T2-M4 International Tax Issues Flashcards
1
Q
what are some definitions of taxpayers and transactions?
A
- a “controlled taxpayer” is any one of two or more taxpayers owned or controlled directly or indirectly by the same interests
- a “uncontrolled taxpayer” means any one of two or more taxpayers NOT owned or controlled directly or indirectly by the same interests
- a “controlled transaction/transfer” means any transaction or transfer between 2 or more member of the same group on controlled taxpayers
- a “uncontrolled transaction/transfer” means any transaction between two or more taxpayers that are NOT members of the same group
- a “permanent” concept established when a corp:
+ conducts business in a foreign country on a regular basis
+ has a permanent location in a foreign country; and
+ operates the corp’s business through the foreign location
2
Q
what are the most common pricing methods?
A
- comparable uncontrolled price (CUP): only for tangible property (sales, purchases, and leases)
- comparable uncontrolled transaction (CUT): only for intangible property (regarding royalty payments)
- resale price: tangible property only
- cost plus: tangible property only
- comparable profits method: based on operating margin, gross margin, return on assets, or return on capital
3
Q
what circumstances do transfer pricing issues exist?
A
- a US based taxpayer transfers, sells, purchases, or leases tangible property or intangible property to or from an affiliate that either:
+ is not subject to US income tax; or
+ does not file a consolidated income tax return with the US based taxpayer - a US based taxpayer enters into loan agreements or service contracts with an affiliates that either:
+ is not subject to US income tax; or
+ does not file a consolidated income tax return with the US based taxpayer - a US based taxpayer shares costs with an affiliate that either:
+ is not subject to US income tax; or
+ does not file a consolidated income tax return with the US based taxpayer
4
Q
what is advance pricing agreement program?
A
- advance pricing and mutual agreement’s mission is to resolve actual or potential transfer pricing disputes in a timely, principled, and cooperative manner
- the program requires agreement on the following issues:
+ choose a transfer pricing method
+ select comparable uncontrolled companies or transactions (comparables)
+ decide on the years over which comparables’ results are analyzed
+ adjust the comparables’ results because of the differences with the tested party
+ construct a range of arm’s-length results
+ test the results during the program period
+ agree on critical assumptions - APA is a binding contract between the IRS and the taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return for a covered year consistent with the agreed transfer pricing method
5
Q
what are the 2 types of foreign entities?
A
- Foreign branch:
- is an extension of the domestic corp
- NOT a separate legal entity
- earnings from branch are usually taxed by the foreign host country
- federal tax consequences:
+ profits/losses earned by branch are treated as being earned directly by the domestic corp
+ credits against taxes are allowed for the lesser of foreign tax imposed by host country or the foreign tax credit limitation
+ remittance of branch profits back to the domestic corp is NOT a taxable event for federal tax purposes - Foreign subsidiary:
- is a separate legal entity and incorporated under the laws of the host country
- sub’s profits are taxed by the host country
- federal tax consequences:
+ income earned by the sub is NOT taxed until the earnings are brought back to the US in form of dividend
+ foreign tax credit is not allowed
+ certain types of income earned are not allowed to be deferred and are subject to immediate taxation (such as passive investment income)
+ because sub is a separate legal entity, it is important that transactions between the US parent and sub follow the transfer pricing rules, or penalties will be imposed
6
Q
what are the 9 source of income in the US?
A
- Interest
- Dividends
- Personal services (where the service is performed)
- Rents and royalties
- Disposition of the US real property interest
- sale or exchange of inventory property (where the title passes)
- underwriting income: derive from the issuing of any insurance or annuity contract
- social security benefits
- guarantees
7
Q
what is the the US tax system?
A
- The US tax system is a worldwide tax system because citizens and residents are generally subject to tax on their worldwide income
- under TCJA in 2017, the act allows certain US corps earnings dividend income outside US borders to take a 100% DRD
- the other tax system is territorial tax system or also called source-country taxation. A nation only taxes its citizens and residents on income earned inside its borders. Most countries are members of organization for economic cooperation and development (OECD) employ territorial tax system
- rules of “substantial presence” and “effectively connected” provide thresholds for triggering taxation of foreign persons
8
Q
what is foreign tax credit and its limitation**?
A
- Foreign tax credit for income taxes paid to a foreign government is the primary mechanism to mitigate double taxation.
- limitation calculation: pre-credit US tax on total taxable income x (foreign source income/total taxable income)
- corps report its FTC on form 1118
- individuals, estates, and trusts report on form 1116
9
Q
what are 4 separate category income sources and its purpose?
A
- passive category income (dividends, interest, rents, royalties)
- general category income (active business income)
- foreign branch income
- global intangible low-taxed income
- the purpose is to prevent a company from using excess credits from high-tax foreign business profits to offset low-taxed passive investment income
- limitation calculation: pre-credit US tax on total taxable income x (SEPARATE category foreign income/total taxable income)
10
Q
what are certain requirements of DRD for foreign entities under US tax law***?
A
- a US corp is allowed to take 100% DRD against foreign-source income if it owns 10% or more of dividend-paying foreign corp
- a 10% shareholder but NOT a US corp is NOT eligible for DRD
- no foreign tax credit/deduction is allowed on dividends that benefit from 100% DRD
- the US corp must hold foreign stock for more than 365 days during the 731day period beginning 365 days before ex-dividend date
- the following income are NOT eligible for 100% DRD:
+ Subpart F income
+ Global intangible low-taxed income (GILTI) (apply to tax year after 12/31/2017)
+ income invested in US property
+ income subject to the transition tax
11
Q
what is outbound transactions?
A
- foreign activities of US persons
- generally, US persons can defer US taxes on foreign income (through active operations) until such income is repatriated (brought) to the US (ex: in form of dividends)
- the US has 2 anti-deferral rules:
+ passive foreign investment company regime (PFIC)
+ controlled foreign corporation rules/Subpart F regime - when both PFIC and Subpart F rules apply, subpart F rules supersede PFIC rules
12
Q
what is passive foreign investment company PFIC**?
A
a foreign entity is a PFIC if it meets a gross income or asset test:
- if 75% or more of foreign corporation’s gross income is passive (dividends, interests, rents, royalties)
- if at least 50% of foreign corporation’s total assets are passive assets (assets that produce passive income)
13
Q
what is subpart F income and its purpose***?
A
- subpart F exists to require immediate recognition in US income for certain types of income (passive income and related active income) that are easily manipulated. This feature reduces both the ability to shift the income between jurisdictions as well as the ability to defer the income
- a foreign corporation is considered a CFC if more than 50% of its stock is owned by US shareholders
- a US shareholder is any US person owning at least 10% of foreign corp’s stock (vote or value)
- subpart F only applies to a foreign corporation that qualifies as a CFC
14
Q
what is inbound transactions?
A
- foreign person’s investment in the US and file form 1120-F
- 2 categories:
+ business income: taxed on net basis (gross income less allowed deductions/expenses)
+ nonbusiness income (dividends, interests, compensation for personal services): taxed at gross basis at 30% statutory withholding rate - ex: income earned by a US branch by a foreign person must file form 1120-F
15
Q
what are the 2 US withholding tax regimes for nonbusiness income*?
A
- Fixed, determinable, annual, or periodic income (FDAP): deals with withholding on investment type income such as dividends, interests, royalties
- Foreign account tax compliance act of 2010 (FATCA): deals with withholding tax on foreign entities for failure to provide information to US recipients
- compensation from personal services is subject to withholding tax
