International Taxation in a Nutshell
Authors:
Herzfeld, Mindy / Doernberg, Richard L
Edition:
11th
Copyright Date:
2018
26 chapters
have results for international taxation in a nutshell
Personal Note v 1 result
- It has been my privilege for more than 25 years to author ten editions of International Taxation as part of the Nutshell Series. But advancing age, the arrival of joyful grandchildren and the unmistakable cosmic sign of the enactment of a totally new international tax system in the U.S. have convinced this old dog that someone else gets to learn the new tricks. Mindy Herzfeld and I have worked together professionally and she is well-known in international tax circles as a splendid tax practitioner, widely published author and teacher. The future of the International Taxation Nutshell could not be in better hands.
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Preface vii 10 results (showing 5 best matches)
- Hopefully, this book kindles an interest in international taxation. If it does, the reader must move beyond this primer into the maw of the Internal Revenue Code, Regulations, rulings and caselaw that make up the substance of U.S. international taxation. In addition, there are ample secondary sources that explore the subject more comprehensively.
- The tax law that was enacted by Congress in December 2017 made major changes to the U.S. international tax rules, some of them the most significant since these rules were first established in the early decades of the 20th century. This 11th edition of International Taxation in a Nutshell therefore represents a significant revision from prior editions to capture the changes in law. At the same time, as this edition is going to press, the dust is still settling on the new law. Regulatory guidance by the IRS and Treasury has yet to be issued in most areas of the new law, and this regulatory guidance will need to be substantial. In other words, this edition is not likely to be the last.
- The study of international taxation is not just important for law students who want to become expert in a highly technical area of the law. For anyone who is or will be involved in international business and investment transactions, it is important to have some basic understanding of the relevant tax laws. This book therefore serves as an introduction to the U.S. law of international taxation for both law students interested in becoming tax experts, and a broader audience of those engaged in cross-border business from a variety of backgrounds. It is a primer that can be useful for law and accounting students, foreign tax practitioners or scholars, U.S. tax practitioners seeking an introduction to the area or an overview of recent changes in the international tax rules, and others who might benefit from an overview of the U.S. tax laws governing international trade and investment. The book summarizes the law, offering some attention to the purposes of the various legal rules. However...
- It will come as no revelation that the U.S. income tax laws are wondrously complex, made even more so by recent changes ostensibly intended to “simplify” the law. Moreover, the student of U.S. international tax law should have some grounding in U.S. individual, partnership, state, employment and corporate tax principles. U.S. international tax does not exist in a vacuum. Knowledge of foreign tax systems is also useful. But realistically, many practitioners have their hands full trying to understand the U.S. system and collaborate with foreign colleagues on cross-border transactions. Ironically it is because of the complexity that it is important to present a straight-forward conceptual framework of the U.S. international tax provisions. Even with a framework, the intricate rules governing U.S. taxation of international transactions can be mind-numbing. Without an understanding of the structure of the U.S. international tax provisions (and often even with such an understanding), the...
- Those readers who are beginning their study of this subject for the first time are therefore very fortunate: they are not burdened by expectations and old ways of thinking that ground those whose education was in a prior regime. New students of international taxation have the chance to become freshly minted experts in the area, not far behind those with decades of experience of practicing in this area. It’s an exciting time to be studying this field.
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Chapter 9 The Foreign Tax Credit 289 148 results (showing 5 best matches)
- A second possibility is that Germany should do something—either exclude the income from its tax jurisdiction or give a credit for U.S. taxes paid thereby reducing German taxation to $0. This solution runs counter to a basic international tax principle—the country of source ( , the place where the taxpayer resides). This international taxation principle recognizes that the source country’s economic environment is likely to have played a larger role in the production of income than the economic environment of the residence state. If the income is earned in Germany, Germany has first crack at taxation, and if any adjustment is to be made, the United States as a residence country must make it.
- While it is apparent that there is international double taxation, it is not apparent what should be done to ameliorate the situation. There are many possibilities. First, perhaps nothing should be done—neither Germany nor the United States should make any adjustments. But this solution treats the U.S. taxpayer earning foreign source income inequitably when compared to a U.S. taxpayer earning U.S. source income. In addition to the issue of equity or fairness, the failure to relieve such double taxation may cause some taxpayers to structure their affairs to avoid producing income in Germany even though, in the absence of tax considerations, the German investment is more productive than a competing U.S. investment.
- Because the foreign tax credit is aimed at preventing international double taxation of income, the only payment allowed as a tax credit against U.S. income tax liability is a foreign . Foreign taxes that are income taxes in the U.S. sense can qualify for a tax credit even if imposed by a political subdivision or local authority of a foreign country. By contrast, U.S. state and local taxes are not creditable, but can only be deducted.
- To have trudged through the rules governing the foreign tax credit only to learn that the rules do not apply to income from and taxes paid to U.S. treaty partners would be cruel indeed. But not surprisingly, U.S. bilateral income tax treaties do address the crediting of foreign income taxes. For example, in the U.S. Model Treaty, Article 23 provides relief from double taxation generally in accordance with U.S. domestic law rules governing relief from double taxation. However, treaty relief from double taxation under some treaties may be more favorable for a taxpayer than under U.S. domestic law rules providing relief from double taxation ( , the source rules used in limiting the foreign tax credit may provide the taxpayer a larger foreign tax credit under the treaty than under U.S. domestic law). Where treaty resourcing rules permit a foreign tax credit that would not be available under U.S. domestic law, the item of income is put in a separate treaty basket to prohibit any cross-...
