1 / 33

Chapter 16: U.S. Taxation of Foreign-Related Transactions

Chapter 16: U.S. Taxation of Foreign-Related Transactions. Chapter 16: U.S. Taxation of Foreign-Related Transactions. U.S. TAX OF FOREIGN- RELATED TRANSACTIONS. Jurisdiction to tax Taxation of U.S. citizens & residents Taxation of nonresidents U.S. taxation of foreign activity.

virgil
Download Presentation

Chapter 16: U.S. Taxation of Foreign-Related Transactions

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 16:U.S. Taxation ofForeign-Related Transactions Chapter 16: U.S. Taxation of Foreign-Related Transactions

  2. U.S. TAX OF FOREIGN-RELATED TRANSACTIONS • Jurisdiction to tax • Taxation of U.S. citizens & residents • Taxation of nonresidents • U.S. taxation of foreign activity

  3. Jurisdiction to Tax • Taxpayer’s country of citizenship • Taxpayer’s country of residence • Type of income earned • Location where the income is earned

  4. Taxation of U.S. Citizens and Residents • U.S. citizens and resident aliens taxed on worldwide income • Income earned in foreign countries or U.S. possessions receives special treatment • Foreign tax credit • Foreign earned exclusion

  5. Foreign Tax Credit (FTC)(1 of 3) • FTC permits U.S. citizens and residents to avoid double taxation • Directly reduces U.S. tax liability • FTC limited to lesser of Foreign tax actually paid OR foreign taxable income_ U.S. tax worldwide taxable income x liability

  6. Foreign Tax Credit (FTC)(2 of 3) • Source of income rules on p. C16-6 • Used to determine numerator of FTC formula • FTC deducted after nonrefundable credits for 2004 and later years

  7. Foreign Tax Credit (FTC)(3 of 3) • Unused FTC carried back two years and forward five years on a FIFO basis to a year where taxpayer has an excess credit limitation • Special FTC limitation • Ten separate baskets of income • Foreign tax credit calculated for each basket of income • See page C16-7 for partial list of baskets

  8. Foreign Earned Income Exclusion (FEI) (1 of 5) • FEI available to U.S. citizens and resident aliens working abroad • Eligibility • Bona fide resident test • Resident of foreign country uninterrupted for entire tax year and maintain tax home in foreign country

  9. Foreign Earned Income Exclusion (FEI) (2 of 5) • Eligibility (continued) • Physical presence test • Taxpayer must be physically present in a foreign country for 330 full days during a 12-month period, AND • Maintain a tax home in a foreign country during that period

  10. Foreign Earned Income Exclusion (FEI) (3 of 5) • Foreign earned income • Wages, salaries, & fees as compensation for personal services actually rendered • Amount of exclusion • Lesser of • $80,000, OR • Foreign earned income for current year, OR • $218.58 ($80k/366 days in 2004) x no. of qualifying days in current yr

  11. Foreign Earned Income Exclusion (FEI) (4 of 5) • Additional exclusion for taxable housing allowance • Limitation lesser of • Actual housing amount included in income,OR • $11,581 (.16 x Step1 GS-14 rate) x (qualifying days/366) • Housing costs incurred in excess of $11,581 are a for AGI deduction

  12. Foreign Earned Income Exclusion (FEI) (5 of 5) • Housing allowance exclusion (continued) • Housing allowance exclusion reduces amount eligible for FEI • FTC and FEI are mutually exclusive • Claim either the FTC or the FEI on foreign earned income, but not both

  13. Taxation of NonresidentAliens (1 of 5) • Resident aliens are taxed same as U.S. citizens • Nonresident aliens generally taxed only on U.S. source income • Taxpayer is a resident alien if they meet one of the two tests

  14. Taxation of NonresidentAliens (2 of 5) • Resident alien tests • Green-card test • Permanent resident w/ “green card” visa • Physical presence test • Present  31 days during current calendar year AND present  183 weighted average days during a three year period • Current year: 1 day counted as 1 day • Prior year: 1 day counted as 1/3 day • 2nd prior year: 1 day counted as 1/6 day

  15. Taxation of NonresidentAliens (3 of 5) • Most U.S. source passive or investment income is taxed at 30% • 30% applied to gross amount • U.S. payer must withhold tax • U.S. payer responsible for tax if not withheld • Tax rate often reduced by tax treaties

