International Taxation in a Nutshell
Author:
Herzfeld, Mindy
Edition:
13th
Copyright Date:
2023
20 chapters
have results for tax
Chapter 8. Introduction to the Foreign Tax Credit 91 results (showing 5 best matches)
- 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 § 10.03, limitations are placed on the creditability of foreign income taxes. The U.S. taxpayer is allowed to credit only $30,000 of German taxes ( , 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).... ...tax...
- If the levy in question is determined to be a tax, it is necessary to ascertain whether the tax stands alone or is part of a broader tax. For example, suppose that a U.S. taxpayer is subject to a foreign tax on the gross revenues resulting from sales in that foreign country. Viewed as a tax in and of itself, the tax on gross sales revenue may not qualify as a creditable income tax if no allowance is made for the cost of goods sold. However, if the levy is deemed to be part of an overall tax system that viewed in its entirety is a creditable income tax for U.S. tax purposes, then the levy may be creditable. Conversely, suppose that a U.S. taxpayer pays a foreign tax, based on the net sales income generated in the foreign country. Viewed as a separate tax, the levy may be a creditable income tax. However, if the levy is deemed to be part of an overall tax that has other features that render the tax not creditable against U.S. tax liability, the levy on net sale income will not be a...tax
- A tax can also be considered a creditable tax if its base is the amount of a net income tax, such as if the tax is computed as a percentage of a net income tax. Reg. § 1.901–2(b)(6). The net income tax must qualify as a creditable tax under the rules described above in order for the surtax to be a creditable tax.
- 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. The 2022 regulations revise the requirements for when a foreign tax qualifies as an in lieu of tax, providing that a foreign tax only qualifies as such if it meets a “substitution” requirement. Reg. § 1.903–1(b)(2). A foreign tax (the “tested foreign tax”) meets the substitution test only if all the following requirements are satisfied: first, the foreign country has a generally imposed net income tax; second, the foreign country does not impose a separate income tax on the same income that forms the tax base for the tested foreign tax; and third, but for the tested foreign tax, the generally-imposed net income tax would otherwise have been imposed on the excluded income (referred to as the “close connection” requirement). The regulations say that the close connection...
- 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. Note 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.
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Chapter 2. Basic U.S. Jurisdictional Tax Principles 31 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 credit 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...
- 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...
- Because the United States only provides a foreign tax credit for foreign income taxes imposed on income that the United States considers to be foreign source, the U.S. source rules, described in Chapter 3, play an important role in determining the total U.S. tax burden on U.S. persons’ income earned overseas. U.S. taxpayers generally want to plan to maximize their foreign source income to allow a maximum foreign tax credit and thereby minimize any potential U.S. tax on the income. Whether a U.S. taxpayer earns foreign or U.S. source income, it will be taxable in the United States. But with foreign source income, the amount of U.S. tax may be lowered if foreign tax credits are available.
- There is one other taxing provision affecting foreign corporations that must be considered—the branch profits tax under § 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 the 30 percent tax on any dividend paid in accordance with . The two taxes comprise the double tax system that is a mainstay of U.S. corporate taxation in general. Suppose instead that the nonresident alien individual operates the U.S. business through a foreign corporation. The corporation’s business income (the effectively connected income) is still taxable. . Historically, when the foreign corporation distributed a dividend to its foreign shareholders, it was not difficult for the shareholder to avoid the imposition of the 30 percent tax under ...of distributed corporate earnings regardless of whether the distributing corporation is a U.S. or foreign corporation, Congress enacted a branch profits tax...
- For example, suppose a nonresident U.S. citizen owns shares of stock in a U.S. company. The shares have a basis of $1 million and a fair market value of $10 million. On the sale of the stock, the taxpayer faces $9 million of income for U.S. tax purposes. In order to avoid any U.S. tax, suppose the taxpayer renounces U.S. citizenship and then sells the stock. In the absence of a provision like , the taxpayer could avoid U.S. tax on the $9 million of gain. However, would apply to immediately tax the gain on the expatriation (although in some cases, a taxpayer can elect to defer the tax).
