International Taxation in a Nutshell
Author:
Herzfeld, Mindy
Edition:
12th
Copyright Date:
2020
27 chapters
have results for international tax law in a nutshell
Preface 12 results (showing 5 best matches)
- The study of international taxation is not just relevant 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 cross-border investment transactions, it is important to have a basic understanding of the relevant tax laws. This book 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,...
- To consider fully the international tax laws affecting international trade would require the study not only of U.S. international tax laws but also of foreign tax laws. However, such a study is beyond the scope of this book. So too is any consideration of the non-tax legal concerns affecting international transactions, including private international law, European Union law, the WTO, other free trade agreements, the internal laws of other nations, customs law, tariffs, and non-tax international treaties. The tax laws of the individual states of the United States are not discussed. The focus here is on U.S. international tax laws and U.S. income tax treaties.
- 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. Over the past two years, Treasury and the IRS have engaged in the herculean tax of writing interpretive guidance for the new laws, issuing thousands of pages of regulations (proposed and final) in the process. This 12th edition of International Taxation in a Nutshell represents a significant revision from the 11th edition, which incorporated the statutory changes of TCJA but was published before any regulatory guidance had been released. There’s no reason to think that Treasury and the IRS are done with this process, however. The upcoming years are sure to see finalization of proposed guidance as well as new and revised rules.
- 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, the rules are all but incomprehensible.... ...an...
- The book is divided into three Parts. It begins with an introduction to the fundamentals of U.S. international taxation and the source rules. The second Part then addresses the U.S. activities of foreign taxpayers—that is, investment and business activities carried on by nonresident individuals and foreign corporations in the United States. After a consideration of what a nonresident is for U.S. tax purposes, the basic U.S. jurisdictional tax principles are considered in this Part, with some attention given to the branch profits tax and the provisions affecting foreign investment in U.S. real estate. Also included in this Part is a chapter on U.S. income tax treaties. The new U.S. tax act did not come about in a vacuum, and part of the context for these changes includes international developments in tax treaty principles. This chapter touches upon, but does not comprehensively address, those broader changes. The last chapter in this Part addresses filing, withholding, and reporting...
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Chapter 14. Tax Arbitrage and an Evolving Global Tax Landscape 119 results (showing 5 best matches)
- As this book is going to press, the OECD is engaged in a new project that has morphed out of BEPS and its failure to address questions about how to appropriately tax cross-border profits in the digitalized economy. A project that began with limited scope has now evolved into one that is asking fundamental questions about how to allocate multinational companies’ profits between and among nations. Whether this project will result in a wholesale rewrite of international tax rules and what the implications might be for U.S. international tax rules is uncertain at this time. But it’s likely that this edition of International Taxation in a Nutshell won’t be the last.
- As you wrap up your initial study of U.S. international tax rules, hopefully you’ve come to realize that even this comprehensive review represents nothing more than a toe in the proverbial international tax waters, and that it’s not possible to think about the U.S. international tax rules in isolation. Rather, they are the product of a continuous give and take between the United States and other countries in terms of seeking to attract investment and investors and cracking down on planning opportunities.
- It’s in this second aspect of the development of international tax rules that the OECD has come to take on a larger role over the past several years. The OECD is not itself a legislative body, and its reports are simply recommendations that other countries have made various levels of commitments to adopt. Moreover, members of Congress are notoriously reluctant to take direction and advice from international organizations, especially ones headquartered in other countries. Nonetheless, the BEPS project has been very influential in changing the conversation over the role of international tax rules to limit cross-border tax arbitrage, and evidence of its recommendations and reactions to the project are sprinkled throughout the TCJA.
- 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 (sometimes referred to as double non-taxation). 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. Through tax arbitrage, taxpayers may receive a tax benefit in more than one jurisdiction.
- Suppose an entity that is not taxable under U.S. law ( , a tax-exempt pension fund or a foreign entity not subject to U.S. tax) has a tax attribute that has no value to the entity (because it is tax-exempt) but has value to other tax-paying entities. In this scenario, one can expect a market to exist that would allow the taxpaying entity to “purchase” the tax attribute in a way that benefits both the buyer and the seller at the expense of the U.S. government because the tax attribute has gone to the highest and best use.
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Chapter 1. Introduction 33 results (showing 5 best matches)
- Virtually every country has tax rules that govern the tax treatment of its residents operating abroad and foreign taxpayers operating in that country. While international taxing systems differ from country to country, there are some basic similarities and understandings. Sometimes these understandings are set forth in bilateral income tax treaties working in tandem with domestic tax laws; in other cases, it is the domestic tax laws of a country that determine the appropriate tax treatment.