  16. Taxation of NonresidentAliens (4 of 5) • Income exempt from U.S. taxation • Non-USToB capital gains if individual physically present < 183 days during year • Non-USToB interest from banks or other financial institutions not taxed • Portfolio interest • Income from casual sale of personal property

  17. Taxation of NonresidentAliens (5 of 5) • Individuals must itemize deductions • Cannot claim standard deduction • Normal deductions apply for items “effectively connected” to a USToB • Gains from real property considered “effected connected” to a USToB • Tax treaties often reduce or eliminate U.S. for many types of income

  18. Taxation of U.S. BusinessOperating Abroad • Domestic corporations • Foreign corporations • Deemed paid foreign tax credit • Controlled foreign corporations • §482 rules and tax avoidance • Foreign Sales Corporations

  19. Domestic Corporations • Domestic subsidiary corporations • Can file consolidated return w/parent • Parent protected from foreign creditors of subsidiary • Foreign branches • Income and losses taxed currently • Eligible for direct FTC (described earlier)

  20. Foreign Corporations(1 of 2) • If domestic corp owns  10% of foreign corp, domestic corp eligible for “deemed paid credit” for dividends received from foreign corp

  21. Foreign Corporations(2 of 2) •  10% domestic corp owner can also claim dividends received deduction • U.S. tax on foreign sub’s income deferred until dividends received

  22. Deemed PaidForeign Tax Credit • Deemed paid credit calculation

  23. Controlled ForeignCorporations (CFC) (1 of 3) U.S. Manufacturing Corporation (Chicago) Foreign Purchasers of U.S. Manufacturer’s Products Physical flow of goods Billing of tax haven sales subsidiary by U.S. manufacturer Billing of foreign purchasers by tax haven sales subsidiary Foreign Sales Subsidiary (Island Corporation) Typical tax-avoidance scenario of a CFC

  24. Controlled ForeignCorporations (CFC) (2 of 3) • CFC definition • > 50% of foreign corp stock owned by U.S. shareholders • U.S. shareholder defined as owning 10% of stock • Some income forms (Subpart F income) of the CFC are taxed in the year in which they are earned.

  25. Controlled ForeignCorporations (CFC) (3 of 3) • Tax-deferred earnings can be taxed under Subpart F when invested in U.S. property. • Previously taxed income is distributed tax-free. • Special rules apply to the sale or exchange of CFC stock.

  26. §482 Rules & Tax Avoidance(1 of 3) • Tax avoidance opportunity high for domestic parent and 100% owned subsidiary (see slide #23) • U.S. parent sells goods/services at less than FMV to 100% foreign sub, OR • Foreign sub pays less than FMV for use of U.S. parent’s intangibles (e.g., patents)

  27. §482 Rules & Tax Avoidance(2 of 3) • §482 authorizes IRS to distribute, apportion, or allocate gross income, deductions, credits or allowances between or among controlled entities

  28. §482 Rules & Tax Avoidance(3 of 3) • §482 Regs hold that transaction of tangible property between entities must meet arm’s-length standard • Consistent w/ transactions between uncontrolled entities • Comparable transaction under comparable circumstances

  29. Foreign SalesCorporations (FSC) (1 of 4) • FSC is a special export entity • Must meet certain mandated administrative and economic activity requirements. • Part or all of FSC’s foreign trade income exempt from U.S. taxation • Exempt amount based on transfer pricing method used. • May use other-than-arm’s-length pricing.

  30. Foreign SalesCorporations (FSC) (2 of 4) • Dividend distributions may be eligible for a 100% dividends-received deduction. • Foreign tax credit also available for taxes withheld on dividends. • FSC status restricted to foreign corps having made FSC election before 10/1/2000.

  31. Foreign SalesCorporations (FSC) (3 of 4) • In 2000, the World Trade Organization declared that FSCs are illegal export subsidies

  32. Foreign SalesCorporations (FSC) (4 of 4) • In 2001, U.S. replaced FSCs with extraterritorial income rules • In 2002, WTO declared extraterritorial income rules an illegal export subsidy • Congress proposed to repeal extraterritorial income rules and replace with other economic incentives

  33. End of Chapter 16 Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’sKenneth W. Monfort College of Businessrichard.newmark@PhDuh.com

More Related