Chat with AIExam 16: Ustaxation of Foreign-Related Transactions
Guinness Corporation,a U.S.corporation,began operating overseas in the current year.This year,Guinness sold machine tools that it manufactured in the United States to Canadian companies from a branch office located in Toronto,purchased a 40% investment in a Brazilian corporation from which it received a dividend,and received royalties from an English firm that is the licensee of machine tool patents held by Guinness.The English firm uses the patents to manufacturer machine tools it sells in England.What international tax issues should Guinness's Director of Taxes consider with respect to these activities?
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Verified• Does Guinness Corporation have to recognize its profit from the machine tool sales in Canada in its current year tax return?
• Did Guinness Corporation pay any Canadian income taxes on the machine tool sales?
• Are the foreign taxes creditable? If so,what exchange rate is used to translate the taxes? What foreign tax credit limitation applies to the foreign taxes? Is a foreign tax credit carryback or carryover created?
• How is the foreign tax credit election made? Does the credit have to be claimed with respect to all foreign taxes? Is it advisable to deduct the foreign taxes (instead of crediting them)?
• Does Guinness Corporation have to report the dividend received from the Brazilian corporation in its current year tax return?
• Do the Subpart F rules apply to the investment in the Brazilian corporation?
• What exchange rate is used to translate the dividend?
• Were any income taxes withheld by the Brazilian government on the dividend payment? Was the appropriate amount of taxes withheld in accordance with the U.S.-Brazil tax treaty? Are such taxes creditable? What exchange rate is used to translate such taxes?
• Is Guinness Corporation eligible to claim a deemed paid foreign tax credit with respect to the dividend? If so,what is the amount of the deemed paid credit?
What foreign tax credit limitation applies to the foreign taxes?
• Does Guinness Corporation have to report the royalties received from the U.K.company in its current year tax return? What exchange rate is used to translate the royalty payment?
• Were any U.K.taxes withheld from the royalty payment? Was the appropriate amount of taxes withheld in accordance with the U.S.-U.K.tax treaty? What exchange rate is used to translate the taxes? Are the U.K.taxes creditable? What foreign tax credit limitation applies to the foreign taxes?
• Are any Guinness Corporation expenses allocable to the foreign-source income that is received? What effect do such expenses have on the foreign tax credit limitation(s)?
Guinness Corporation reports the machine tool profits,dividends,and royalties in its current-year tax return.Any expenses allocable to the income items under Reg.Sec.1.861-8 are deductible in determining foreign-source taxable income.
The machine tool profits and foreign taxes are translated under different rules depending on the functional currency for the operation (i.e. ,the U.S.dollar or Canadian dollar).The dividend and royalties are translated using the exchange rate for the date on which the payment was made.Foreign taxes withheld on the payment also are translated using the same exchange rate.The U.S.-Canada and U.S.-U.K.tax treaties will apply to the branch profits and dividend payments.The Brazilian corporation is not a CFC.Therefore,Subpart F does not apply.A deemed paid foreign tax credit can be claimed for a portion of the Brazilian corporation's foreign income taxes.The U.S.-Brazil tax treaty needs to be checked regarding the appropriate withholding rate.The credit is translated using the historical exchange rate at which the taxes were paid.For foreign tax credit purposes,the machine tool profits are in the other income basket,the dividend is in a separate basket for noncontrolled Sec.902 corporation dividends,and the royalties are likely passive income,although they could be in the other income basket depending on the facts and circumstances.The credit is claimed on Form 1118,with separate forms being filed for each foreign tax credit limitation basket.
In accounting for multinational corporations,
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Compare the U.S.tax treatment of a nonresident alien and a resident alien,both of whom earn U.S.trade or business and U.S.investment income.
(32) VerifiedA nonresident alien who earns investment income is taxed only to the extent that such amounts are U.S.-source income.U.S.-source investment income is taxed at a 30% rate without any reduction for deductions,losses,etc.U.S-source income that is effectively connected with the conduct of a U.S.trade or business is taxed at the regular individual tax rates.Such amounts can be reduced by deductions,losses,etc.Only limited amounts of foreign-source income that is effectively connected with the conduct of a U.S.trade or business is taxed by the United States.A resident alien is taxed on his or her worldwide income without any different tax treatment for trade or business income or investment income.A resident alien is permitted to reduce both income forms by any deductions,losses,etc.that are related to the income.The resulting amount is then taxed at the progressive individual tax rates.