- From an efficiency point of view, the aspirational goal for a tax system in general, or for the U.S. rules governing international transactions specifically, is the implementation of a tax-neutral set of rules that neither discourage nor encourage particular activity. The tax system should remain in the background, and business, investment and consumption decisions should be made for non-tax reasons. In the international tax context, the concept of tax neutrality has historically been measured against several standards.
- In December 2017, the U.S. Congress adopted a different approach towards addressing some of the same concerns behind the OECD’s BEPS project and
- 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 ( , the “source” country where the income is earned) and the residual taxing authority to the country of nationality or residence (the “residence” country). 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. Many countries have...
- A third neutrality standard is national neutrality. Under this standard, the total U.S. returns on capital which are shared between the taxpayer and the U.S. Treasury are the same whether the capital is invested in the United States or abroad. That is, if the U.S. tax rate is 21 percent of a taxpayer’s income (with the taxpayer keeping the other 79 percent of the income), the imposition of foreign taxes will not alter that rate. Applying the national neutrality principle to the example above, any taxes paid to Ireland by X Corp. would be deductible and not creditable against U.S. income tax liability; foreign income taxes would be treated in the same manner as any other domestic or international business expense. Notice the effect on the taxpayer is higher overall taxes because the deductibility of Irish income tax does not reduce U.S. tax dollar-for-dollar.
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Chapter 5. The Role of Income Tax Treaties 109 results (showing 5 best matches)
- Many of the Code ground rules discussed 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.
- 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.
- While the United States is willing to exchange information pursuant to its treaties, normally one country will not assist in collection of another country’s taxes. (Lord Mansfield). It is difficult to defend this common law principle in the tax area when a foreign government can already seek to enforce a foreign judgment based on a breach of contract in a U.S. court. Why shouldn’t a U.S. court enforce a foreign tax judgment (and vice versa) as long as the taxpayer has notice, the right to be heard, and the right to raise any constitutional due process defenses. Providing tax administrations with more tools to obtain information about their tax residents’ activities in other jurisdictions is another hot—and developing—area of international tax law. Some of the steps the United States has taken in this regard are discussed in the next chapter.
- The United States also has entered into tax information exchange agreements (TIEAs) with countries that are not treaty partners to facilitate international cooperation in the enforcement of tax laws. In addition, the United States has ratified the multilateral OECD Convention on Assistance in Tax Matters which also provides for information exchanges.
- 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.
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Chapter 15. Tax and Trade and Foreign Policy 46 results (showing 5 best matches)
- 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 CFC, the worldwide income.
- Generally speaking, tax and trade have developed as separate disciplines over the past fifty years—you probably won’t discuss the World Trade Organization in a tax course, and the Internal Revenue Code is unlikely to be required reading in any course on international trade. But the reality is that tariffs—which are the ultimate enforcement mechanism when trade disputes go awry—are simply another means for imposing a tax on cross-border trade in goods (or services). If tariffs haven’t been part of the international tax curriculum, it’s because tariffs have played an increasingly smaller role in cross-border trade over the past several decades.
- As the previous chapters of this book have shown, international tax rules have been subject to revision by Congress repeatedly throughout the past century to achieve various goals relating to U.S. and overseas investment. The history of the development and evolution of U.S. international tax rules is to some degree a reflection of shifting U.S. policy goals relating to overseas development, balance of payments, and the strength of the domestic economy. In this chapter, we’ll consider some of the tools that Congress has, and has authorized the executive branch to use, through which U.S. international tax rules are used more explicitly to advance U.S. protectionist or expansionist goals, or to influence or deter other countries’ or taxpayers behaviors.
- The General Agreement on Trade in Services (GATS) entered into force in 1995. It extends to the services sector the principles of the General Agreement on Tariffs and Trade, first signed in 1947. GATS and GATT generally prohibit countries from discriminating against residents of other countries in the trade of goods and services. Tax measures cannot be applied in an arbitrary or unjustifiably discriminatory way between countries where like conditions prevail, or as a disguised way to restrict trade in services. Tax measures won’t be considered inconsistent with the requirements of national treatment if differences in treatment are designed to ensure the “equitable or effective imposition or collection” of direct taxes. As an example of a recent proceeding in which a tax measure was found to violate international trade agreements, in 2016, a WTO Appellate Body ruled that a number of measures that Argentina had adopted against countries it considered non-cooperative for tax purposes...
