Tax Planning Goals

1
Tax Planning Goals

• Avoiding income recognition
• Postponing income recognition
• Changing tax jurisdictions
• Controlling classification of income
• Spreading income among related taxpayers
• When to act contrary to usual techniques

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INTERNATIONAL TRANSACTIONS
3
BASICS OF US CROSS-BORDER TAXATION

• Worldwide approach (US)
• All income is taxable
• Deduction or credit to relieve double taxation
• Territorial approach (Hong Kong)
• Income tax only on events occurring within
  borders
• Regardless of who the taxpayer is
• US uses this approach for non-US taxpayers

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BASICS OF US TAXATION OF CROSS-BORDER ACTIVITIES

• Form a business as a branch
• Does not exist for US income tax purposes
• Flow through gain/loss/credit to parent
• Form a non-US subsidiary
• No US income taxation until repatriation, ie as
  dividend
• Deferral method
• Remember FAS 109 treatment differs

5
TAX TREATIES

• For US, usually bi-lateral
• There are non-tax treaties too
• Designed to relieve double taxation for
  cross-border trade
• Sometimes follows model treaty language
• CCH listing of status of various treaties

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TAX TREATIES KEY ISSUES

• Permanent Establishment
• Withholding targets and rates
• IRS cooperation
• Financial disclosures
• Treaty shopping limitation of benefits
  article
• Transfer pricing methods, policing
• Expatriate treatment

7
SOURCING RULES

• For US taxpayers ? Not a taxing statute, but a
  computational tool used for other provisions
• For non-US taxpayers ? Baseline for US taxation
  of net income
• Rules apply in computing net income, ie for
  income and deductions
• RESULT US source or Foreign source income or
  deduction

8
FOREIGN CURRENCY

• US gain/loss on transactions denominated in
  another currency. Similar to FAS 52
• Payables and receivables per sales contract
• Tax and audit payments
• Remittances from foreign branch
• Tax issues
• Timing of gain/loss
• Source of gain/loss
• Character of gain/loss

9
MOVEMENT OF CAPITAL ACROSS BORDER

• 367 overrides 351 deferrals when a non-US
  subsidiary is created
• Create branch or sub
• Liquidate sub
• Merger, takeover, etc
• Exception for outbound transfer of trade or
  business assets, except
• Depreciation recapture
• Inventory, receivables, installment notes
• Leased assets
• Special rule for transfers of intangible assets
• Inbound transfer creates dividend income re
  deferral from CFC

10
CONTROLLED FOREIGN CORPORATIONS (CFCs)

• Non-US sub cannot join a US consolidated return
  no taxation until remittance
• To counter this opportunity, CFC rules of Subpart
  F
• Current inclusion of income earned by non-US sub
• Pass-through, not related to actual distributions
• Only if gt 50 percent US shareholders
  (w/attribution)

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SUBPART F INCOME

• Pass-Through only for certain types of income.
  Triggers constructive dividend Pro rata share
  of Income net increase in US investments
• No tax then upon actual remittance
• No pass-through if sale is within CFCs country
• Convert gain on sale of CFC stock to ordinary, to
  extent of untaxed Subpart F income

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MORE ON SUBPART F

• De minimis, no pass-through if Subpart F income lt
  5 percent of gross income, or lt 1M. All Subpart
  F if gt 70 percent
• Basis adjustments from Subpart F passthrough
• US Parent Low-Tax CFC High-Profit Sale

13
FOREIGN TAX CREDIT

• Election Credit against US tax, at US rates,
  for non-US taxes paid on dual-taxed income
• Lesser of
• Actual tax paid, or
• US Tax x Foreign-source income / Worldwide TI
• Must be paid as income-like tax
• Carry back 1 year, forward 10
• Without election, deduct the taxes paid

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INDIRECT FTC

• Allowed when foreign sub pays a dividend
• Because of repatriation rule, US parent never has
  claimed FTC on this distributed income
• Credit Foreign taxes paid x Dividend / Subs
  EP
• Amount of credit also is reported as gross income
  78
• Up to six tiers of ownership allowed, 10
  ownership reqd at each level

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MORE ON THE FTC

• Compute separate FTCs for each basket of income
• Meant to discourage cross-crediting of rates
• Overall foreign loss
• Allows foreign loss amount to reduce US source
  income
• Recapture the US income then when net foreign
  income returns
• Clear the foreign loss through all of the foreign
  baskets first

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US TAXATION OF NON-US PERSONS

• US investment income 30 percent tax
• Zero tax on US portfolio debt
• Zero tax on non-business US capital gains
• US business income
• Prevailing US tax rates
• On income effectively connected to US business
• Zero tax on securities trading, unless there is a
  US trading office
• Also subject to AMT

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TRANSFER PRICING
Rev 100
Profit 60
Cost 40

• Tax Issue Profit is located in high-tax
  jurisdiction
• Customer has no preference as to location of
  vendor
• Idea Create a controlled subsidiary in
  lower-tax jurisdiction

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TRANSFER PRICING
Rev 100
Profit 60
Cost 40
Parent
Rev 55
Cost 40
Profit 15
Sub
Rev 100
Cost 55
Profit 45
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Example 29
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Example 29
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Example 29