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Chapter 1. Introduction 23 results (showing 5 best matches)
- One standard is capital-export neutrality. A tax system meets the standard of capital-export neutrality if a taxpayer’s choice between investing capital at home or abroad is not affected by taxation. For example, if X Corp., a U.S. corporation, is subject to a 21 percent tax rate in the United States on its worldwide income, and the income from its Irish branch is also subject to a 12.5 percent Irish tax, a U.S. tax system with capital-export neutrality would credit the Irish tax against the potential U.S. tax liability and tax the Irish profits in the United States at a 8.5 percent residual tax rate. X Corp.’s tax rate is 21 percent regardless of the location of the investment. If the investment is located in the United States, taxes are paid to the U.S. treasury; if the investment is located in Ireland, the Irish treasury would collect as tax 12.5 percent of the income and the United States would collect as tax 8.5 percent of the income. With perfect competition, capital-export...tax
- The U.S. tax system has elements of all three standards of neutrality. Historically, the tax credit in Chapters 8 and 10, allows U.S. taxpayers operating abroad to reduce U.S. taxes by an amount equal to any income taxes paid to other countries on foreign income (subject to limitation). This provision is driven by notions of capital-export neutrality. However, not all foreign taxes are creditable ( , foreign property taxes, value added taxes, capital taxes), and allowance of the credit is limited in certain circumstances, most significantly by changes made to U.S. law as part of the 2017 U.S. tax reform, and revisions to regulations defining a foreign income tax published in 2022. To the extent that a U.S. taxpayer incurs foreign taxes that are not creditable, those foreign taxes sometimes can be deducted for U.S. tax purposes. This treatment and other restrictions on the foreign tax credit mechanism are in keeping with the concept of national neutrality. To the extent that the...
- 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.
- 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...
- From an efficiency point of view, the aspirational goal for a tax system in general, and 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.
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Chapter 4. Taxing Rules for Non-U.S. Persons 87 results (showing 5 best matches)
- 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 30 percent tax on gross FDAP income should be contrasted with the tax on net business income that applies to income effectively connected to the conduct of a U.S. trade or business. The decision to tax FDAP income on a gross basis, generally through a flat 30 percent withholding tax, is more a concession to economic reality than it is a policy decision. While a nonresident engaged in a trade or business in the United States often has assets ( ., factory, office, machinery) that may be seized if the nonresident fails to pay the required tax, the nonresident with FDAP income may escape U.S. tax jurisdiction if no withholding tax is collected before payment is received.
- The statutory rate for both the branch profits tax and the branch profits tax on interest is 30 percent. However, as explained in Chapter 5, the dividend article (or branch profits tax article) of an applicable treaty may reduce the rate of tax on repatriated branch profits to 5 percent or even eliminate the branch profits tax. Similarly, the rate of withholding tax on interest paid by a branch or treated as paid by a branch often is reduced under the applicable treaty interest article often to 10 percent or 0 percent.
- If a taxpayer is an applicable BEAT taxpayer, they are subject to an additional tax that is imposed on an alternative base that excludes base eroding payments and the “base erosion percentage” of any net operating loss (NOL) for the tax year. For tax years beginning in 2019 through 2025, the rate of tax imposed on this alternative base is 10 percent; it increases to and 12.5 percent for tax years beginning after December 31, 2025. Some banks and securities dealers are subject to a rate 1 point higher than the regular rate. The BEAT tax liability is equal to this amount minus the regular tax liability for the year as calculated under , but reduced by many credits, including foreign tax credits. Broad anti-abuse rules apply.
- The base erosion tax benefit is the $200 not subject to full U.S. withholding tax that is paid to a related party. It does not qualify for the under-3 percent safe harbor because USCo’s base erosion percentage is: $220, or almost 91 percent. USCo’s base-erosion minimum tax amount (BEMTA) is equal to the excess of 10 percent multiplied by USCo’s modified taxable income minus the regular tax liability. For USCo, modified taxable income is $300 of gross income minus $20 of non-base eroding payments, or $280. BEMTA equals: (.10 × $280) minus the regular tax liability on USCo’s taxable income. USCo’s taxable income is $80 ($300 − $200 − $20) and its regular tax liability is .21 × 80, or $16.80. So BEMTA equals $28 minus $16.80, or $11.20. The total U.S. tax is the $16.80 plus $11.20 or $28 on a tax base of $280, ignoring the base erosion payments.