- When the international boycott factor has been determined, it is used in computing tax penalties. Under , the foreign tax credit that would otherwise be allowed 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 , the foreign tax credit is reduced by $6,000 ($200,000/$1 million × $30,000) to $24,000. Oddly, foreign taxes which are not creditable because of or as a business expense under
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Chapter 11. Intercompany Pricing 126 results (showing 5 best matches)
- Because of the planning opportunities (as well as the potential pitfalls) it presents, transfer pricing is one of the most controversial and contested issues in international taxation today. It is an area closely scrutinized by the IRS and where most multinational taxpayers perceive the highest risk in connection with their activities in multiple jurisdictions. The technical tax issues involved in determining the correct transfer price under U.S. rules or OECD guidelines have been exacerbated by the growth in global supply chain structures in recent years as well as the increased contribution of the value of intangibles to multinationals’ profits. Because of the importance and complexity of transfer pricing, it has become a sub-specialty for international tax practitioners—that is, a significant subset of international tax professionals focus solely on transfer pricing issues. It’s a topic that’s also become highly political—blamed for the failure of developing countries to generate...
- 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 ( , for purposes of determining the indirect foreign tax credit), the E&P account of the related foreign corporation reflects the correlative adjustments.
- In 1979, the OECD published its first transfer pricing report with interpretations of Art. 9 of the OECD Model Treaty. This report—like the regulations—has been supplemented regularly by additional detailed transfer pricing reports. The OECD’s “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” were first published in 1995. As with the Commentaries to the OECD Model Treaty, the OECD Transfer Pricing Guidelines are not legally binding under international tax law, but they are considered a valuable means of interpretation. The OECD subscribes to an “ambulatory theory” of international law, under which later-in-time amendments to the commentaries to the OECD Model Treaty could be authoritative in interpreting treaties previously signed.
- 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 arises from an international tax perspective is determining income and expenses that reasonably can be considered to arise within a territory.
- On the flip side, transfer pricing adjustments also can lead to international double taxation. Suppose that in Table 1 below, country A ( , Japan) 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:
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Chapter 8. Introduction to the Foreign Tax Credit 81 results (showing 5 best matches)
- In the situation where the taxpayer has excess foreign tax credits, international tax planning has historically focused on ways to turn the U.S. income into foreign source income. Suppose that the U.S. taxpayer was able to turn all of the U.S. source income into foreign source income in a manner that would not trigger any additional foreign tax. Now the taxpayer would have $200,000 of foreign source income. The potential U.S. tax is $60,000, but the taxpayer may qualify for a tax credit for the $50,000 tax paid in Germany. Notice that in this situation the German tax would not be offsetting U.S. tax on U.S. source income. With the tax credit, the U.S. tax bill would be $10,000. The result is an overall tax bill of $60,000 rather than the $80,000 tax bill that existed before turning the U.S. source income into foreign source income. Changing the source of income from U.S. source to foreign source income in this case results in a tax savings.
- In some cases, a tax that does not qualify as a creditable foreign income tax may nevertheless be creditable as an “in-lieu-of” tax under if the tax is imposed in lieu of a tax on income that is generally imposed. In order for a tax to qualify as an in-lieu-of tax, the foreign country must have a general income tax law that would apply to the taxpayer but for the in-lieu-of tax, and the general income tax is not imposed on the taxpayer because of the in-lieu-of tax. Reg. § 1.903–1(a)(2)
- 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 income is earned) has taxing priority over the country of residence ( , 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.
- 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 tax under . 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 (and not in all circumstances).
- 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-...
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Chapter 7. Introduction to U.S. Business Activity in Foreign Countries 43 results (showing 5 best matches)
- An important feature of the U.S. international tax system is the foreign tax credit, which has been part of the Code since 1913. The foreign tax credit serves to prevent double taxation that could otherwise result from the U.S. and another country both asserting tax on the same income earned by a U.S. resident (the U.S. because of its worldwide tax system and the foreign country because it taxes income earned in its jurisdiction (many other countries relieve double taxation by exempting business income earned in other jurisdictions while using a credit mechanism for investment income earned and taxed in other jurisdictions)). Chapter 8 an introduction to the foreign tax credit, which essentially allows a U.S. taxpayer to decrease its U.S. tax liability on foreign source income by the amount of any foreign income taxes paid on the foreign source income. The foreign tax credit can be a “direct” credit ( , where the foreign tax is paid directly by the U.S. taxpayer) or “indirect.” An...
