international tax and transfer pricing topics
TRANSCRIPT
International Tax and Transfer Pricing Topics
Jason Rauhe, CPAFebruary 9, 2016
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AGENDA• General U.S. Tax Principles
• Income Tax Treaties
• Foreign Tax Credit
• General International Tax Filing Requirements
• Transfer Pricing Overview
• Foreign Bank Account Reporting / Foreign Account Tax Compliance Act (“FATCA”) Overview
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General US Tax Principles
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JURISDICTION TO TAXSource Jurisdiction• Residents and nonresidents alike
are taxed on income from economic activity within a particular (sourced) country
Residence Jurisdiction• All income accruing to
residents of a country, regardless of source, is subject to tax by that country
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STATUTORY FRAMEWORKWho is a U.S. Person?• U.S. citizens• Green card holders (lawful
permanent residents)• Residents for income tax purposes
“Substantial presence” test– Generally, 31 current days, plus 183 days in
current and prior two years
• Domestic corporation / partnership / estate / trust Based on place of incorporation /
organization – U.S. state
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STATUTORY FRAMEWORKWho is a Foreign Person?
• Anyone who is not a U.S. person Non-U.S. citizen
Non-green card holder
Does not satisfy “substantial presence test”
• Foreign corporation / partnership (organized outside the U.S.)
• Foreign estate/trust
• Foreign government
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STATUTORY FRAMEWORKU.S. Persons
• What income is taxed? U.S. person is taxed on worldwide income wherever sourced Does not matter where U.S. citizen lives
• How is income taxed? Net taxable income Progressive rates Double taxation avoidance Foreign tax credit (or deduction)
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STATUTORY FRAMEWORKForeign Persons
• What income is taxed?
U.S.-sourced income that is:
– “ECI” — income “effectively connected” with U.S. “trade or business”
– “FDAP” — “fixed, determinable, annual, or periodic gains, profits, and income”
– Interest, dividends, rents, royalties, wages, salary
– Gain on sale of U.S. real property
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U.S. TAX DEFERRAL
• U.S. shareholders of nonresident corporations are not subject to U.S. taxation until distributions are received from the corporation as a dividend
• Deferral benefit is the greatest when foreign tax on income of the foreign corporation is low or none
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ANTI-DEFERRAL REGIMESU.S. shareholders might be subject to U.S. tax even if income is not actually distributed by the FC to the shareholder
• Foreign corporations
Controlled Foreign Corporation (CFC) — Subpart F Income
– U.S. control required
Passive Foreign Investment Company (PFIC)
– Income Test: 75% or more of gross income is passive
– Asset Test: 50% or more of a corporation’s assets are passive
– U.S. control NOT required
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FOREIGN CORPORATIONSCONTROLLED Definition
• A foreign corporation in which:
More than 50% either
– Total combined voting power of all classes of stock entitled to vote, or
– Total value of the stock
Is owned by U.S. shareholders
On any day of the foreign corporation’s taxable year
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FOREIGN CORPORATIONSCONTROLLED U.S. Shareholders – a U.S. Person Who:
• Owns 10% or more voting power of all classes of stock, or
• Holds direct, indirect or constructive ownership
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SUBPART F• Designed to prevent deferral of portable income
• Directed at two basic types of income: Passive investment income Income derived from dealings with related entities
• Applies to income derived by a CFC and is not country-specific
• Eligible for foreign tax credit
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SUBPART F• Subpart F – income is included in income of U.S. shareholder in
year earned rather than when distributed
• §956 Income – earnings of CFC invested in U.S. property treated as distribution Includes most loans to U.S. shareholders Applies when U.S. shareholder pledges stock as loan security
• Basis in CFC stock is adjusted for inclusion and distributions
• Not considered dividends, so not eligible for reduced “qualified” tax rate or DRD deduction
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PREVIOUSLY TAXED INCOMESUBPART F:• Prevents double taxation that could occur upon an actual
distribution from a CFC
• Excludes from gross income any actual distributions of earnings previously taxed as Subpart F income or investments in U.S. property
• Foreign exchange gain or loss is recognized when actual distribution occurs
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Income Tax Treaties
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PERMANENT ESTABLISHMENTTaxation of Business Profits
General treaty rule:Profits of a foreign corporation from U.S. activities are taxable if it carries on business in the U.S. through a permanent establishment (PE). If so, the profits may be taxed by the U.S., but only to the extent they are attributable to that PE.