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Chapter 7. Introduction to U.S. Business Activity in Foreign Countries 30 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 that 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 indirect foreign
- Since the early days of the U.S. income tax, taxpayers have attempted to avoid the tax by shifting income overseas beyond U.S. taxing jurisdiction. This is especially desirable from a taxpayer’s standpoint if the foreign source income would be subject to little or no tax in the foreign jurisdiction. One of Congress’ earlier attempts to prevent such income shifting was through enactment of the subpart F rules, which subject income earned by CFCs from transactions that are viewed as particularly susceptible to income shifting to full U.S. tax (discussed in Chapter 9).
- for certain income earned abroad is basically a substitute for the foreign tax credit on that income. In the absence of , a U.S. taxpayer with earned income abroad would pay U.S. taxes on that income but could reduce the U.S. taxes by the amount of foreign taxes paid on such income. , in contrast, permits an exclusion from gross income even if the income earned abroad is not taxed (or is taxed at a lower rate than it would be taxed in the United States) by the foreign country.
- The next several chapters focus on the U.S. tax treatment of U.S. taxpayers doing business or investing abroad. As noted in Chapter 2, the United States differs from most other countries in that it taxes its residents and citizens on a “worldwide” basis. Under a worldwide system, the residence country asserts taxing jurisdiction over all the income earned by its residents, regardless of where earned. Under a territorial system, in contrast, the resident country only asserts taxing rights over income earned in that jurisdiction.
- In reality, the U.S. worldwide system historically operated as such in name only; some scholars have referred to it as a “quasi-worldwide” system. That’s because in practice, U.S. taxpayers were able to defer taxation of foreign earnings because generally speaking, income earned by foreign corporations was not taxed in the United States until repatriated as a dividend. And as any good student of the subject of tax knows, deferring tax for long enough is essential equal to zero tax from a present value perspective.
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Chapter 10. Limitations on the Foreign Tax Credit and the Indirect Credit 78 results (showing 5 best matches)
- Suppose that a newly-formed, wholly-owned foreign subsidiary of a U.S. corporation (USCo) earned $1 million in its first year, all of which constituted subpart F income, on which it paid $250,000 in foreign income taxes. The foreign corporation therefore has $750,000 of earnings and profits for its only year of existence, all of which qualify as subpart F income—$1 million of earnings minus the $250,000 tax payment. USCo includes in its taxable income $750,000 under . If USCo included just $750,000 into income and was able to credit $250,000 of foreign taxes against its U.S. tax liability, the effective tax rate on the subpart F income would be 33 percent ($250,000 tax on $750,000 of income) when the foreign tax rate was actually 25 percent ($250,000 tax on $1 million of income). The indirect foreign tax credit treats USCo as if it directly paid the allocable portion of income taxes borne by the included income. USCo is required to include not only the $750,000 in income but also...
- Suppose USCo, a U.S. corporation, directly earns net income of $100,000 from business activities it conducts 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, USCo 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.
- 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:
- 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.
- In effect under this “overall” method, the taxpayer would be permitted to average the highly-taxed Mexican income with the non-taxed Cayman Islands income so that the United States would only collect $21,000 of U.S. tax instead of $42,000 in the example above where there was $200,000 of U.S. source income. For various periods in U.S. tax history, the taxpayer was permitted to use this “overall” method of determining the foreign tax credit limitation.
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Chapter 14. Tax Arbitrage and an Evolving Global Tax Landscape 102 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 (sometimes referred to as double non-taxation). When two countries classify the same transaction differently or even when tax treatment is inconsistent within a country, 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.
- , 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.
