Taxation of International Transactions

Transcription

1 Taxation of International Transactions

2 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

3 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 deductible Taxable to individual shareholders Dividend received deduction to corporate shareholders

4 General Tax Provisions Transparent Entities Partnerships Limited liability companies No tax to entities Tax on partners or members

5 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

6 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

7 Domestic of Foreign Taxpayer? Consequences under U.S. law Domestic taxpayer: rule of worldwide taxability Foreign taxpayer: Any U.S.-source income?

8 WE/THEY U.S. taxpayers: U.S. citizens Resident aliens Substantial Presence Test U.S. corporations Foreign taxpayers: Non-resident aliens Foreign corporations

9 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

10 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

11 Source of Income No statutory rule: Reason by analogy Alimony: No statutory rule Like interest? Like compensation?

12 Inbound Tax Regimes US Trade or Business Net Usual Rates Passive Income Gross percent USTB? Provide services in US Regular, Continuous Substantial business activiites Withholding tax mandatory

13 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

14 Branch Profits tax US Branch Brazco operates Texas branch Net income of branch at 35% No tax on repatriation because no income But 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

15 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

16 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 20 percent interest; payable when enough cash; subordinated to all other claims

17 Plaza del Tax Toros IRS TAXPAYER

18 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

19 Taxation of Outbound Transactions Alternatives: Territoriality Many countries World Wide Taxation US and few others Hybrids

20 US Tax of Foreign Income Worldwide taxability But use of foreign subsidiaries Foreign tax credit

21 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

22 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

23 Effect of Treaty Commits parties to mitigate double taxation either by Exemption Foreign tax credit But treaty not necessary under US law

24 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: gross up of 200 = 1,000 US tax: 350 indirect FTC 200 = 350

25 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

26 Using Excess Credit: Cross-Crediting Nirvana has no income tax income tax Oz 1, Nirvana 1, US basic 2, FTC 400 Net US 300

27 Tax Planner s Reward

28 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

29 Impact of Treaties Mutual cooperation provision Possible mandatory arbitration where negotiation fails Baseball arbitration supported by US Treasury Department

30 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

31 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

32 Tax Law Enforcment

33 FATCA Foreign Account Tax Compliance Act Withholding tax on payments to : foreign financial Institutions who do not agree to provide information about US depositors

34 Base Erosion and Profit Shiting BEPS Major project of OECD, authorized G7 meeting in Intended to increase international cooperation to defend against tax evasion.