- The U.S. tax system does not allow a foreign country’s income taxes to reduce U.S. income taxes on U.S. source income. As explained in more detail in § 9.06, limitations are placed on the , the German taxes can only offset the U.S. taxes on the $100,000 of German income). The taxpayer’s total tax bill is $50,000 of German taxes and $30,000 of U.S. taxes (on the $100,000 of U.S. source income). To the extent that a U.S. taxpayer cannot credit foreign income taxes against U.S. income taxes on the same income, the foreign tax credit limitation takes away the neutrality a U.S. taxpayer may face in the decision of whether to invest in Germany or the United States. But the United States is unwilling to relieve double taxation that in its view is caused by unwarranted taxation by another country (or by the taxpayer’s decision to generate income in a high-tax jurisdiction). Historically, foreign tax credits that are limited in this manner were available as credits in other years under a...
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Chapter 5 The Role of Income Tax Treaties 127 103 results (showing 5 best matches)
- Certain types of business income are sometimes dealt with separately in the U.S. Model. For example, Article 8 of the U.S. Model provides that income (from direct operation or from rental activities) from shipping and air transport in international traffic is generally taxable in the state of residence of the entrepreneur rather than in the state in which the income is produced, even if the income is attributable to a permanent establishment in that state. This rule reflects a concern that difficulties in allocation may otherwise result in multiple taxation of shipping profits. Article 6 of the U.S. Model provides that income from real property may be taxed in the state where the property is located. The income may also be taxed in the owner’s state of residence if relief from double taxation is allowed for any situs state taxation. The real property article applies both to business and investment income from real property.
- Many of the Code ground rules in the previous Chapters (and in the following Chapters dealing with U.S. taxpayers) are altered by more than 50 bilateral income tax treaties between the United States and its trading partners (referred to in tax treaties as “contracting states” rather than “countries”). The principal purpose of this income tax treaty network is to facilitate international trade and investment by lowering tax barriers to the international flow of goods and services. Lower overall taxation encourages trade and investment. Every contracting state involved in international commerce acts in two capacities for tax purposes. In some situations a contracting state claims the right to tax as the residence state of a taxpayer. In other situations a contracting state asserts tax jurisdiction based on the source of income earned by a nonresident.
- A major purpose of the U.S. bilateral income tax treaty network is to eliminate international double taxation. U.S. income tax treaties contain reciprocal commitments by each state when acting as a residence state to provide either a foreign tax credit for taxes paid in the source state or to exempt income earned in the other contracting state. For example, the United States grants a credit for any foreign income taxes paid on foreign source income while often the other contracting state exempts from its taxation U.S. source business income (and grants a credit for source state taxation of investment income). 2016 U.S. Model, Art. 23.
- U.S. income tax treaties typically contain a mutual agreement procedure provision for resolving treaty disputes. 2016 U.S. Model, Art. 25. Under such a provision, if a taxpayer claims that the action of the tax authorities of a contracting state has resulted, or will result, in taxation that violates the treaty, the competent authorities of both contracting states seek to reach an agreement to avoid double taxation. Under a mutual agreement article, the competent authorities of the contracting states can enter into a mutual agreement (which may modify domestic law) in order: (i) to resolve specific cases in which a taxpayer alleges violation of a treaty; (ii) to agree upon interpretation and application of a treaty provision; and (iii) to eliminate double taxation in cases not expressly provided for in the treaty. In the United States, the competent authority is the Secretary of the Treasury or his delegate, which is the IRS Commissioner, Large Business & International Division.
- Income tax treaties exist to limit a contracting state’s tax jurisdiction in order to avoid international double taxation. To that end, a treaty provision should not be construed to restrict in any manner any exclusion, exemption, deduction or credit, or any allowance accorded by the domestic laws of the treaty partners. Stated differently, income tax treaties can reduce a taxpayer’s U.S. tax liability but cannot generally increase it.
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Chapter 7 Introduction to U.S. Business Activity in Foreign Countries 215 35 results (showing 5 best matches)
- In this part of the book, the U.S. tax treatment of U.S. taxpayers doing business or investing abroad is considered. In general, U.S. citizens and residents are taxable on their worldwide income. (The TCJA ostensibly moved the United States to a territorial system of taxation, but as we will see in this and the following chapters, this territorial system is narrowly circumscribed.) The worldwide feature of the U.S. income tax system raises at least three major issues involving U.S. taxpayers. First, to the extent that the United States taxes a U.S. taxpayer’s worldwide income and the same income is also taxed by the foreign country in which it is earned ( the source country), how is international double taxation avoided? As is discussed in Chapter 9 , the primary method of avoiding double taxation in the United States is through the use of a foreign tax credit which essentially allows a U.S. taxpayer to decrease U.S. tax liability on foreign source income dollar-for-dollar by the...
- The exclusion is limited to compensation (pensions and annuities are not covered) not exceeding $104,100 for personal services actually rendered while overseas; it does not cover personal services rendered in anticipation of, or after the conclusion of, an overseas assignment or over international waters. I.R.C. §§ 911(b)(1)(A) . Suppose that a U.S. taxpayer residing in Mexico is engaged in the publishing business in Mexico. Can the taxpayer exclude $104,100 of income from taxation? Under I.R.C. § 911(d)(2)(B) , printing presses) are material income-producing factors, not more than 30 percent of the net profits are treated as earned income subject to exclusion. Capital is a material income-producing factor if the operation of the business requires substantial inventories or substantial investments in plant, machinery, or other equipment, but not if the capital is incidental to the production of income ( . If services performed abroad culminate in a product that is either sold or... ...a...