- The TCJA ostensibly moved the United States to a territorial system by providing for a reality is much more complex. The participation exemption is extremely limited, while the TCJA also vastly expanded current tax on income earned by companies controlled by U.S. shareholders (“controlled foreign corporation” and “U.S. shareholder” are technical terms defined in the Code and discussed in greater detail in Chapter 9). In effect, the TCJA moved the U.S. international tax system from one that allowed almost unlimited deferral of tax on foreign earnings to one that imposes a type of minimum tax on those earnings. In an unusual display of Congressional humor, the regime pursuant to which this minimum tax is imposed is referred to as GILTI (which stands for “global intangible low-taxed income”). The GILTI regime along with its antecedent and close cousin, the Subpart F regime, are discussed in Chapter 9.
- In 1962, 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 (these “Subpart F” rules are discussed in greater detail in Chapter 9). From a tax perspective, enactment of this regime immediately made exporting 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 dividends received deduction is not available for dividends from controlled foreign corporations that are “hybrid dividends,” defined as any dividend for which the foreign company received a deduction or other tax benefit. . The legislative history explains that this rule is a response to international concerns regarding hybrid arrangements used to achieve double nontaxation. A taxpayer that receives a hybrid dividend is in a sense doubly penalized—not only is the dividend ineligible for the dividends received deduction, but this amount also can’t be offset by a foreign tax credit for any taxes paid on the foreign earnings that generated the dividend.
- U.S. tax law and high U.S. corporate rates prior to enactment of TCJA encouraged U.S. taxpayers to offshore profitable intangibles to related foreign entities to try and achieve lower tax rates on the income generated by those intangibles. In enacting TCJA, Congress also wanted to reduce incentives for U.S. companies to move manufacturing overseas in order to take advantage of lower tax rates. To fulfill the goals of encouraging U.S. ownership of valuable intangible assets, provides a special deduction for income defined as foreign derived intangible income. The deduction is currently equal to 37.5 percent of the foreign-derived intangible income of domestic companies, resulting in a corporate tax rate of 13.125 percent (the deduction is reduced, and so the tax rate goes up, after 2025).
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Dedication 1 result
Chapter 13. International Tax-Free Transactions 89 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. They also potentially allow taxpayers to transfer valuable intangible property developing in a high-tax jurisdiction to a low tax jurisdiction. 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 (without negating treatment) then sells the asset. Under prior law, if the foreign subsidiary wasn’t engaged in a U.S. trade or business, the gain from the sale of the asset likely...
- This problem was particularly acute under the pre-TCJA international tax regime, but still exists today. A complex statutory and regulatory regime has evolved to prevent what Congress and the IRS viewed as different types of cross-border tax avoidance that mostly reflects the prior tax regime. It’s unclear how these rules might evolve to reflect the new “territorial” system but in the meantime these somewhat outdated rules need to be taken into account by taxpayers engaging in taxable and otherwise non-recognition cross-border transactions.
- I.R.C. § 367(a)
- The transfer of an active trade or business to a foreign person could still be subject to tax even under prior law pursuant to a “branch loss recapture rule.” Under prior
- 100 shareholders each owning 1 percent) transfer their stock in USCo in exchange for 100 percent of the stock of ForCo. This is both a transaction under and a B reorganization. The government’s concern is that this inversion may allow tax to escape the U.S. tax net. If USCo were able to transfer stock of a CFC that it owned to ForCo in a tax free manner (or to “freeze” current foreign operations in the CFC and put new operations in a new foreign corporation owned by ForCo), then there may be no U.S. shareholders ( ., 10 percent owners) required to include amounts in income under Chapter 9). Furthermore, inverting a U.S. corporation may facilitate “earnings stripping” where a USCo erodes the U.S. tax base by paying interest to its foreign parent. For discussion of measures the United States has taken to combat earnings stripping, ..., as well as below. To prevent these perceived abuses, if the shareholders receive back more than 50 percent of the stock of ForCo, they will be taxed...in
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Chapter 2. Basic U.S. Jurisdictional Tax Principles 39 results (showing 5 best matches)
- For U.S. citizens and residents, including domestic corporations, among the most important international tax provisions are those dealing with the foreign tax credit. Chapter 8. If a U.S. taxpayer earns income in Germany, that income is taxable in the United States and may be taxable in Germany as well. In order to alleviate this double tax, the United States allows the taxpayer to offset taxes due in the United States with the income taxes paid in Germany. This foreign tax mechanism is full of twists and turns that are considered in more detail . For example, if Germany decides to tax income that the United States considers to be U.S. source income, no credit for German taxes paid is allowed to offset U.S. tax on that income. Also, if the German tax on the income earned in Germany is higher than the U.S. tax on that income, the U.S. taxpayer may not be able to credit the entire German tax against the U.S. tax liability. Essentially, the German tax can be used only to offset the U.S.