Jose,a U.S.citizen,has taxable income from U.S.sources of $15,000 and taxable income from a foreign country of $35,000.Assume the U.S.tax rate is 25% and Jose paid $12,000 in taxes to the foreign country.What foreign tax credit can be claimed by Jose?
(50) Excess foreign tax credits can be carried back one year and forward five years.
(30) What are the carryback and carryforward periods for the foreign tax credit?
(34) Under the Subpart F rules,controlled foreign corporations (CFCs)are required to distribute a certain portion of their income as dividends to their U.S.shareholders.
(40) Zeta Corporation,incorporated in Country Z,is 100% owned by Zelda Corporation,a U.S.corporation.Zelda purchases some machines from an unrelated corporation,for use in Country A.The portion of the sales contract covering installation and maintenance of the machines is assigned by Zelda to Zeta.Zeta is to be paid for these services by Zelda.Does this qualify as foreign base company services income?
(38) Discuss the Sec.482 rules concerning the sale of goods and services between a domestic parent corporation and a foreign subsidiary at a lower-than-normal price.
(43) A foreign corporation with a single class of stock is owned 8% by Bert,49% by Xi Yong,30% by Ernie,and 13% by Mark.Bert,Ernie,and Mark are U.S.citizens,and Xi Yong is a nonresident alien.The shareholders are not related.Is the foreign corporation a controlled foreign corporation (CFC)?
(35) Phoenix Corporation is a controlled foreign corporation (CFC)incorporated in Country X.It is 100% owned by its U.S parent corporation.Phoenix has $80,000 of taxable income from the sale of widgets that were purchased from their U.S.parent corporation.All widgets have the same gross profit.Sixty percent of the widgets were sold through a Country Y wholesaler that is 100% owned by Phoenix,and are destined for use in Country Y.The remaining 40% are sold through unrelated Country X wholesalers and are destined for use in Country X.What amount of profits will be constructively distributed as foreign-based company sales income to the U.S.parent company?
(37) Describe the financial statement implications of the foreign tax credit and a foreign subsidiary.
(35) U.S.citizen Patrick is a bona fide resident of a foreign country for all of the current year.Patrick uses a calendar year as his tax year.He has $100,000 of self-employment income and incurs $20,000 in housing expenses.The base housing cost amount is $15,616.The deduction for housing expenses is
(38) Michael,a U.S.citizen,earned $100,000 of foreign-earned income and no other U.S.or foreign income in 2013.He also incurred $10,000 of employment-related expenses,none of which were reimbursed.If the full foreign-earned income exclusion is utilized,calculate the deductible employment-related expense (before the 2% nondeductible floor).
(43) Phoenix Corporation is a controlled foreign corporation (CFC)incorporated in Country X.It is 100% owned by its U.S.parent corporation.Phoenix has $80,000 of taxable income from the sale of widgets that were purchased from their U.S.parent corporation.All widgets are intended for use or consumption within Country X and have the same gross profit.Sixty percent of the widgets were sold through a Country X wholesaler that is 100% owned by Phoenix,and 40% are sold through unrelated Country X wholesalers.What amount of profits will be constructively distributed as foreign-based company sales income to the U.S.parent company?
(39) Compare the foreign tax payment claimed as a deduction versus a similar payment claimed as a credit.Create an example to demonstrate the tax effect.Use 28% as the marginal tax rate in your example.
(36) Domestic corporation X owns all the stock of controlled foreign corporation (CFC)T.X's acquisition cost for the CFC investment is $150,000.The CFC reports E&P of $200,000 since the domestic corporation acquired its interest,of which $120,000 was Subpart F income.The CFC makes a cash distribution of $90,000 to the domestic corporation.What is the domestic corporation's basis for its investment in T immediately after the cash distribution?
(40) Darlene,a U.S.citizen,has foreign-earned income of $150,000 and employment-related expenses of $15,000.Darlene earns no other income.Darlene also has $12,000 of itemized deductions not directly related to the foreign-earned income.She can exclude $97,600 of foreign-earned income.Darlene incurs $33,750 of Country C income taxes on $150,000 of Country C taxable income.How much of Darlene's foreign income taxes are noncreditable?
(37) Income is "effectively connected" with the conduct of a U.S.business only if
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