- Until enactment of the TCJA, which adopted a limited form of territorial taxation, U.S. citizens and corporations were subject to full taxation of all of their worldwide earnings. Under new I.R.C. § 245A , U.S. corporate shareholders that own at least 10 percent of the stock of foreign companies can claim a 100 percent dividends received deduction for the foreign source portion of any dividend received from such companies after December 31, 2017. No foreign tax credit is allowed for any dividend for which a deduction under I.R.C. § 245A may be claimed. To be able to claim the dividends received deduction, the shareholder generally must hold its stake in the foreign company for more than 365 days in the two-year period surrounding the dividend date.
- In 1962, the U.S. Congress enacted the foreign base company rules, in an effort to curtail the movement of U.S. export profits into foreign subsidiaries in tax haven jurisdictions. From a tax perspective, exporting immediately became more costly. In 1971, Congress enacted the domestic international sales corporation (DISC) legislation, the practical effect of which was to exempt a portion of U.S. exporters’ profits by funneling export sales through a domestic subsidiary of the U.S. exporter.
- The DISC framework angered U.S. trading partners and, following a decision by a panel established under the General Agreement on Tariffs and Trade that the DISC legislation constituted an illegal subsidy, was largely withdrawn in favor of the foreign sales corporation (FSC) legislation. The U.S. Congress hoped that the FSC legislation would comply with international trade law because of the statutorily required foreign character of the FSC.
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Chapter 10 Intercompany Pricing 357 120 results (showing 5 best matches)
- Transfer pricing is one of the most controversial and contested issues in international taxation today. It is the area of international taxation that is perhaps most closely scrutinized by the IRS, and the area in which most multinational taxpayers perceive the most risk in connection with their activities in multiple jurisdictions. The technical tax issues have been exacerbated by the growth in global supply chain structures in recent years, as well as the increased value assigned to intangible assets in generating multinationals’ profits. Because of the importance and complexity of transfer pricing, it has become a sub-specialty for international tax practitioners—that is, many tax professionals focus solely on transfer pricing issues. It is also a highly scrutinized question in relation to the push for developing countries to meet revenue targets through collection of tax receipts. It has become a campaign issue for non-governmental organizations; often the term ‘transfer pricing...
- Incorrect transfer pricing can easily lead to international double taxation. Suppose that in Table 1 below, country A ( , the United States) under its transfer pricing rules determines that in addition to the $200 reported as income, an additional $400 of income reported by a foreign subsidiary in country B is really taxable in the United States. Assume that country B does not agree and continues to tax the $800 of income reported on the return. The results are as follows:
- and the regulations thereunder are mostly consistent with the OECD Transfer Pricing Guidelines, there are differences. What this means in practice is that if the United States makes a reallocation under , the other country won’t agree to make the corresponding adjustment unless it agrees with the allocation. If the other country does not agree with the reallocation of income, the two countries have generally agreed (in Art. 25 in the OECD Model Treaty) to reach a compromise under the mutual agreement procedures contained in the treaty. If the countries fail to reach a compromise, a taxpayer may confront international double taxation.
- In a domestic context, such correlative adjustments usually mean an increase in the tax liability of one party and a decrease in the tax liability of the other party. In an international context, the United States may not have tax jurisdiction over a related party resident in a foreign country. However, to the extent that the income of a foreign corporation is relevant for U.S. tax purposes (
- Transfer pricing—addressed by the United States in and in much of the rest of the world through adoption of OECD transfer pricing guidelines—represents the policies and procedures associated with the way in which a company prices goods, services, and intangibles transferred within an organization. From an international tax standpoint, transfer pricing concerns itself with transactions between affiliates domiciled in different taxing jurisdictions. Transfer pricing is significant for both taxpayers and tax administrations because it affects the allocation of profits from intra-group transactions, which impacts the income and expenses reported, and therefore taxable profits of related companies that operate in different taxing jurisdictions. One of the most challenging issues that arise from an international tax perspective is determining income and expenses that can reasonably be considered to arise within a territory.
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Chapter 1 Introduction 1 34 results (showing 5 best matches)
- The potential for double taxation occurs when conflicting jurisdictional claims arise. For example, country A may claim the right to tax a person (including a corporation) based on that person’s nationality or residence while country B stakes its claim of taxing authority because income is earned in country B. There is a norm of international taxation which the United States has generally followed that cedes the primary taxing authority to the country of territorial connection ( , where the income is earned) and the residual taxing authority to the country of nationality or residence. Accordingly, the United States normally credits any income taxes paid in India on income earned in India by a U.S. citizen or resident against the income tax otherwise due in the United States, and only the excess, if any, of U.S. income tax on the foreign income over the foreign tax on such income is collected by the U.S. treasury. Similarly, many countries have adopted more of a territorial approach...