- The tax-exempt entity ends up with an $18 million profit (more than the $17 million net dividend it would have received). USCo reports a $20 million dividend and takes a $3 million foreign tax credit. With the credit, USCo has a $1.2 million net U.S. tax liability on the $20 million dividend (assuming a 21 percent U.S. tax rate). On the sale back to the tax-exempt entity, USCo takes an $18 million loss deduction which saves $3.78 million in U.S. taxes (assuming a 21 percent rate). In total, USCo receives a $17 million net dividend and suffers an $18 million real loss on the stock sale. But the $3.78 million tax saving on the loss deduction not only covers the $1.2 million net U.S. tax on the dividend (after the foreign tax credit) but also covers the $1 million economic loss and produces a $1.58 million profit for USCo. This transaction appears to be a win-win situation for the tax-exempt entity and USCo.
- For example, suppose that USCo purchases for $75 all rights to a copyright that is about to expire. The expected income from the copyright is a $100 royalty subject to a 30 percent Country X withholding tax. Economically, USCo has paid $75 to receive $70 ( , $100 royalty minus the $30 Country X withholding tax). USCo might engage in this transaction because the $30 tax credit not only will offset any U.S. tax on the royalty income but will also save more than $5 of U.S. tax on other foreign source income USCo might have. For example, USCo might have $100 of gross income from the royalty and $40 of expenses associated with the royalty. On the $60 of net income, the United States would impose a tax of $12.6 (assuming a 21 percent rate) which will be fully offset by the $30 withholding tax on the royalty. In some cases, USCo will be able to use the $17.4 of withholding tax that did not offset U.S. tax on the royalty to offset potential U.S. tax on other foreign source income. Taking
- The BMT also provides a new foreign tax credit—the corporate alternative minimum tax foreign tax credit. . Calculating the credit allowed for foreign taxes paid against the CAMT liability also requires you to turn off many of the principles you’ve learned (so painfully) in the prior chapters of this book. The CAMT foreign tax credit calculation retains only in part the limitation based on foreign source income which is so integral to the determination of the credit allowed under . Specifically, the foreign tax credit limitation applies for purposes of the alternative minimum tax only for foreign taxes paid by CFCs, while allowing a carryforward for foreign taxes paid in excess of 15 percent ( , the BMT rate). But there is no foreign tax credit limitation at all for foreign taxes paid by a U.S. person (corporation) directly that are creditable under taxes.
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Chapter 9. Taxation of U.S. Persons’ Foreign Income Earned in Corporate Form 84 results (showing 5 best matches)
- The Tax Court recently addressed, and the Sixth Circuit affirmed, a case that addressed the branch , the company underwent a restructuring of its overseas manufacturing operations that took advantage of both the Mexican maquiladora incentive regime and the liberal tax ruling regime in Luxembourg. The U.S. parent company organized a Luxembourg CFC (“Lux”), which entered into a contract manufacturing arrangement with its wholly-owned Mexican entity treated as disregarded for U.S. tax purposes, and sold the resulting products to related entities within Whirlpool’s global distribution chain (note that a disregarded entity is treated as a branch for U.S. tax purposes). Due to the tax treaty between Mexico and Luxembourg, Lux’s employment of a single part-time employee, and a ruling from Mexico that Lux did not have a permanent establishment there, Whirlpool paid no current tax on the profits earned through these sales, and paid a relatively low rate of tax on the (small amount of)...
- Ever since the United States has had an income tax, the U.S. international tax system has rested on 2 broad principles: worldwide taxation, meaning that a U.S. taxpayer is taxable on their income wherever earned (the implications being that business conducted abroad, directly or through a branch, would be fully taxable in the United States), and second, deferral, meaning that in the case of a foreign business conducted through a corporation, U.S. tax generally was not imposed (deferred) until such time as those earnings were repatriated (The U.S. tax imposed on foreign-earned income might be reduced by any applicable foreign tax credit.) The 2017 tax law upended this system in two important ways: First, as discussed in Chapter 7, , see § 9.02) are subject to tax under ...global intangible low-taxed income (GILTI) in the hands of their U.S. Shareholders (also a defined term), albeit at a reduced rate of taxation. Because most foreign earnings of controlled foreign corporations have...
- The regulations extend the “branch rule” 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.” 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).