- 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.
- 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 connected with the conduct of a
- While the residence of a corporation may be easy to determine under U.S. law, it is not always easy to determine whether an entity is to be taxed as a corporation. Suppose entity E is formed in country X by US1 and US2, who are individual residents of the United States. Is the income earned by E, income earned by a nonresident corporation or is the income earned by a transparent partnership in which case individuals US1 and US2, U.S. residents, will be taxable? Historically, this has been a difficult problem compounded by the fact that country X might treat E as a corporation while the United States might treat E as a transparent partnership (or vice versa). “Check-the-box” regulations can provide taxpayers with flexibility in choosing whether they wish to be taxed as a pass-through or corporate entity for U.S. tax purposes—depending on how the entity is organized under local law. ...regulations, the legal form matters in determining the extent of the taxpayer’s flexibility to...
- For example, suppose USCo currently earns $100 million of foreign source income from Country X, paying Country X income taxes of $42 million, and $100 million of U.S. source income. For U.S. tax purposes, USCo declares $200 million of taxable income and faces a potential U.S. tax (assuming a 21% tax rate) of $42 million. However, USCo may be able to take a credit for the foreign taxes paid, but only to the extent of the U.S. tax that would be imposed on the foreign source income. In this example, the credit would be limited to $21 million ( , the potential U.S. tax on the foreign source income). In total, USCo would pay $21 million of U.S. tax and $42 million of foreign tax. Now suppose that USCo was able to change the source of what is now the $100 million of U.S. source income. If USCo can turn that income into foreign source income and not incur any additional foreign tax in doing so, then USCo may be able to use the full $42 million of foreign taxes paid to offset the $42 million...
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Chapter 9. Taxation of U.S. Persons’ Foreign Income Earned in Corporate Form 147 results (showing 5 best matches)
- The U.S. international tax system as designed in the 20th century was intended to ensure that foreign earnings of a CFC would at some point be subject to U.S. tax at ordinary income rates ( not treated as a capital gain).
- Much time and energy of international tax practitioners prior to enactment of the TCJA was spent on ensuring that a U.S. taxpayer’s controlled foreign subsidiaries would not generate subpart F income, which would subject that income to immediate U.S. tax. The TCJA upended 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 how foreign tax credit applies to GILTI as compared to subpart F income, a topic that is discussed in detail in Chapter 10.
- Until 2018, much of U.S. international tax planning was focused on making sure that the earnings of CFCs didn’t fall within the definition of subpart F income. In an odd twist, tax planning post-enactment of TCJA sometimes operates in reverse: taxpayers can benefit from having income categorized as subpart F income rather than having it includible as GILTI under . The reason for this has to do with the way the foreign tax credit applies for purposes of the GILTI inclusion. ( the discussion of the indirect foreign tax credit in Chapter 10).
- As noted above, the subpart F rules were enacted in order to make sure that U.S. persons couldn’t shift mobile income to low-tax jurisdictions, and the rules defining subpart F income generally aim to fulfil that goal. The TCJA’s expansion of the subpart F regime requires that U.S. shareholders of CFCs include in income each year a new category of income known as GILTI. . In effect, GILTI functions as a kind of minimum tax on U.S. shareholders’ foreign earnings, but it’s also not exactly a minimum tax. That’s just one reason why it’s a complicated provision for students to understand, taxpayers to comply with, and the IRS to administer. Regulations finalized in June 2019 (T.D. 9866) provide some answers to taxpayers’ basic questions about how to calculate the GILTI inclusion, but both taxpayers and the government are still navigating their way through this provision that has introduced complex, but also fundamental, changes to the U.S. international tax rules.
- The “branch rule” applies to manufacturing branches as well as sales branches. The manufacturing branch rule only applies if the effective tax rate of the sales subsidiary is less than 90 percent of or more than 5 percentage points less than the effective tax rate that would have applied to the sales income had it been earned in the manufacturing country. Reg. § 1.954–3(b)(1) . Therefore, in order for the rule to apply in this example, the income earned by Switzerland must be taxed at an effective tax rate that is less than the effective tax rate had the income been earned and taxed in Germany. The regulations do not provide much guidance on how to determine the “effective tax rate.” GLAM 2015–002. Whether there is a sales branch or a manufacturing branch, subpart F may apply only where the sales unit (whether a branch or the rest of the corporation) is taxed at a lower rate than the manufacturing unit (whether the rest of the corporation or the branch).