- But despite pressures in some quarters on international trade, one can see the relentless pressure for global trade to continue to grow, also from Mr. Smith’s example. If written in 1955, Mr. Smith probably was able to acquire a car that was designed and manufactured in the same country in which he was purchasing it. Most of the parts—from the steel body to the seat upholstery—were probably also made in a single country. Today’s economy is vastly different, and the car that Mr. Smith acquires today is probably sourced from multiple countries and crossed international borders many times in the process. The growth of global supply chains—in both goods and services—has played a big role in contributing to the growth in international trade highlighted in the numbers above. Changes to cross-border trade, and to the taxation of cross-border transactions, have also been driven by the increasingly important role of intangibles in generating value and profits for businesses both domestically...
- In the example just considered, potential double taxation arises because one country claims taxing authority based on the residence (or citizenship) of the taxpayer and another country claims taxing authority based on where the income arises. Juridical double taxation can also arise when each of two countries claims a taxpayer as a resident or where each of two countries claims that income arises in that country. Countries generally attempt to combat juridical double taxation both through unilateral domestic legislation and bilateral tax treaties with other countries.
- In general, a country exercises jurisdiction for legal purposes based on either . With respect to taxation, a country may claim that all income earned by a citizen or a company incorporated in that country is subject to taxation because of the legal connection to that country. With limited exceptions, the United States exercises such jurisdiction over its citizens and companies incorporated in the United States regardless of where income is earned. Business profits earned directly by a U.S. corporation in Italy are subject to tax in the United States (and normally in Italy as well). Salary earned by a U.S. citizen who is a resident of Switzerland from Swiss employment is subject to tax in the United States (and in Switzerland as well).
- THE CENTRAL PROBLEM OF INTERNATIONAL TAXATION
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Chapter 13 Tax Arbitrage and Government Responses 497 117 results (showing 5 best matches)
- One job of the international tax advisor in serving clients is to avoid double taxation. The intersection of different tax systems can produce double taxation, as outlined above, but it can also provide opportunities to minimize and, at times, eliminate tax liability. When two countries classify the same transaction differently or even within a country when tax treatment is inconsistent, the opportunity for tax arbitrage arises. Tax arbitrage is simply the process of exploiting the differences between two different countries’ tax treatment of the same transaction. Tax arbitrage essentially is the other side of the double taxation coin. Through tax arbitrage, taxpayers can often receive a tax benefit in more than one jurisdiction.
- Suppose X Corp. is incorporated in country X but is managed and controlled in country Y ( , important corporate decisions are made in country Y). X Corp. earns business income in country X but does not have a permanent establishment there. If country X uses a “place of effective management” test to determine residence while country Y uses a “place of incorporation” test, the result may be that the income of X Corp. escapes taxation. Country X may not exercise source state taxing authority because X Corp.’s presence there does not rise to the level of a permanent establishment. Country X may not exercise residence-based taxing authority because, it considers X Corp. to be a country Y resident, while country Y may not exercise residence-based or source-based taxation because it considers X Corp. to be a country X resident that earns income in country X.
- Double taxation may occur when two competing jurisdictions claim to have the primary authority to tax the same income with neither providing any relief for taxes imposed by the other jurisdiction. For example, suppose that USCo renders services training Indian computer programmers in the United States. The Indian programmers use their newly-acquired skills in India. Under U.S. law, the services were rendered in the United States and USCo’s compensation for those services is U.S. source income. If India treats the services as having been performed in India ( , where the services are used), India may impose a tax on the compensation paid. Because the United States will not generally give a tax credit for foreign taxes imposed on what the United States regards as U.S. source income, the result may be double taxation (although in some cases the credits may be available to offset U.S. tax on other foreign source income in the same income basket, or Indian taxes may be creditable under the...
- The ability to arbitrage differences between tax systems can arise in a variety of circumstances where two countries characterize transactions inconsistently. Differing rules with respect to source, residence, transfer pricing, etc. offer openings for taxpayers to avoid or minimize overall taxation from cross-border transactions.
- The regulations permit “eligible entities” to choose among various business classifications. Both domestic and foreign businesses may be “eligible entities” if they meet the requirements of the regulations. Generally, once a change in classification is made, a subsequent change in classification cannot be made for five years. However, an election by a newly formed eligible entity is not considered a change. Reg. § 301.7701–3(c)(1)(iv) . An “eligible entity” may be classified as a corporation, partnership or a single member entity. A single member entity (sometimes informally referred to as a “tax nothing” or “disregarded entity”) provides flow-through taxation and resembles a partnership but with only one member. This creates an “entity” that is ignored for tax purposes in the United States. When an entity is transparent for U.S. tax purposes but is recognized as a corporation in the country of operation, it is a “hybrid entity.” When an entity is recognized as a corporation in the...
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Copyright Page 6 results (showing 5 best matches)
- Nutshell Series, In a Nutshell
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Chapter 8 Taxation of U.S. Persons’ Business Income from Controlled Foreign Corporations and Other Related Provisions 229 127 results (showing 5 best matches)
- Generally speaking, much of international tax planning prior to enactment of the TCJA involved ensuring that a U.S. multinational’s foreign subsidiaries would not generate subpart F income, which would subject that income to immediate U.S. taxation. The TCJA altered this calculation as well, with an inclusion of subpart F income in some cases now being more preferable to U.S. shareholders than an inclusion of GILTI. This analysis has to do with the operation of the foreign tax credit, which is discussed in detail in the next chapter.
- In connection with the transition to a mislabeled territorial system of taxation, the TCJA imposed a one-time transition tax on the accumulated earnings of CFCs (and other foreign corporations with at least one 10 percent U.S. shareholder that is a corporation). I.R.C. § 965 . The transition tax was supposed to be the cost of getting to a new more beneficial regime of taxation of foreign earnings. In light of the fact that the GILTI regime imposes immediate taxation on almost all foreign earnings of CFCs, the rationale for the transition tax seems somewhat ironic.