- This “high tax exception” allows a U.S. shareholder to avoid subpart F treatment for an item of income earned by a CFC that is essentially taxed at the same rate at which it would have been taxed had it been earned directly by the U.S. shareholder. Before enactment of the TCJA there were few tax jurisdictions that had a corporate tax rate equal to 90 percent of the U.S. rate (35% × .90 = 31.5%). Income earned in jurisdictions subject to an effective foreign rate of at least 18.9 percent may now qualify for the high-tax exception.
- In determining whether the high tax exception is met, the U.S. dollar amount of foreign income taxes paid or accrued with respect to the net item of income is divided by the U.S. dollar amount of the net item of income, increased by the associated foreign taxes. Like the subpart F rules generally, determining the effective tax rate requires an allocation of items of gross income and expenses, as well as taxes, among different categories. See § 10.04.
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Chapter 5. The Role of Income Tax Treaties 81 results (showing 5 best matches)
- The U.S. branch profits tax was enacted as a substitute tax for any tax that might be payable on dividends paid by a foreign corporation out of U.S. earnings and profits. U.S. Model clarifies that the United States may impose its branch profits tax on income repatriated from a U.S. branch to a foreign corporation’s home office. The tax on that repatriation is the same as that which would be imposed on a U.S. corporation making a dividend payment to its foreign parent corporation; the applicable tax rate generally is 5 percent, but in some treaties with no withholding tax on dividends paid to certain qualified persons ( , publicly-traded parent corporation), the branch profits tax may also not be imposed. 2016 U.S. Model, Art. 10(10).
- The 2016 U.S. Model introduced new restrictions on eligibility for the lower rate on interest and royalties (and guarantee fees), for payments made to a “special tax regime.” 2016 U.S. Model, Art. 3(1)( ). The goal of these new provisions is to deny treaty benefits when an amount that would otherwise be subject to U.S. withholding tax is not taxed or is taxed at a preferential rate in the jurisdiction of its beneficial owner. In furtherance of this goal, the 2016 U.S. Model denies treaty benefits if the beneficial owner of the payment benefits from a special tax regime, which generally means that the amounts are subject to a preferential tax rate (relative to other types of income), or that is excluded from the tax base through one or another specified mechanism, so long as it is then subject to an effective tax rate less than either 15 percent or 60 percent of the general statutory rate in the recipient jurisdiction. But the 2016 U.S. Model also says that a special tax regime won’t...
- 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.
- 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. But sometimes, larger political considerations play a role, as in when the United States entered into tax treaties with a number of countries that had been members of the former Soviet Union in the 1990s and early 2000s.
- 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.
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Preface 12 results (showing 5 best matches)
- International tax law does not exist in a vacuum—its closely intertwined with cross-border trade, investment, economics and politics. As a result, 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...
- 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.
- It will come as no revelation that the U.S. income tax laws are wondrously complex. 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. Unfortunately, that is all too often the case even with an understanding of the structure.
- The third Part of the book is directed at foreign activities of U.S. citizens and residents—that is, investment and business activities of U.S. citizens and residents, including domestic corporations that generate income outside the United States. Consideration of the treatment of controlled foreign corporations and the U.S. foreign tax credit, forms the centerpiece of this Part. This Part also discusses passive foreign investment companies, intercompany pricing, rules governing the treatment of foreign currency, and international tax-free transactions. There is also a chapter on tax arbitrage—the heart of much international tax planning—including a discussion of how the parameters of such planning have shifted over the past five years, and other global developments affecting taxpayer behavior. The income tax provisions regulating the “ethics” of U.S. business behavior abroad are also briefly addressed.
- 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 last chapter in this Part addresses filing, withholding, and reporting requirements.
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Chapter 3. Source Rules 25 results (showing 5 best matches)
- The source rules are important both to: (1) U.S. citizens, residents, and domestic corporations; and (2) nonresident alien individuals and foreign corporations. For the former, the source rules matter because the foreign tax credit for income taxes paid to foreign countries is only available to offset U.S. income taxes on foreign source income. For example, if Japan taxes income of a U.S. corporation that under U.S. tax rules is U.S. source income, the income taxes paid to Japan may not be creditable as an offset against taxes payable to the United States on the income.
