in the new foreign parent
OR - Denied certain tax attributes IF former US shareholders own 60% but less than 80% of interest in the new foreign parent
- don’t receive 100% DRD
- individuals - not entitled to lower-rate on qualified dividends