- For the past 100 years, the U.S. has had a worldwide system of taxation, meaning that if a U.S. taxpayer conducted business abroad, the earnings of the foreign business were taxable in the U.S.—either immediately, in the case of a foreign business conducted through a branch, or when those earnings were repatriated to the U.S. via a dividend, in the case of a foreign business conducted through a corporation. (The U.S. tax imposed on that foreign-earned income might be reduced by any applicable foreign tax credit, discussed in Chapter 9.) The TCJA upended this system in two important ways: First, as discussed in Chapter 7, , dividends paid to 10 percent U.S. shareholders that are corporations from specified foreign companies are now entitled to a 100 percent dividends received deduction. I.R.C. § 245A . Second, most of the earnings of controlled foreign companies (a term described in § 8.02) are now subject to tax under ...low-taxed income (GILTI) in the hands of their U.S.... ...at a...
- As a result of the dividends received deduction enacted as part of the TCJA, I.R.C. § 1248, originally enacted as a backstop to protect worldwide taxation, now will generally function as a taxpayer favorable rule. New I.R.C. § 1248(j) provides generally that any amount which is treated as a dividend under I.R.C. § 1248 is treated as a dividend for purposes of applying I.R.C. § 245A —thereby entitling the U.S. shareholder to a dividends received deduction for the portion of the gain treated as a dividend under I.R.C. § 1248. This rule only applies in the case of stock held for at least one year.
- The statutory requirement to include GILTI of controlled foreign companies in income is located in a part of the Code known as subpart F. The subpart F rules, enacted in 1962, were intended to prevent U.S. taxpayers from shifting mobile income to low-taxed jurisdictions and thereby enjoy what Congress viewed as inappropriate deferral of U.S. taxation on this income. The subpart F rules generally did not try to impose current U.S. tax at the shareholder level on active business operations conducted by a foreign corporation dealing with unrelated parties.
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Chapter 2 Basic U.S. Jurisdictional Tax Principles 15 36 results (showing 5 best matches)
- The United States is unusual among nations in taxing its citizens on their worldwide income regardless of their residence. In , plaintiff, a citizen of the United States, was a resident of Mexico. The Supreme Court held that U.S. taxation of the taxpayer’s worldwide income violated neither the U.S. Constitution nor international law. The Court justified taxation on the theory that the benefits of citizenship extend beyond territorial boundaries. For example, the United States seeks to protect its citizens anywhere in the world. Also, citizens have the right to return to the United States whenever they want and participate in the economic system. In effect, a citizen of the United States has an insurance policy, and taxes are the cost of maintaining that policy.
- Nonresident alien individuals are also subject to U.S. taxation on some types of recurring investment income.
- The taxation of inbound transactions is not as all-encompassing as the taxation of outbound transactions. Nonresident aliens and foreign corporations are not subject to U.S. taxation on their apply the rates in a manner set forth in other specified provisions.
- The basic ground rules governing the taxation of both nonresidents and residents often serve as a backdrop to a series of bilateral income tax treaties. Chapter 5. These treaties typically allocate the taxing authority over specified types of income to the treaty partners. Once a treaty has allocated taxing authority to a treaty partner, the domestic tax laws of that partner govern the ultimate tax treatment. For example, the treaty between the United States and the Netherlands provides that business profits of a Dutch resident are exempt from U.S. taxation unless the profits are attributable to a permanent establishment ( , a fixed place of business) in the United States. If the business profits are attributable to a U.S. permanent establishment, they are subject to taxation under either (corporations); if not, the profits are not taxable in the United States even if under purely domestic law principles the income would be considered income effectively ...conduct of a U.S. trade...
- § 4.05. Suppose a nonresident alien individual does business in the United States through a U.S. corporation. The corporation is taxed on its earnings under and the shareholder is subject to the 30 percent tax on any dividend paid in accordance with
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Chapter 12 International Tax-Free Transactions 453 88 results (showing 5 best matches)
- Transfers of property across international boundaries—particularly transfers from taxpayers within the United States to taxpayers outside the United States—create the possibility of tax avoidance in circumstances where nonrecognition provisions would normally render the transaction tax-free. For example, suppose a U.S. corporation holds an appreciated asset with a basis of $8 million and a fair market value of $30 million that it intends to sell. If it sells the asset, it must recognize the $22 million gain for U.S. tax purposes. Suppose instead that the corporation transfers the asset in a nonrecognition transaction governed by to a foreign subsidiary which (which without negating I.R.C. § 351 treatment) then sells the asset. If the foreign subsidiary is not engaged in a trade or business in the United States, the gain from the sale of the asset may not be subject to U.S. taxation even though the appreciation occurred while the asset was held by the U.S. entity. Gain may not be...
