Taxation of Foreign Income Flashcards
What do treaties do?
Override tax provisions in US tax law or foreign tax law.
What foreign TPs are usually taxed on? US persons?
Foreign: Only on US source income.
US: Taxed on all income earned anywhere in the world.
Who does “US persons” include?
A citizen or resident of the US, a domestic partnership, corporation, estate, or trust.
When is earned income foreign source? US source? Employee benefits?
F: if earned in a foreign county.
U: if earned domestically.
This rule include employee benefits.
Wen is unearned income foreign source?
When received from a foreign resident or for property that is used in a foreign country.
Source of gain from sales: how is it determined? Exception?
Based on the residence of the seller.
Except:
*Inventory is sourced where title transfers.
*For depreciable property, recapture is sourced where depreciation was claimed; remaining gain is sourced where title transfers.
Source of gain from sales: income from the sale of intangible?
Sourced where the amortization was claimed.
Source of gain from sales: Income from the sale or exchange of real property?
Sourced based on the location of the property.
When is interest income US source?
If received from:
- US government
- Noncorporate US residents
- Domestic corporations
When does active business income of a US corporation become foreign source
If the corporation receives 80% or more of its active business income from foreign sources over the previous 3 yrs.
Source of dividends? Exception?
- Dividends from US corporations are US source.
- From foreign corporations are foreign source.
- Exception: if a foreign corporation receives 25% or more of gross income from income connected with a US business for 3 previous tax years, the dividends is US source.
Source of income from the use of tangible property? Intangible property?
T: The country in which the property is located.
I: The country in which the property is used.
When would IRS exercise its authority to change allocation of income and deductions?
If it determines that TP’s methods do not clearly reflect income.
What is the tax result when assets are transferred from US to a foreign country?
May trigger income, gain, and depreciation recapture applies.
Outbound transactions: when is gain deferred? Exceptions?
Gain is deferred if assets are used in a trade or business outside the US. Exceptions: If the property is: *Inventory or unrealized receivables. *Installments obligations *Foreign currency
What is controlled foreign corporations (CFC)?
A foreign corporation for which more than 50% of the voting power or value of stock is owned by US shareholders (limited to those who own, direct, and indirect, 10% or more of the foreign corporation) on any day of the tax year of the foreign corporation.
CFC: tax consequences of CFC income for US shareholders?
Taxed on CFC income as a constructive dividend.
CFC: Is all income taxed as constructive dividend?
No, only certain ones.
CFC: what is the main type of income?
- Not connected economically to the country in which it is organized.
- Income from insuring the risk of loss from outside the county in which it is organized.
Question:
B Corp is CFC for the entire tax year.
T is a US based corporation, owns 75% of B for the entire year. Both are calendar year corporations. Subpart F income is $50,000 and no distributions have been made. What is T’s constructive dividend for the tax year?
$50,000x75%=37,500
World wide income has potential of double taxation. What are 3 provisions to avoid this?
- Foreign income taxes paid are an itemized deduction for individuals.
- Alternatively, a credit may be claimed for foreign taxes paid.
- Certain individuals can elect to exclude foreign-earned income.
Foreign tax credit: when is credit for foreign taxes paid limited? Formula?
When the US effective tax rate exceeds the foreign effective rate.
Limit = US tax on worldwide income x (Foreign source taxable income/worldwide taxable income).
Foreign tax credit computation: what must individuals add?
Personal exemptions to worldwide income.
Foreign tax credit: what happens to excess foreign tax credits?
Can be carried back 1 yr and forward 10 yrs.
