ALI-ABA Course of Study Fundamentals of International Business Transactions May 8-10, 2008 Toronto, Ontario, Canada

Transcription

1 121 ALI-ABA Course of Study May 8-10, 2008 Toronto, Ontario, Canada By Robert J. Cunningham Baker & McKenzie LLP Chicago, Illinois

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3 22 th Annual ALI-ABA Course of Study th Annual ALI-ABA Course of Study Fundamentals of International Business Transactions Presentation 1 Robert J. Cunningham Baker & McKenzie Chicago Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm. Multiple Presentations Part Tax Considerations in Selecting a Form of Doing Business or Investing Abroad 3. Transfer Pricing and Related Areas 2008 Baker & McKenzie 2 What is the Focus? United States corporation. Expanding business internationally. Licensing Selling Manufacturing United States income taxation. Simple structures and transactions. Tax laws effective as of April 1, Baker & McKenzie 3

4 th Annual ALI-ABA Course of Study What You Need to Know About Taxation of International Business Relevant income tax rules. Structures for international business transactions. Special Export Entities. Specific international tax rules. Rules governing cross border transactions Baker & McKenzie 4 Sources of International Tax Law Internal Revenue Code of 1986, amended. Foreign income and other tax rules. Country Specific Regional rules, such as EU International double tax treaties Baker & McKenzie 5 Taxes Imposed on International Business Much of international tax planning is designed to minimize total taxation. Direct taxes taxes paid by US company. Corporate (Federal, state and local). Branch taxes. Withholding taxes. In lieu of Baker & McKenzie 6

5 22 th Annual ALI-ABA Course of Study 125 Taxes Imposed on International Business Indirect taxes taxes paid by foreign affiliate. Creditable by US parent corporation Follow dividend distributions. Multiple tiers Baker & McKenzie 7 Taxes Imposed on International Business Transaction taxes. VAT GST Customs Baker & McKenzie 8 Direct Taxation Start with taxable income (US or foreign). Income/Revenue US, branch, indirect (Subpart F income) Deductions Credits Tax imposed upon net income Calculate foreign income/taxes. Calculate foreign tax credits Baker & McKenzie 9

6 th Annual ALI-ABA Course of Study US Taxation of Foreign Income Source of income and deductions. Treatment of foreign currency. Avoidance of double taxation (foreign tax credit mechanism). Anti-tax avoidance mechanisms. Indirect US taxation of foreign corporations (Subpart F rules) Application of double tax treaties Baker & McKenzie 10 Source of Income Used to calculate taxable income (type or source) (branch, foreign taxable income) Determine by type of income (e.g., services, sale of goods, royalties, interest, dividends, etc.). Allocate and apportion costs and deductions to the respective source of income Baker & McKenzie 11 Foreign Currency United States tax is US dollar-based. Difficult and complicated rules. Convert foreign transactions to US dollars. Manage substantial risk of foreign currency Baker & McKenzie 12

7 22 th Annual ALI-ABA Course of Study 127 Withholding Taxes Income derived in a foreign jurisdiction without a branch. Payment of income by resident to nonresident. Dividends Interest Royalties Capital gains 2008 Baker & McKenzie 13 Withholding Taxes Subject to tax on gross amount paid (i.e., no deductions). US withholding tax rate 30%. Use of Treaty provisions Baker & McKenzie 14 Over 60 US bilateral income tax treaties. Purposes. Mitigate double taxation Prevent discrimination Promote better relations 2008 Baker & McKenzie 15

8 th Annual ALI-ABA Course of Study US is modernizing its treaties. US is trying to extend to non-industrial countries, such as in Latin America. Legal weight: force of law Baker & McKenzie 16 Define residents. Look to domicile. Hybrid entities creating problems. Restrict benefits through limitation of benefits provisions Baker & McKenzie 17 Establish jurisdiction to tax business activities. Provide reduced withholding tax rates. Establish procedures to resolve problems (I.e., competent authority) Baker & McKenzie 18

9 22 th Annual ALI-ABA Course of Study 129 Permanent establishment definition. Fixed place of business tests. Agency test. US concept of engaged in a trade or business in Baker & McKenzie 19 The US non-treaty withholding rate is 30%. These rates are either reduced or eliminated in treaties. New U.S./Japan treaty - best rates. Dividends 10%/5%/0% Interest 10%/0% Royalties 0% 2008 Baker & McKenzie 20 Limitation-of-benefits provision apply to dividends, interest and royalties. Prevent abuse of special country-tocountry rates. Additional resident test: Whether the resident has an economic interest in the transaction in the particular country Baker & McKenzie 21

10 th Annual ALI-ABA Course of Study Robert J. Cunningham, Esq. Baker & McKenzie LLP One Prudential Plaza, Suite East Randolph Drive Chicago, IL (312) Rev.1, April 12, Baker & McKenzie 22