R5. Multi-jurisdictional tax issues

Question 1

Federal

Transfer Pricing

Answer 1

• Controlled taxpayer: SUB
• Controlled transaction : parent sub
  sub sub
• uncontrolled transaction: company outside customer

Question 2

Arms Length Standard

Answer 2

• the IRS adjustment: necessary to determine “ true taxable income”
• applied to a controlled transaction and controlled transfers ( related party transactions)

related party transaction results = company/customer transaction results

1. Comparable transactions and Standard of comparability

a. Comparable Uncontrolled Price (CUP) : only for tangible property
b. Comparable uncontrolled transaction (CUT); only for intangible property (regarding roylaty payments)

Question 3

Transfer Pricing Issues

Answer 3

• transfers, sells, purchases or leases tangible property or intangible property to RElated party
• loan agreements or service contracts with RElated party
• shared costs with RElated party

1. 1 Section 482 not based on allowable pricing methods
   - document study must be completed no later than the date the taxpayer files the federal income tax return

1. 2 transaction solely between a foreign country
   - all taxes are in a foreign country

1. 3 competent authority
   - advances ruling: get IRS to approve before the transaction is done

1.4 Advance pricing agreement program
binding agreement with IRS

Question 4

State Income tax consideration

Answer 4

1. 1 federal limitation on states rights to impose the income tax
   * * think of sales tax**
   - only biz is solicitation
   - order sent outside the state
   - orders are accepted, they are filled by shipment or delivery from a point outside the state

--------------- 
net income tax law does not apply to: 
- sales and use taxes 
- franchise tax 
- gross receipt taxes 

now you are subject to income tax:
- owing or leasing tangible property or real property
- sending employees for training or work
- soliciting sales in a state
- providing installation, maintenance, (even though thrid party)
- accepting or rejecting sales order or accepting returns

Question 5

State allocation and apportionment of federal taxable income

Answer 5

1. Allocation of nonbiz income
   - Allocate it to home state (commerical domicile)
   - remove from line 28 and assign to state where it should be taxed

2. Apportionment of biz income
   - apportion biz income among state
   according to
3. property
4. payroll
5. sales

Question 6

state income taxes and controlled taxpayers

Answer 6

require a combination of income of related members if combo will better reflect the extent of biz done within the state

Question 7

Entity classification

Answer 7

1. Foreign branch
   - Foreign taxed now & Fereal taxed now
   - unincorporated foreign entity
   - earnings from the branch are generally taxed by the foreign host country
   - taxed in full when earned
   - can take CRedit OR deduction
2. Foreign SUB
   - separate legal entity
   - profits are taxed by the host country (foreign taxed now)

• income earned not taxed util the earnings are brought back to URS - Federal taxed later