- : (1) the repatriation of foreign assets in an inbound liquidation or inbound reorganization; (2) certain foreign-to-foreign reorganizations; and (3) certain divisive reorganizations involving a foreign corporation. In these transactions, the primary tax policies reflected in the regulations are: (a) to provide immediate taxation when untaxed (by the United States) earnings of a foreign corporation are repatriated to U.S. corporate shareholders; and (b) to prevent the U.S. transferor from avoiding any potential ordinary income taxation under
- , 2015–34 IRB 210), regulates many of these structures by limiting the U.S. taxpayer’s ability to shift income from the IP (for example, via special partnership allocations) to related foreign entities that may not be subject to U.S. taxation. In some cases, the very transfer of IP itself to a partnership might be taxable event. The type of planning used to move future appreciation in the value of IP to a foreign entity outside the U.S. tax net in order to minimize taxation of royalties or eventual IP disposition has anyway become less beneficial to U.S. headquartered companies because new renders the profits of the foreign entity/partner from intangibles subject to a minimum tax. In addition, the lower U.S. tax rate reduces the benefits from such complex planning.
- Note that in this foreign-to-foreign context the amount that is recognized by USCo is “the section 1248 amount” rather than “the all E&P amount.” The section 1248 amount consists of foreign E&P and, unlike the all earnings and profits amount, may include the earnings and profits of subsidiaries. To understand why the all E&P amount was limited to the E&P of the top tier company while the section 1248 amount includes E&P of lower tier entities, consider the following. USCo owns all the stock of FSub1 which in turn owns all the stock of FSub2. If FSub1 liquidates, there is no need for the E&P of FSub2 to be taxable to USCo because later distributions or a later liquidation would have resulted in U.S. corporate level taxation. But suppose USCo transfers the stock of FSub1 to FSub3 in a reorganization under
- overrides the nonrecognition patterns outlined above by denying corporate status to the foreign corporation involved in the transaction. For example, if a U.S. taxpayer transfers appreciated property to a foreign corporation in a transaction that would otherwise be will deny the transferee-corporation corporate status for purposes of calculating gain (although I.R.C. § 351 applies to other aspects of the transaction), thereby resulting in taxation of the built-in gain to the transferor under . As indicated below, the denial of corporate status would also override nonrecognition in the context of subsidiary liquidations and reorganizations. Similarly if the assets of a U.S. corporation are merged into, or otherwise acquired by, a foreign corporation in an asset reorganization, nonrecognition under I.R.C. § 361 may not be available.
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Chapter 4 Taxing Rules 75 109 results (showing 5 best matches)
- Second, a statutory exemption exists in that provides that gross transportation income derived by a foreign corporation from the international operation of ships or aircraft is exempt from U.S. taxation if the corporation’s country of residence provides for a reciprocal exemption. A corresponding exemption from the 4 percent withholding tax under . Thus, if the country where the foreign company is incorporated does not impose an income tax, or if it grants an equivalent exemption from its income tax for transportation income earned by U.S. corporations (either via domestic law or by an exchange of diplomatic notes), the foreign corporation will not be subject to U.S. taxation (either gross-or net-based) on its U.S.-source transportation income.
- A foreign government (or controlled entity) is exempt from U.S. taxation on income from stocks, bonds or other securities and interest on bank deposits.
- Moreover, income received from or by a “controlled commercial entity” is subject to U.S. taxation.
- Dispositions other than sales can trigger U.S. taxation. Suppose that a nonresident holding U.S. real property exchanges the property for stock of a foreign corporation in a nonrecognition exchange qualifying under . If there is no recognition on the exchange, the foreign taxpayer would then be free to sell the stock in a foreign corporation free of U.S. taxation. However, overrides all statutory nonrecognition provisions unless the property received in the transaction would be taxable in the United States if sold ( , if the foreign owner gives up a FIRPTA interest and receives a FIRPTA interest in return—a “FIRPTA for FIRPTA” exchange). In the example, the foreign taxpayer may not be able to rely on because gain from the sale of stock in a foreign corporation by a nonresident is not taxable in the United States. However, even foreign-to-foreign exchanges can sometimes qualify for nonrecognition.
- There are two exceptions under which income from the international operation of ships and aircraft can be exempted from gross and net-based U.S. taxes. First, most U.S. tax treaties contain a shipping and air transport article that generally provides that income derived by a corporation from the operation of ships or aircraft in international traffic is taxable only in the country in which the corporation is a resident. in § 5.05(D)(1). Thus, foreign corporations that are resident in a U.S. treaty partner country whose treaty provides for that exemption can avoid the U.S.
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Chapter 14 International Boycott and Foreign Bribery Provisions 549 31 results (showing 5 best matches)
- The “international boycott factor” is defined as a fraction, the numerator of which reflects the foreign operations of a person (and related persons) in or related to the boycotting country with which that person (or related persons) cooperates during the taxable year. The denominator represents the entire foreign operations of the person (or related persons). . More specifically, the numerator is the sum of: (a) purchases made from all boycotting countries associated in carrying out a particular international boycott; (b) sales made to or from all boycotting countries associated in carrying out a particular international boycott, and; (c) payroll paid or accrued for services performed in all boycotting countries associated in carrying out a particular international boycott. Reg. § 7.999–1(c)(2)
- Under some circumstances, the application of the international boycott factor method results in a loss of substantial tax benefits even when most of the benefits are not related to boycott operation. This arises because the international boycott factor is multiplied by, in the case of the foreign tax credit, the worldwide foreign tax credit of the taxpayer, and in the case of a controlled foreign corporation, the worldwide income which would otherwise be deferred.