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Chapter 10. Limitations on the Foreign Tax Credit and the Indirect Credit 104 results (showing 5 best matches)
- But the proposed regulations also say that base differences arise only in limited circumstances (for example, for categories of items such as life insurance proceeds or gifts, that are excluded from income for Federal income tax purposes but may be taxed as income under foreign law). All other differences between U.S. and foreign tax bases are essentially referred to as a “timing difference.” For example, a difference between U.S. and foreign tax law in the amount of deductions that are allowed to reduce gross income, like a difference in depreciation conventions or in the timing of recognition of gross income, is not considered to give rise to a base difference. In the case of a timing difference, the proposed regulations say that taxes on such income are allocated and apportioned to the appropriate separate category or categories to which the tax would be allocated and apportioned if the income were recognized under Federal income tax principles in the year in which the tax was...
- The foreign tax credit limitation applies not just to limit a taxpayer’s ability to claim a foreign tax credit to the U.S. tax on its foreign source income. Within foreign source income, Congress has created a regime in which income is categorized into separate “baskets”: the taxes paid on income in one basket is generally not creditable against taxes paid on income belonging in a different basket.
- To illustrate, suppose that USCo earns $1,000 of U.S. source business income and suffers a $1,000 loss from business operations in Germany. The U.S. taxation for the year is $0 on the worldwide income of $0. In the next year, USCo earns $1,000 from U.S. business operations and $1,000 from business operations in Switzerland. Assuming a 21 percent rate, the U.S. tax on the $2,000 of worldwide income is $420. If the Swiss income tax is also a 21 percent rate, USCo is able to credit the $210 of Swiss tax on $1,000 of Swiss income against the U.S. tax liability, resulting in a $210 U.S. tax liability. Over the two year period, the United States collected only $210 on $2,000 of U.S. source income for an effective tax rate of 10 percent. That result arises because on net foreign income of $0 over a two-year period, the taxpayer paid $210 of foreign taxes that were creditable against U.S. taxes.
- Applying the formula to the problem above results in a U.S. income tax credit for the current year of $21,000 of the $50,000 Mexican income tax and a U.S. tax collection of $42,000—essentially $200,000 of U.S. source income taxed at a 21 percent tax rate:
- Suppose T, a U.S. taxpayer (corporation), directly earns net income of $100,000 from business activities in Mexico and $200,000 of income from U.S. sources. Assume that the U.S. tax rate is a flat 21 percent while the Mexican rate is 50 percent. The U.S. tax liability on the $300,000 of worldwide income is $63,000. Absent a limitation provision, T could credit the $50,000 of Mexican taxes against the U.S. tax liability, leaving a net U.S. tax liability of $13,000, or an effective U.S. tax rate of only 6.5 rather than 21 percent on the $200,000 of U.S. source income. In order to prevent foreign income taxes from reducing U.S. income taxes on U.S. source income, has historically limited the foreign tax credit to foreign income taxes imposed on foreign source income to the extent those taxes do not exceed the U.S. income tax on that foreign source income.
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- Nutshell Series, In a Nutshell
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Chapter 4. Taxing Rules for Non-U.S. Persons 125 results (showing 5 best matches)
- 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. Thus, foreign corporations that are resident in a U.S. treaty partner country whose treaty provides for that exemption can avoid U.S. tax on transportation income imposed by
- 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
- Note that the branch profits tax results in two taxes on the foreign corporation with the U.S. branch—one tax when the income is earned and one tax when the earnings are repatriated or deemed repatriated. In the case of a U.S. corporation, there is only one tax imposed on the corporation that earns the income. The second tax in this case is imposed on the shareholder when the earnings are distributed as a dividend. The branch profits tax is a proxy for this second level of tax that would be imposed on a dividend from a U.S. corporation to a foreign shareholder.
- The international tax provisions of the Code provide little guidance as to what constitutes a USTB. . Certainly, passive investment activity does not rise to the level of a trade or business. For example, a nonresident individual or foreign corporation merely collecting interest or dividends from a U.S. payer is not engaged in a trade or business in the United States. The gross interest or dividend income (with no deductions permitted) normally would be subject to tax at a 30 percent statutory (or lower treaty) rate.