- citizens doing business or investing abroad. These taxpayers are taxable on worldwide income earned directly or through a branch, so that all deductible expenses potentially reduce U.S. tax liability. Furthermore, these taxpayers can offset their U.S. tax liability with foreign income taxes paid on their foreign source taxable income ( , taking deductions into account) if those foreign taxes do not exceed the U.S. tax potentially imposed on that income. To the extent expenses are allocated and apportioned against foreign source income, a U.S. taxpayer may be limited in their ability to claim a foreign tax credit. For this reason, U.S. taxpayers generally prefer expenses to be allocated and apportioned against U.S. source income.
- The rules requiring allocation of deductions are not applicable where the tax being imposed is the 30 percent tax on FDAP income of a nonresident—that tax is imposed on gross income; no deductions are allowed. But 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.
- Note that the U.S. rule—which looks to place of use rather than the residence of the payor in determining the source of royalty income—is fairly unique. The potentially adverse consequences of the unique sourcing rule applied by the United States (which can lead to U.S. residents not being able to claim a foreign tax credit on royalty income on which another jurisdiction has levied a gross basis withholding tax) have been exacerbated by changes to the foreign tax
- . For a U.S. taxpayer, treating such gains as foreign source income may mean that any foreign taxes imposed on that gain are creditable against U.S. tax liability. In contrast, foreign taxes imposed on U.S. source income are not creditable against U.S. taxes on that income.
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Chapter 6. Filing, Withholding, and Reporting Requirements 56 results (showing 5 best matches)
- 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.
- With some exceptions, had income from any U.S. source (even if its income is tax exempt under an income tax treaty or code section).
- When a foreign beneficial owner of an instrument carrying OID has the instrument redeemed by the corporation, the withholding agent must compute and withhold the requisite tax on the amount of OID that accrued while the foreign person held the obligation up to the time when the instrument is redeemed. Generally, no withholding is required if an OID instrument is sold unless the sale is part of a plan to avoid tax and the withholding agent has reason to know of the plan. Reg. § 1.1441–2(a) . However, even in the absence of withholding tax the seller may have to file and pay tax on the accrued interest. Reg. § 1.1441–2(b)(3)
- A person who is required to withhold and pay tax under but that fails to do so is liable for the tax owed plus any applicable interest and penalties.
- Congress has enacted a welter of penalty and interest provisions to ensure that taxpayers comply with the Code’s requirements. For example, there are penalties for failure to file a tax return or to pay tax ( ), failure to pay estimated income tax ( ) and failure to deposit withheld taxes (
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Chapter 11. Intercompany Pricing 59 results (showing 5 best matches)
- 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.
- The CBC report is supposed to be filed by the parent company of a group with its local tax authority; for U.S. multinationals, this means that it is filed with the IRS. The report is then shared with other tax authorities under multilateral or bilateral tax agreements, including information exchange agreements. The data required by the template is intended, along with the transfer pricing master file and local files, to provide tax administrations with sufficient information to conduct transfer pricing risk assessments and examinations. Taxpayers that are obligated to file the report must report information, on a country-by-country basis, related to the group’s income and taxes paid, together with certain indicators of the location of the group’s economic activity. Specifically, companies are required to include the following information with respect to each jurisdiction in which they do business:
- Total income tax paid on a cash basis to all tax jurisdictions, and any taxes withheld on payments received by the constituent entities;
- 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.
- Historically, ParentCo may not have been liable for U.S. taxes on SubCo’s income because SubCo is a foreign corporation earning foreign source business income. After 2017, most of the income earned in Switzerland likely would be subject to U.S. tax as GILTI under deduction for GILTI lowers the effective tax rate on GILTI to 10.5 percent, which means that it still may be preferable to generate profits in Switzerland rather than directly by ParentCo, or in Switzerland rather than another jurisdiction with a higher tax rate.
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Chapter 13. International Tax-Free Transactions 45 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 developed 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 treatment) then sells the asset. Before enactment of a quasi-minimum tax in 2017, if the foreign subsidiary wasn’t engaged in a U.S. trade or business, the gain from the sale of the asset likely wasn’t subject to U.S.
