Corporations: Earnings & Profits & Dividend Distr.

Going Global and US Tax Considerations1OBJECTIVESDefine Basic Filing RequirementsExplain Relief from Double TaxationReview International Scenarios and the US Tax ImplicationsNote US Tax Forms for Foreign ActivityDiscuss Potential Tax IssuesDescribe Process and Structure at IRS

At the end of this module you will:

Explain why there is a need to study ethics

Define ethics, morals, and values

Compare Legal and Ethical reasoning

Note the influences on ethical studies

Review case studies and examples

2People who complain about taxes can be divided into two classes, men and women.

Of death and taxes, both are certain, but only taxes can get you an automatic extension.

Income tax has made more liars out of Americans than golf.

Paying taxes means you have a job.

You are hereYour customers & vendorsIn General . . . . . Domestic (U.S.) entity

Worldwide Customers & Vendors (Canada, Mexico, UK, South America, Singapore, and all points in between)

Buy and Sell worldwide16th AmendmentThe Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.6 from whatever source derived 7Entity Classification - DomesticSole Proprietorship (Form 1040)

S-Corporation (Form 1120-S)

C-Corporation (Form 1120)

Partnership (Form 1065)Entity Classification - InternationallyU.S. Branch

Corporation

Partnership

Hybrid EntityMust choose wisely

Double TaxationU.S. taxes on worldwide incomeTaxed by U.S. on income within the U.S.Taxed by U.S. on income outside the U.S.

Foreign jurisdictions impose income taxes too (territorial taxation)10Double Taxation ReliefForeign Tax Credit reduces double-taxation (U.S. and foreign) of the same incomes

Subject to limitations

May deduct the tax instead of credit

Carry forward unused credits for 10 years

Characterize as active or passive11

Foreign Tax Credits IssuesComputing Errors

Translation Errors

Sourcing of Income

Passive vs. Active

Cash Basis vs. Accrual13

GLOBAL SCENARIOS

Do Nothing ScenarioUS mfg. of biological 3-D printer

Has worldwide sales associates

Sells directly to customers

Pays commission to sales associates

Tax implications All US sourced income and expenses

U.S. BranchClient opens office in Toronto

Register as an unincorporated entity and files all necessary Canadian paper work

No advice from CPA or Attorney

Tax implications All US sourced (consolidated on US return)16CorporationClient sets up a corporation in Mexico

Ships directly from Mexico to EU and to other destinations within Mexico

How to report income (loss) from Mexico

How to report return on investment17PartnershipForm Partnership by making a contribution

Partnership conducts R&D and license products for use in South America market

Filing Requirements

How to report income (loss)

How to report return on investment18HybridHybrid entities have a foreign tax status different from a US tax status

Example: Foreign Corporation but US Branch, Section 1504(d) election

What is best foreign structure and what is best US tax structure

19TreatiesResidenceFiling RequirementsWithholding TaxSourcingE & PTransfer PricingFTCsSubpart FE.C.I.P.E.

INTERNATIONAL FORMSForm 926 Transfer of Property to Foreign CorpForm 5471 Controlled Foreign CorporationForm 8865 Return with respect to certain foreign partnerships (note foreign PS files 1065 if ECI or USI)Form 8858 Disregarded EntitiesForm 1118 Foreign Tax CreditsTD F -90.22-1 Foreign Bank and Financial AccountsForm 1042/1042S Withholding Taxes Penalties may be assessed for failure to file certain international forms.

The penalties can be substantial and may affect the statute of limitations

Potential International Issues Inter-Company TransactionsInbound / OutboundTransfer PricingShifting of IncomeAllocation and Apportionment of Deductions28Transfer Pricing A sells to BAt Inflated PriceAt Discount PriceEffect to AIncrease RevenueIncrease AGIIncreases EarningsDecrease RevenueDecrease AGIDecreases EarningsEffect to BIncrease CostDecrease AGIDecrease EarningsDecrease CostIncrease AGIIncrease Earnings 29

Documentation / Production of RecordsInformal Document RequestFormal Document RequestPre-Summons LetterSummonsPenalties IRC 6038, 6038A, 666230Return filed and inputReturns reviewed by International AgentDecision made. Should return be worked by International?Case assigned to field agent with international aspects involved. International issues may STILL need to be worked, and a referral may still be proper.NoYesStamped Accepted as Filed Referral Not MandatoryCase stamped International SelectedCase assigned to an International Agent to workHow a filed return flows through International review31IRS International OrganizationIRS Commissioner

Deputy Commissioner, International

Industry Directors (IBC, IIC, TPO)

International Field Operations and Programs

32Intl Field Operations and Programs

Overseas Operations

Exchange of Information

Tax Attach

Programs

Offshore Voluntary Disclosure

Global High Wealth / SBSE Intl

Transfer Pricing Practice

APMA

The Exchange of Information Program Office is in the Competent Authority and International Coordination Division in the Office of the LB&I Deputy Commissioner, International.

Exchange of Information administers and coordinates all Exchange of Information programs arising out of U.S. tax treaties and tax information exchange agreements (TIEAs): Specific (requests to and from foreign governments), Spontaneous and Routine Exchanges of Information. It also supports the Simultaneous Examination Program and the Simultaneous Criminal Investigation Program.

Overseas Posts are in London, Paris, Beijing, Frankfurt and one in Plantation, FL These offices serve as the eyes and ears of the Service.

International Meetings, Travel and Visitors organizes international meetings and manages the International Visitors Program. The International Travel Office processes passports, visas and country clearances for IRS international travelers.

The US Territories Program Manager is the primary IRS liaison with the Territory Tax Departments, U.S. Treasury Department, U.S. Department of Interior and other Federal Agencies in resolving income tax issues involving the US Territories. 33

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