- The purpose of the branch profits tax is to subject the income earned by foreign corporations operating in the United States to two levels of taxation like income earned and distributed by U.S. corporations operating in the United States. In the latter case, the income is taxed at a rate of 21 percent when earned by a U.S. corporation and is subject to a maximum 30 percent tax when the corporation makes a dividend payment.
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Outline 103 results (showing 5 best matches)
Chapter 6. Filing, Withholding, and Reporting Requirements 93 results (showing 5 best matches)
- These rules are designed to combat offshore tax evasion by requiring non-U.S. financial institutions ( foreign financial institutions or FFIs) and other offshore vehicles to report certain information pertaining to U.S. taxpayers holding financial assets abroad. The intent behind the law is to require FFIs to identify and report U.S. persons holding assets abroad and for certain non-financial foreign entities (NFFEs) to identify substantial U.S. owners. In order to comply with these rules, FFIs are required to enter into an FFI Agreement with the U.S. Treasury or comply with withholding agents (USWAs) must document all of their relationships with foreign entities in order to assist with the enforcement of the rules. Failure to enter into an agreement or provide required documentation will result in the imposition of a 30 percent withholding tax on certain payments made to such customers and counterparties. The intent of FATCA is not impose a withholding tax but rather to use the...
- Negligence is defined to include any failure to make a reasonable attempt to comply with the tax laws. If a position lacks a “reasonable basis,” negligence penalties may result. Reg. § 1.6662–3(b) , regulations, revenue rulings) also can trigger the penalty, although if a taxpayer discloses the existence of the adverse rule and has a “reasonable basis” for the position taken, the penalty can be avoided. Many practitioners think they can take have a reasonable basis for a position if they have a 20 percent likelihood of success in the event of litigation.
- In many cases, a nonresident taking a position that a treaty of the United States overrules (or otherwise modifies) a U.S. domestic tax law must file a return and disclose this position on a statement (Form 8833) attached to the taxpayer’s return. . For example, a nonresident who contends that the U.S. ECI that it generates is not attributable to a U.S. permanent establishment or a foreign corporation that claims a treaty exemption from the U.S. branch profits tax is required to disclose that position under . Moreover, a foreign person entitled to a treaty reduction of the 30 percent statutory withholding rate on interest, dividends, etc. ( , a W-8BEN—BEN is short for “beneficial owner”; entities file a W-8BEN-E) prior to the time of payment in order to receive the treaty benefits. Reg. § 1.1441–6(b)(1) . Even then, in some cases where the payments are from related parties and exceed more than $500,000, a taxpayer may still be required to file a Form 1120-F (along with a Form 8833). A...
- penalizes a taxpayer for any underpayment of tax required to be shown on a return which is attributable to specified factors including negligence (or worse), any substantial understatement of income tax or any substantial valuation misstatement. Generally, the penalty is equal to 20 percent of any underpayment but can be 40 percent for substantial valuation misstatements or 75 percent in the event of fraud.
- Other important forms for a U.S. corporate taxpayer include the Form 1118 which is used to compute a corporation’s foreign tax credit for income taxes paid or accrued to a foreign country or a U.S. possession and is filed as part of the taxpayer’s corporate income tax return. Any corporation that claims a foreign tax credit must attach this form to its income tax return. This form has also become more complex as a result of TCJA changes.
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Chapter 12. Foreign Currency 97 results (showing 5 best matches)
- 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 ( , the branch 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. tax. For a branch (including a hybrid entity 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 U.S. dollars for purposes of computing the foreign tax credit.
- instructed the Treasury to review all significant tax regulations issued in 2016 or later and to the extent that they imposed undue financial burdens on U.S. taxpayers and added undue complexity to the tax laws, to take concrete action to alleviate their burdens. Treasury has identified the I.R.C. § 987 2016 final regulations as meeting these criteria. In a report published on October 16, 2017 ( ), Treasury indicated that it intended to propose modifications to the 2016 final regulations to reduce burden and compliance challenges associated with those regulations and that it was actively considering other rules in connection with that proposal. Notwithstanding the government’s (finally!) issuing final regulations in this area, the uncertainty continues at least for some time.