- Even if a taxpayer does not participate in an international boycott, the taxpayer may have a reporting obligation under
- When the international boycott factor has been determined, it is used in computing tax penalties. Under is reduced by the product of that amount and the international boycott factor. For example, suppose the numerator of the international boycott factor fraction ( , purchases, sales, and payroll in the boycotting country) is $200,000 and the denominator ( , total foreign purchases, sales, and payroll) is $1 million. Assume further that X Corp. would normally have a foreign tax credit computed under or as a business expense under
- To the extent that a controlled foreign corporation cooperates in an international boycott, income which would not otherwise be treated as subpart F income (
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Index 563 108 results (showing 5 best matches)
Chapter 6 Filing, Withholding, and Reporting Requirements 173 88 results (showing 5 best matches)
- Consider also the scenario when a foreign partnership is engaged in a trade or business in the United States. Its effectively connected income is subject to U.S. taxation, but there is no withholding under on this income. If the partnership then distributes its effectively connected income to its foreign partners, unless there is a withholding obligation, U.S. source income may escape U.S. taxation entirely (although the partners are obligated under to pay the tax due as a result of the partners’ conduct of a U.S. trade or business).
- treats gain and loss from the disposition of a U.S. real property interest (a “USRPI”) recognized by a foreign person “as if the taxpayer were engaged in a trade or business within the United States during the taxable year and as if such gain or loss were effectively connected with such trade or business” for purposes of imposing net income-based taxation under I.R.C. §§ 871 882. When a foreign person disposes of a USRPI, of the total amount paid. A special rule, provided in , applies when a domestic partnership with foreign partners disposes of a USRPI. Under that section, the partnership is required to withhold tax equal to 21 percent of the gain realized and allocable to the foreign partners. Similarly, there is a 21 percent withholding obligation on certain distributions of U.S. real property interests by a domestic or foreign corporation. . Because the gain is effectively connected income in the hands of the U.S. partnership, there is an overlap of two withholding regimes...
- If a nonresident is engaged in a trade or business in the United States, the taxpayer must file a tax return for that year even if the taxpayer has no effectively connected income for the year or is exempt from taxation by statute or treaty. . Historically, the IRS in regulations has taken the position that if no return is filed or if the return filed is not “true and accurate,” a nonresident may not claim any deductions from gross income.
- As noted, a beneficial owner of income otherwise subject to FDAP withholding, typically files a W-8BEN(-E). An intermediary who collects a payment for the beneficial owners ( , a foreign bank or foreign partnership) files a W-8IMY and in cases where it is not a qualified intermediary it should attach each appropriate W-8BEN(-E) so the withholding agent knows how much to withhold. In some cases, a FDAP payment ( , payment for services performed in the United States) is made to a nonresident that is engaged in a U.S. trade or business to which the income is effectively connected. In these cases, the nonresident should provide a W-8ECI which informs the potential withholding agent not to withhold because the nonresident is required to file a U.S. tax return ( , a Form 1120-F for a corporation or a Form 1040-NR for an individual). Finally, foreign governments (or their controlled entities) are exempt from withholding under I.R.C. § 892 on certain types of FDAP income. In these situations,
- In general, the beneficial owners of a payment to a flow-through entity ( , a partnership) are the persons who under U.S. tax principles are the owners of the income in their separate and individual capacities. For example, suppose that a payment is made to a partnership. Under generally applicable U.S. tax principles, the beneficial owners of partnership income are the partners in the partnership. Therefore, when a payment is made to that partnership, the beneficial owners of that payment are the partners in their separate and individual capacities. In determining the beneficial owners of payments to a partnership, the withholding agent may be required to look through multiple tiers of pass-through entities in order to find a beneficial owner that is not a conduit. Reg. § 1.1441–1(c)(6)(ii)
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Chapter 3 Source Rules 33 85 results (showing 5 best matches)
- For nonresident aliens and foreign corporations, the source rules are important for two reasons. In the case of income from a U.S. trade or business, it is generally the case that income must be from U.S. sources to be effectively connected income and therefore subject to taxation under . In the case of nonbusiness income ( , FDAP income), the 30 percent withholding tax is applicable only to U.S. source income. For example, if a nonresident alien investor receives a dividend that is deemed not to be U.S. source income, there is no U.S. taxation.
- The title-passage rule applies to personal property (including inventory) that is purchased and resold. The rule does not apply to personal property (including inventory) that is produced by the taxpayer. For example, suppose a foreign corporation has a Spanish factory that manufactures thermostats which are shipped to a U.S. warehouse where sales representatives sell the thermostats to U.S. purchasers. Such a transaction is referred to as a “Section 863 Sale” by the regulations. Reg. § 1.863 3. The TCJA amended the rule in section 863(b) that determines how to source the income from such a sale, so that it is allocated for source purposes solely to the country where production activities take place. , taxation in the United States depends on whether the income is effectively connected income under either . In the example above, the foreign source gain attributable to the production is not subject to U.S. taxation. If a portion of the production activities had taken place in the U.S....
- The nonresident might engage in this transaction because of an outstanding obligation to pay interest measured by LIBOR plus 3 percentage points owed to someone else which the nonresident wishes to transform from a risky payment (if LIBOR should rise unexpectedly) into a fixed 10 percent interest obligation. The U.S. party may be willing to undertake some risk, betting that the 10 percent payment received will exceed the LIBOR plus 3 percentage points paid. However, suppose that in year 1, LIBOR is 9 percent. Therefore the net flow of income is $20,000 of income from the U.S. payor to the nonresident. Is that payment subject to taxation as FDAP income? Generally, income under a notional principal contract is sourced in the country of the recipient’s residence. The income would be treated as foreign source income not subject to FDAP taxation under
- International communications income of a U.S. taxpayer is treated as 50 percent from U.S. sources and 50 percent from foreign sources.
