Adnan Islam - International Taxation

275 Solution 13

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International Taxationis intended solely for use in continuing professional education and not as a reference. It does not represent an official position of the American Institute of Certified Public Accountants, and it is distributed with the understanding that the author and publisher are not rendering legal, accounting, or other professional services in the publication. This course is intended to be an overview of the topics discussed within, and the author has made every attempt to verify the completeness and accuracy of the information herein. However, neither the author nor publisher can guarantee the applicability of the information found herein. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

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ISBN 978-1-11975-649-1 (Paper)

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Course Code: 732015

ITTF GS-0419-0A

Revised: May 2019

Recognize the comprehensive system of outbound (core) and inbound U.S. international taxation laws.

Recognize the concepts of timing for income recognition.

Identify the international tax provisions of the Tax Cuts and Jobs Act (TCJA) signed in December 2017.

Recognize U.S. federal income tax benefits for U.S. exporters of U.S. property under the interest charge domestic international sales corporations (IC-DISC) regime.

This course will cover the fundamentals of U.S. corporate international taxation, with a primary focus on “outbound concepts” and technical tax issues. This course has been updated to cover the fundamental international tax provisions within the TCJA, including for international tax Treasury Regulations and Notices released through March 2019.

In general, the United States taxes U.S. persons on their worldwide income. The United States may grant the functional equivalent of an exclusion through a foreign tax credit or tax deduction. For example, under Section 936, a domestic corporation may offset hypothetical U.S. taxes on certain income connected with U.S. possessions against U.S. taxes that otherwise would be due.

Section 7701(b) contains methodical rules to define when an alien is a U.S. resident. Mere presence in the United States for 183 days in a taxable year may subject an alien to taxation on worldwide income for that year. In general, a domestic corporation, which is subject to U.S. taxation on worldwide income, is a corporation incorporated in the United States. In certain narrow cases, however, the Internal Revenue Code (IRC) may treat a foreign corporation as domestic or treat a branch of a domestic corporation as foreign.

In general, a U.S. person that incurs foreign losses may deduct those losses for U.S. tax purposes. However, the deduction of a dual consolidated loss may be limited. Further, recapture rules may trigger income in a taxable year after a foreign loss.

Because the United States generally taxes U.S. citizens and residents on worldwide income, the issue of double taxation may arise when such a person has income from foreign countries or U.S. possessions. To reduce the problem, the United States generally grants a foreign tax credit for income taxes paid to foreign countries and U.S. possessions. Section 904 contains complex rules regarding the foreign tax credit, and its limitations may severely limit the actual use of the credits.

The United States does not automatically tax a U.S. person on the income of a foreign corporation that is owned in whole or in part by that person. Therefore, U.S. persons may form a foreign corporation to conduct foreign activities without incurring U.S. taxes before receipt of distributions from the corporation or a sale of the corporation’s stock. However, Congress and the U.S. Treasury have adopted rules, regulations, notices, and significant annual reporting requirements for controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs), in addition to foreign disregarded entities, foreign branches, or qualified branch units (QBUs), and foreign partnerships.

The United States has entered into tax treaties and conventions with many foreign countries. In general, those treaties affect the U.S. taxation of foreign persons, not U.S. persons. The “Saving Clause” in each treaty generally gives the United States the right to tax its corporations, citizens, and residents as if the treaty had never come into force. In certain cases, a tax treaty may limit the U.S. taxation of U.S. persons. Examples of such help for U.S. citizens and residents include ( a ) the allowance of U.S. foreign tax credits, with special source rules for purposes of Section 904; ( b ) tax treaty or protocol clauses that prevent discriminatory treatment of foreign persons that are U.S. residents and of domestic corporations owned by foreign persons; ( c ) exemptions for certain types of income; ( d ) the allowance of certain deductions; and ( e ) the use of competent authority procedures (for example, mutual agreement procedures or “MAP”) to resolve inconsistent treatment by the United States and the foreign treaty country.

Exporting U.S. products to foreign countries

Exporting or performing services to foreign persons outside the United States

Foreign branch of a U.S. business — Section 987Section 987 may apply when the U.S. taxpayer operates in a branch form (such as a check-the-box foreign disregarded entity or a foreign partnership) and such branch is a QBU with a functional currency different than that of its owner.

New benefits and tax provisions available only to C corporations under the TCJA

Subpart F income from CFCs

global intangible low-taxed income (GILTI) from CFCs

Dividends Received Deduction (DRD) or Participation Exemption applicable for C corps that own at least 10% of a foreign corporation — Section 245A

Investment in U.S. property by a CFC — Section 956

Section 863(b) sourcing rules modifications

Foreign tax credits (FTC)Direct foreign tax credit, Section 901Indirect or deemed-paid credit, Section 902 (repealed by the TCJA)Allowable credit calculated on Forms 1118 (corporate) or 1116 (individual)

Limitation on FTC, Section 904

U.S. shareholders of PFICs

Limits on interest expense for U.S. businesses (that is, 30% of adjusted taxable income [ATI])

1 Section 987 addresses which issue?Currency translation values at the time of a transaction.Character of gain or loss.Foreign branches that are QBUs.Transfer pricing.