- does not apply to “personal transactions” entered into by an individual. Personal transactions are any transactions except to the extent that expenses attributable to such transactions would be deductible under as a trade or business expense or as an expense of producing income. . For personal transactions entered into by individuals, general tax principles apply. Suppose that a U.S. taxpayer goes to Europe on vacation, purchasing 2,000 Euros when the conversion rate was 1 USD = 1 Euro. There are no tax consequences as the taxpayer spends the Euros on vacation even if there is currency fluctuation. At the end of the vacation suppose the taxpayer converts 600 Euros into $900 at a time when the conversion rate is 1 USD = .67 Euro. Under general tax principles, the taxpayer recognizes a $300 capital gain for tax purposes. Had the gain been less than $200 the ...received $450 dollars on reconversion because the exchange rate was 1 USD = 1.33 Euro, the taxpayer would have a $... ...tax...
- A key difference between the approach taken in the final regulations and the 2006 proposed regulations, versus the 1991 proposed regulations, is that the newer versions of the regulations are intended to make it harder for taxpayers to trigger the realization and recognition of gain or loss without a fundamental change in the QBU’s business. The government’s primary concern was taxpayers’ ability to intentionally trigger losses that could be used as a deduction resulting in less U.S. tax, while deferring gain that might increase U.S. tax. As with many other of the rules we have examined in prior chapters, the history of the government’s various iterations of rules is the story of its attempts to prevent taxpayers from taking advantage of complex rules to their advantage in the cross-border business environment.
- U.S. tax liability is determined in U.S. dollars. With foreign exchange rates constantly fluctuating, the tax issue that arises is how and when a taxpayer’s foreign exchange gains and losses are converted to dollars? For example, if a U.S. taxpayer purchases Japanese yen (with U.S. dollars) as an investment and following a shift in exchange rates sells the yen (for U.S. dollars), how is any gain (or loss) to be treated? Or suppose a French branch of a U.S. business conducts its activities using the Euro, how and when should the gains (or losses) of the branch be converted from Euros to dollars?
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Chapter 3. Source Rules 71 results (showing 5 best matches)
- The 30 percent tax on FDAP income of a nonresident is imposed on gross income; no deductions are allowed. However, the tax on a nonresident’s income that is effectively connected with the conduct of a trade or business is imposed on taxable income. . As a result, the allocation and apportionment of expenses serves an important function for foreign taxpayers engaged in a U.S. trade or business. To the extent that expenses are allocated and apportioned against income effectively connected to the conduct of a U.S. trade or business, a foreign taxpayer’s income subject to U.S. tax liability is reduced. Keep in mind that what the United States does under its domestic law has no necessary effect on how expenses will be treated by the nonresident’s home country.
- Suppose that USCo, which has foreign operations, suffers a loss in the conduct of its business. The source of that loss is important in determining USCo’s foreign tax credit. For example, suppose that USCo has $100 of U.S. source income and $100 of foreign source income on which a $21 foreign tax is imposed. If USCo also has a $60 loss which is treated as U.S. source loss, then USCo will face a U.S. tax on the $40 of net U.S. source income. The potential $21 U.S. tax on the $100 of foreign source income may be offset by the $21 foreign tax credit. On the other hand, if the $60 loss is allocated against foreign source income, then USCo faces a U.S. tax on $100, rather than $40, of U.S. source income. (Again, the potential U.S. tax on the foreign source income will be offset by the foreign taxes paid.) If income from the activity that produced a loss would have been foreign source income, then the loss generally is allocated and apportioned against foreign source income. ...at a loss...
- There is another exception to the residence-of-the-seller rule pertaining to stock dispositions. If a U.S. resident sells stock of a foreign affiliate (as defined in
- There is a special definition of “residence” for purposes of determining the source of income that is different from the definition of “residence” under for overall taxing purposes. For source purposes, a U.S. citizen or resident alien under who does not have a “tax home” (
- Generally, a dividend paid by a foreign corporation to foreign shareholders is not U.S. source income and is not subject to a 30 percent tax in the United States.
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Index 126 results (showing 5 best matches)
Table of Abbreviations 8 results (showing 5 best matches)
West Academic Publishing’s Law School Advisory Board 11 results (showing 5 best matches)
- Frank R. Strong Chair in LawMichael E. Moritz College of Law, The Ohio State University
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Table of Treasury Regulations and Revenue Rulings 57 results (showing 5 best matches)
Table of Internal Revenue Code Sections 117 results (showing 5 best matches)
- Publication Date: November 18th, 2019
- ISBN: 9781684673469
- 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 revised and updated to address the fundamental changes to the U.S. international tax rules introduced by the 2017 tax act, including interpretive regulatory guidance. It also includes discussion of interaction between U.S. tax rules and global tax changes brought about by recent OECD developments as they affect U.S. taxpayers. 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.