- may be affected by foreign tax rules as the U.S. tax treatment will be the same in either case. A deemed royalty payment may not attract a foreign withholding tax although an actual royalty might. On the other hand, an actual royalty payment may be deductible for foreign tax purposes whereas a deemed royalty payment may not.
- is concerned with U.S. taxpayers transferring appreciated assets beyond U.S. tax jurisdiction without recognizing the gain inherent in the appreciation, taxable in the United States unless it qualified as subpart F income, while those foreign earnings were subject to a U.S. corporate-level tax at ordinary income rates upon repatriation as a dividend. Of course if the income was subpart F income, it was subject to U.S. tax at ordinary income rates when earned by the foreign corporation. In sum, the U.S. tax system was designed to ensure that foreign earnings were subject to a U.S. corporate-level tax at ordinary income rates at some point in time.
- 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 ( 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, at § 4.09, 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 on the exchange of stock in USCo for the stock in ForCo, and no GRA is available to avoid this gain.
- Suppose that USCo distributes all of the stock of FSub to its shareholder ForCo, a foreign shareholder. Generally speaking, such a transaction might be tax-free under the rules of . But because ForCo generally would not be subject to U.S. tax on any gain in the FSub stock, USCo must recognize gain on the distribution of the appreciated stock of FSub. . Note that there would be no tax imposed on USCo if stock of a U.S. rather than a foreign subsidiary were distributed regardless of whether the recipient is a U.S. or foreign distributee. Reg. § 1.367(e)–1(c)
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Outline 44 results (showing 5 best matches)
Chapter 15. Tax and Trade and Foreign Policy 24 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
- But international tax practitioners can’t just ignore the impact and interaction of trade disputes—including the consequences of tariffs—on the pricing of goods and services as they move cross-border. Below is a brief overview of trade and investment agreements that overlap with international tax. The remaining parts of this chapter discuss a number of provisions that were explicitly enacted into the Code to influence other countries’ behaviors (that have nothing to do with taxation). We conclude with a brief mention of a provision that allows the President to retaliate against other countries’ discriminatory taxes.
- 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 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 were...
- Once the extent of the boycott cooperation has been determined, there are two alternative methods for computing the loss of tax benefits: the international boycott factor method or ascertaining the taxes and income specifically attributable to the tainted income. Method election is annual.
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Chapter 12. Foreign Currency 22 results (showing 5 best matches)
- , 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.
- The struggles of tax administrators to address the tax treatment of cross-border transactions in cryptocurrency are not unique to the United States. This is another area of emerging guidance to keep an eye on, both in the United States and in other countries.
- . 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 would have applied and the taxpayer would have recognized no gain. If the taxpayer received $450 dollars on reconversion because the exchange rate was 1 USD = 1.33 Euro, the taxpayer would have a $150 capital loss for tax purposes.
- , 2014–16 I.R.B. 938 (eons ago in the crypto world), in one of its most definitive pronouncements in this area, the IRS described virtual currency as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. The Notice described virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, as “convertible” virtual currency, and only addressed the tax consequences of transactions in such convertible virtual currency. Under that Notice, virtual currency is treated as property for federal tax purposes, and general tax principles applicable to property transactions apply to
- 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
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Index 104 results (showing 5 best matches)
Table of Abbreviations 12 results (showing 5 best matches)
- Publication Date: January 18th, 2023
- ISBN: 9781636590578
- 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 with the most up-to-date discussion of recent regulatory guidance interpreting the significant changes to the U.S. international tax rules introduced by the 2017 tax act. It also includes a discussion of how the newly enacted U.S. book minimum tax interacts with the international tax rules. Referenced throughout are the global tax developments of recent years and how those rules and proposals interact with the U.S. international tax regime. In addition to providing a survey of the technical rules, the book also offers insight into tax planning considerations and how these have been impacted by 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 of cross-border flows. The author’s career spans the academic and private sectors, and she has used her experiences to distill the complexities of real-world tax considerations into a clearly written, straight-forward presentation of the key international tax concepts.
