Taxation of International Transactions - Welcome to … · • Sale of real property: Location of...
Transcript of Taxation of International Transactions - Welcome to … · • Sale of real property: Location of...
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Taxation of International Transactions
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General Tax Provisions
• US Individuals– Gross Income– Business Deductions– Personal Deductions– Personal Exemptions= Taxable Income X Tax Rates (about 40%)= Basic Tax – Tax credits = Net tax liability
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General Tax Provisions • US Corporate Tax
– Gross Income– Business Deductions= Taxable Income X Tax Rate (35%)= Basic Tax – Tax Credits = Net tax liability
Dividends: Not deductibleTaxable to individual shareholdersDividend received deduction to corporate
shareholders
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General Tax Provisions
• Transparent Entities– Partnerships– Limited liability companies
• No tax to entities• Tax on partners or members
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Role of International Law and Practice
• Jurisdiction to tax limited by customary international law
• But double taxation is permissible• Role of bilateral income tax treaties• No comity regarding tax collection in other
countries
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Basic Issues for Every Country
• Domestic or Foreign Taxpayers?• Source of Income• Tax on Profits of Inbound Transactions• Tax on Profits of Outbound Transactions• Defense Mechanisms against Abuse of Rules• Role of International Tax Treaties
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Domestic of Foreign Taxpayer?
• Consequences under U.S. law• Domestic taxpayer: rule of worldwide
taxability• Foreign taxpayer: Any U.S.-source income?
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WE/THEY
• U.S. taxpayers:U.S. citizensResident aliens
“Substantial Presence Test”U.S. corporations
• Foreign taxpayers:– Non-resident aliens– Foreign corporations
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Source of Income
• Compensation: Where services rendered• Dividends: Depends upon corporation paying• Interest: Residence of borrower• Rent: Location of property• Royalties: Whose law protects• Sale of real property: Location of property
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Source of Income
• Sale of personal property:– Residence of taxpayer– Inventory: Title Passage Test– Production and sale of inventory:
• Place of production• Title passage test
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Source of Income
• No statutory rule: Reason by analogy
• Alimony:– No statutory rule– Like interest?– Like compensation?
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Inbound Tax Regimes
• US Trade or Business– Net income @ Usual
Rates
• USTB?– Provide services in US– “Regular, Continuous
Substantial” business activiites
• Passive Income– Gross Income @30
percent
• Withholding tax mandatory
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Inbound Tax Regimes
• All USTB’s combined• Business A $1,000,000; Business B ($400,000)
Tax on $600,000• But two regimes separate• Business A $1,000,000; FDAP $100,000 Tax is
$350,000 + $30,000 = 380,000• But Business A ($1,000,000); FDAP $100,000
Total tax is $30,000
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Branch Profits tax
US Branch• Brazco operates• Texas branch• Net income of branch at
35%• No tax on repatriation
because no incomeBut now: branch profits tax of 30% on repatriation
US Subsidiary• Brazco owns Texas
subsidiary• Texco pays 35% tax on net
income• 30% withholding tax on
dividends
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Impact of Treaties on Inbound Taxation
• FDAP Income Regime:• Withholding taxes are reduced or eliminated
on a reciprocal basis• Business income: • Only taxed if operated through a “permanent
establishment”
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Tax Planning
• Plan A: Invest $10,000,000 in stock of US Sub– Tax on net income– 30% tax on dividends, which are not deductible
• Plan B: Invest $1,000 in stock; Lend $9,999,000 @ 20 percent interest; payable when enough cash; subordinated to all other claims
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Plaza del Tax Toros
IRS TAXPAYER
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Plaza del Tax Toros
• Red Flags:– Debt to Equity Ration– No absolute obligation– Interest rate too high– Subordination put in same position as shareholder
– Net result: Thin capitalization doctrine
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Taxation of Outbound Transactions
• Alternatives:– Territoriality—Many countries– World Wide Taxation—US and few others– Hybrids
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US Tax of Foreign Income
• Worldwide taxability• But use of foreign subsidiaries• Foreign tax credit
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Foreign Tax Credit
• US tax rate 35%• Oz tax rate 20%• Oz branch income of 1,000• Oz tax of 200• US basic tax of 350 less foreign tax credit of
200 = New US tax of 150
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Creditable Taxes
• Foreign “income taxes” and “excess profits taxes”
• Foreign taxes “in lieu of income taxes”– Eg, withholding taxes on investment income– Eg, taxes on assumed income
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Effect of Treaty
• Commits parties to mitigate double taxation either by– Exemption– Foreign tax credit
But treaty not necessary under US law
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Indirect Foreign Income Tax
• Eligibility: US corp owns at least 10% of foreign corp
• Oz sub income of 1,000• Oz tax 200• Dividend to US parent 800• US parent income: 800 + gross up of 200 =
1,000• US tax: 350 – indirect FTC 200 = 350
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FTC Limitation
• Maximum FTC is US tax on foreign-source income
• Eg: Oz tax of 40%• Oz income 1,000• Oz tax 400• US income 1,000• Basic US tax 350 – FTC of 350 = 0• Excess Credit carried over for 10 years
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Using Excess Credit: Cross-Crediting
• Nirvana has no income taxincome tax
Oz 1,000 400Nirvana 1,000 -0-US basic 2,000 700FTC 400Net US 300
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Tax Planner’s Reward
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Transfer Pricing
• Section 482 empowers IRS to recalculate result of transactions between related entities
• Enormous amounts in dispute• Possibility of double taxation because two or
more countries may be examining the same transaction
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Impact of Treaties
• Mutual cooperation provision• Possible mandatory arbitration where
negotiation fails• “Baseball arbitration” supported by US
Treasury Department
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Defense Mechanism• Subpart F of the Code• Controlled foreign corporations• More than 50% of voting power or value owned by “US
shareholders”• “US shareholders” own at least 10% of stock in foreign
corporation• Subpart F income subject to “constructive dividend” to
US shareholders• Subpart F income is primarily passive income and
income realized in circumstances when tax avoidance appears to be a primary objective
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Subpart F Income
• Passive income• Foreign base company sales income.
– Sale between CFC and related entity– Not for use in CFC country of organization
• Foreign base company services income– Services by CFC for related entity– Not performed in CFC country of organization
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Tax Law Enforcment
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FATCA
• Foreign Account Tax Compliance Act– Withholding tax on payments to : “foreign
financial Institutions” who do not agree to provide information about US depositors
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Base Erosion and Profit Shiting
• BEPS—Major project of OECD, authorized G7 meeting in 2012.
• Intended to increase international cooperation to defend against tax evasion.