- Questions also arise as to whether a particular payment is for services rendered or for something else. In , a Swiss national, a scientist, maintained that he was compensated for services performed in Switzerland by a Swiss corporation for work culminating in several patents. The taxpayer maintained that the payments received were foreign source income not subject to U.S. taxation even though the payments were based on U.S. sales of the synthetic vitamins developed from his work. The IRS argued unsuccessfully that the appropriate source rule was the one dealing with royalties—
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Outline 56 results (showing 5 best matches)
Chapter 11 Foreign Currency 409 90 results (showing 5 best matches)
- , a U.S. taxpayer’s functional currency is typically the U.S. dollar in which case a taxpayer must measure income or loss from dealings in foreign currency in U.S. dollars on a transaction-by-transaction basis. In some circumstances, a taxpayer may use a foreign currency as its functional currency. For example, if a U.S. taxpayer has a self-contained, unincorporated foreign branch in England which conducts all of its business in pounds sterling (£), then the pound sterling may be the functional currency of the branch of the U.S. taxpayer. § 11.04(A). Generally, the use of a foreign currency as a functional currency results in deferral of exchange gain or loss, compared with a transaction-by-transaction approach.
- If a U.S. taxpayer operates abroad through either an unincorporated branch or a foreign subsidiary and the activities are conducted in a foreign currency ( , is a QBU) it is necessary to convert the operating results of the foreign business into U.S. dollars at some point in order to determine U.S. taxes. For a branch (and this treatment would include a hybrid entity that is treated as disregarded for U.S. tax purposes but as a corporation for local country purposes), the converted profit or loss is included currently in the taxable income of the U.S. taxpayer. For a foreign subsidiary, any actual or deemed distributions ( , subpart F income) must be translated into U.S. dollars in order to determine the taxable income of the U.S. parent. In addition, foreign taxes paid must be converted to dollars for purposes of computing the foreign tax credit.
- The 2006 proposed regulations represented a significant departure from the proposed 1991 regulations, and were a response to perceived abuses attributable to the 1991 proposed regulations. Under the 1991 proposed regulations, section 987 gain/loss is determined by calculating an “equity pool” and a “basis pool.” Essentially, the equity pool is the taxpayer’s investment in the branch stated in the branch’s functional currency. The basis pool is the investment in the branch in the taxpayer’s overall currency which for a U.S. taxpayer is probably the dollar. A remittance from a QBU is taxable to the extent that the dollar value on the date of remittance exceeds that portion of the basis pool allocable to the remittance. Note that a remittance would also include any payment of principal or interest on a disregarded “loan” from the home office to the branch.
- The rules are complicated, but the general approach of the regulations is fairly straightforward. For purposes of the discussion that follows, assume that USCo owns DE, a disregarded entity for U.S. purposes and a corporation for foreign purposes and that DE conducts a foreign trade or business in a non-dollar functional currency. The rules that follow could also apply where instead of DE, there is a true foreign branch ( branch for U.S. and foreign purposes) engaged in the same activities. Similarly, if USCo was a partner in a partnership that carried on the same activities, the activities would constitute a QBU. Finally, suppose USCo owned all the stock of CFC, a controlled foreign corporation. If CFC operates a trade or business through a branch, disregarded entity or partnership that uses a functional currency that differs from the functional currency of the CFC, section 987 gain/loss may occur on a remittance to the CFC. In some cases, section 987 gain could be subpart F income,...
- Suppose that a U.S. corporation enters into an agreement to sell stock in a German corporation for €80 million. If the seller is worried about fluctuating rates between the date the sales agreement is signed and the day the transaction closes, the U.S. corporation might enter into a forward contract to sell the €80 million. By locking in the exchange rate when the agreement is signed, the seller can eliminate currency risk. If the euro strengthens relative to the dollar, then the amount received at closing will buy more dollars, but there will be a corresponding loss on the forward contract. Conversely, if the euro weakens relative to the dollar, the amount received at closing would buy fewer dollars, but the forward contract would have increased in value. In either case, the dollar value of the sale is locked in.
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Dedication 1 result
Table of Revenue Rulings and Treasury Regulations xli 53 results (showing 5 best matches)
Table of Internal Revenue Code Sections xxix 115 results (showing 5 best matches)
- Publication Date: August 30th, 2018
- ISBN: 9781640209053
- Subject: Taxation
- Series: Nutshells
- Type: Overviews
- Description: This Nutshell, which provides an introduction to U.S. international taxation useful to both U.S. and non-U.S. students and practitioners interested in the topic, has been extensively revised and updated to address the fundamental changes to the U.S. international tax rules introduced by the 2017 tax act, as well as global tax changes brought about by the OECD’s project on cross-border tax avoidance. In addition to providing a survey of the technical rules, the book also offers insight into tax planning considerations and how these have been altered by recent U.S. and global developments. Both the U.S. activities of foreign taxpayers, as well as the foreign activities of U.S. taxpayers are explored. In today’s world, it is crucial for those involved in business and investment activities to understand the tax consequences that impact cross-border flows. The authors’ careers span both the academic and private sectors, and they have used their experiences to distill the complexities of real-world tax considerations into a clearly written, straight-forward presentation of the key international tax concepts.