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PERMANENT ESTABLISHMENTPE – Specific Inclusions, U.S. Model, Article 5
• PE includes:
Place of management, branch office, factory or workshop
Place where natural resources are extracted (e.g., mine, oil or gas well, quarry)
Building site, construction or installation project that lasts longer than 12 months
Drilling rig or ship used to explore for natural resources if that activity lasts longer than 12 months
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PERMANENT ESTABLISHMENTPE – Specific Inclusions, U.S. Model, Article 5
• PE does not include: Use of facilities solely to store, display or deliver goods belonging to enterprise
Maintenance of a stock of goods solely for purpose of storage, display, delivery or processing by another enterprise
Maintenance of a fixed place of business solely to purchase goods or collect information
Maintenance of a fixed place of business solely for the purposes of carrying out other activity of a “preparatory or auxiliary” nature (e.g., advertising)
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Foreign Tax Credit
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FOREIGN TAX CREDIT BASICS• The purpose of the Foreign Tax Credit is to mitigate double
taxation
Foreign income taxed at the higher U.S. or non-U.S. tax rate
• The foreign tax credit is generally available to:
U.S. citizens
Domestic corporations
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FOREIGN TAX CREDIT BASICS• The Foreign Tax Credit is elective
Taxpayers can choose on an annual basis to either claim the foreign tax credit or claim a tax deduction for foreign taxed paid
• In any given tax year, taxpayers must either credit or deduct all foreign taxes No partial credit and partial deductions permitted in the same tax year
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FOREIGN TAX CREDIT BASICSWhat taxes are credible?• Only income or excess profits taxes (essentially income
taxes) are credible• Tax must resemble U.S. income tax (Reg. § 1.901-2)• Penalties, fines, interest, custom duties, VAT, capital and
asset taxes do not qualify for the credit• Tax payment must also be compulsory to be credible for U.S.
federal tax purposes• During compliance process, foreign tax returns should be
requested and maintained in order to support the foreign tax credit claimed upon audit
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SEPARATE BASKETSFOREIGN TAX CREDIT LIMITATION:
• Under IRC § 904(d), the credit limitation must be determined separately for foreign taxes on each separate limitation category (basket)
• For taxable years beginning after December 31, 2006, there are only two baskets: General category income
Passive category income
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MISCELLANEOUS ITEMSFOREIGN TAX CREDIT:• Excess foreign tax credits can be carried backwards and
forward One-year carry-back 10-year carry-forward
• AMT foreign tax credit calculated separately
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DCT FOREIGN TAX CREDITS§902• Withholding – tax deemed paid by income recipient even
though payment could be made by withholding agent
• Income tax on compensation
• Income tax paid on business profits of flow-through entity (e.g., branch, partnership)
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TAX CREDITINDIRECT FOREIGN(“Deemed Paid Credit”) - §901• What taxes are credible?• Income taxes paid by foreign corporations• Who is eligible to take the credit on their U.S. tax return?• Allowed to certain domestic corporations (10% ownership
requirement)• Not allowed for individuals, partnerships or S corporations• Allows for indirect foreign tax credit on dividends received
from foreign corporations, although tax is paid by the foreign corporation, not the recipient
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TAX CREDITINDIRECT FOREIGN(“Deemed Paid Credit”) - §902
• Calculation of Deemed Paid Credit:
Dividend income received deemed to have foreign taxes repatriated with it
Determine the amount of a distributing corporation’s pre-tax earnings attributable to the dividend (IRC §78 “gross up”)
Tax “pre-tax” earnings and allow credit
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TAX CREDITINDIRECT FOREIGN§78 Gross-up
• Tax deemed paid and treated as income
• Not eligible for dividend received deduction
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General International Filing Requirements
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FORM 5471/8865/8858When and Where to File?• Form 5471/8865/8858 is attached to the taxpayer’s income tax return and
is due when the income tax return is due, including extensions
• Type of form to be prepared:
Foreign corporation Form 5471
Foreign partnership Form 8865
Foreign disregarded entity Form 8858
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• A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the time prescribed If the information is not filed within 90 days after the IRS has mailed a
notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired up to a maximum of an additional $50,000 penalty
FORM 5471/8865/8858PENALTIES
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Transfer PricingOverview
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OVERVIEW• Increased global scrutiny of related party transactions• Transfer pricing regulations and penalties vary by
country, as well as documentation requirements• Three branches of transfer pricing to reduce
intercompany transaction exposures and risks: Documentation / compliance Planning Controversy
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AUDIT TRIGGERS• Certain intercompany
Transactions:Intangible property (e.g., technology,
patents, know-how)Services (e.g., management, engineering,
G&A)• Cost sharing arrangements (CSA)• Losses earned for consecutive
years
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PRICING STRATEGIESTRANSFERDocumentation• First line of defense under audit• Documentation rules vary by country• Requirements, filing deadlines, language, method selection,
accepted comparable companies / transactions, etc.
• In general, reports will contain: Industry analysis Functional analysis (i.e., a detailed narrative of a company’s
functions, assets and risks) Economic analysis (i.e., a method used to test transaction, pertinent
regulations and benchmarking results
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PRICING STRATEGIESTRANSFERCompliance• In the U.S., taxpayers:
Must file Forms 5471 and 5472 for related party transactions
May need to file Form 8275 for disclosure Must report Uncertain Tax Positions (UTP) on
Schedule UTP– Includes description of transaction and size of
associated reserve– FIN48 documentation
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PRICING STRATEGIESTRANSFERControversy
• Audit defense
• Dispute resolution
• APAs
• Competent authority
• Arbitration
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Foreign Back Account Reporting Overview
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ACCOUNT (FBAR) — FinCENFOREIGN BANK• Individuals and entities with a financial interest in or
signature authority over foreign accounts
• Must report via Form 114, if aggregate value in foreign accounts exceeds $10,000
• Significant penalties can apply
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ACCOUNT (FBAR) — FinCENFOREIGN BANK• New enacted due dates for Form 114
• For tax years beginning after December 31, 2015
Form 114 will be due April 15
Maximum extension for a six-month period ending October 15
