R5 - International Tax Issues

Question 1

What taxation system does the US have?

Answer 1

Worldwide Tax System

Question 2

What is the FTC limitation?

Answer 2

Lesser of:

• Foreign taxes paid OR
• Limitation Calc = Full US Tax * (FSI/WWIncome)

Question 3

What is the FTC limitation by basket?

Answer 3

Lesser of:

• Foreign taxes paid OR
• Limitation Calc = Full US Tax * (FSI Basket/WWIncome)

Question 4

What is the DRD rule for foreign dividends?

Answer 4

• Exempt dividend income from FSI at least 10% of foreign company.
• Allowed only if US company holds stock for more than 1 year during the last 2 years. 2 years begin on date of ex date.
• Not allowed for GILTI, 965, SubF, income invested in US prop.

Question 5

What are the Anti-deferral rules?

Answer 5

• PFIC

- CFC

Question 6

What is a PFIC?

Answer 6

A foreign entity that meets the Income test and the Asset Test.

Question 7

What is the PFIC Income Test?

Answer 7

When 75% or more of the foreign corp gross income is passive.

Question 8

What is the PFIC Asset Test?

Answer 8

When at least 50% of the foreign corp’s assets are passive (investments)

Question 9

What are the three methods in which PFIC’s undistributed earnings are subject to US tax?

Answer 9

1. Qualified electing fund
2. Mark-to-Market method
3. Excess distribution method

Question 10

What is Subpart F income?

Answer 10

• Applies to CFC

- Prorata share of CFC income is SubF

Question 11

What is GILTI?

Answer 11

• Min tax on low tax income to incentive relocation of FSI to US
• Tested Income - 10% QBAI * Share of Income - GILTI Deduction (50% of GILTI)

Question 12

What is Earnings Invested in US Property?

Answer 12

• This is non-SubF income, but in the form in a Loan.
• No loans go tax free. They are taxed as if they were repatriated.
• Increase in Earnings Invested in US property is the average of quarterly EB loans (like QBAI).

Question 13

What is PTI?

Answer 13

A US SH can exclude distributions of a CFC that were PTI to US SH as GILTI, SubF of Earnings Invested in US Property.

Question 14

What is Transition Tax?

Answer 14

• One time tax.
• Transition from deferred earnings to taxed earnings.
• Cash/Equivalents taxed at 15.5%
• Other earnings taxed at 8%

Question 15

What is BEAT?

Answer 15

• Min tax to large corps with average annual gross receipts of $500MM with large amounts of deductible payments to related foreign affiliates and with payments to foreign RP greater than 3% of total deductions
• Taxed at 5% (2018), 10% (2019-2026), and 12.5% (after 2026)

Question 16

How to calculate BEAT?

Answer 16

1. Perform test, and get 3% of total deductions.
2. BEAT = (Taxable Income + BEAT Deductions)* 10%
3. Calculate regular tax.
4. Pay greater of BEAT or Reg Tax.
5. If BEAT > Reg Tax, then excess is considered BEAT.

Question 17

FDII

Answer 17

• Deduction for certain export activities.
• Deduction for sale of property to foreign related parties that are subsequently sold to unrelated parties.
• 37.5% deduction

Question 18

When does Expatriation/Exit Tax applies for individuals?

Answer 18

Considered “covered expatriates” and needs to meet 1 test out of 3:

1. Tax Liability Test: Average annual net income tax liability exceeds threshold of 171K for 2020.
2. Net Worth Test: $2MM or more on date of expat
3. Compliance test: failed to file for 5 precedent years

Question 19

How to calculate Exit Tax?

Answer 19

(FMV - Basis - 737,000 exclusion) * tax rate

Question 20

When does Expatriation/Exit Tax applies for corporations?

Answer 20

When a company decides to reorganize its operation under a foreign parent to reduce US tax.
Considered “expatriated entity” and falls into 1 of 2 categories:
1. Continue to be treated as a US Person if former US SH own 80%> in new foreign parent.
OR
2. Denied certain tax attributes such as NOL and FTC to offset your inversion gain if US SH 60%-80% of interest in new parent.