Accounting 4570/5570

1
Accounting 4570/5570

• Chapter 16 - International Taxation Issues

2
Direct Taxes

• Corporate Income Tax
• Classic Approach - double taxation
• Integrated System - attempts to eliminate double
  taxation
• Split rate (diff. rates for diff. taxpayers)
• Imputation (credit for taxes already paid)
• Taxable Income
• Territorial approach - only income earned in
  country is taxed (Hong Kong)
• Worldwide approach - all sources of income
  regardless of where earned are taxed

3
Direct Taxes

• Corporate Income Tax
• Worldwide Approach
• Double Taxation
• Tax credits
• Deferral of taxation of foreign source income
• Tax treaties

4
Direct Taxes

• Determination of expenses
• Timing an issue
• Capitalize
• Expense
• Treatment varies depending on country
• Differences in book and tax
• Tax rates different throughout the world
• Withholding tax

5
Indirect Taxes

• Value Added or Goods and Services Taxes (VAT)
• Tax is applied at each stage of the production
  process for the value added by the firm to goods
  purchased from the outside, which have been
  subject to VAT.
• Exhibit 16.1, page 468
• Other taxes
• Capital gains
• Excise taxes
• Estate and gift taxes
• Employment taxes

6
Double Taxation Issues

• Foreign and domestic tax
• Option of deduction versus credit
• See Exhibit 16.2, page 469
• Excess credits (if the foreign tax rate gt U.S.
  tax rate) can be carried forward or backward
• Credit is available on income tax directly paid
  by corporation or deemed direct tax

7
Double Taxation Issues

• Tax credits
• Direct Credit
• Deemed direct tax - paid by foreign corporation
  to foreign government but deemed to have been
  paid by U.S. parent.
• Grossing up - increase dividend by deemed direct
  tax
• Baskets - companies of same stature lumped
  together to determine tax credits
• Tax treaties - reduce or eliminate taxes (61
  treaties )

8
U.S. Taxation of Foreign Source Income

• Export income
• Foreign branch income - 100 taxable
• Deferral - dividends taxes only when received
• Credit allowed for foreign tax paid
• Tax HavenA place where foreigners may receive
  income or own assets without paying high rates of
  tax.

9
Tax Havens

• Controlled Foreign Corporation (CFC)
• CFC U.S. shareholders own gt 50 of voting stock
• Income from foreign corporations
• Active income - only dividends taxed when
  received
• Passive income - Subpart F income
• Income not deferred included in U.S. income
  regardless of if dividends received

10
Subpart F Income

• Eight groups
• Insurance of U.S. risks
• Foreign-based company personal holding companies
• Foreign-based company sales income
• Foreign-based company services income
• Foreign-based company shipping income
• Foreign-based company oil-related income
• Boycott-related income
• Foreign bribes

11
U.S. Taxation

• Foreign currency translation
• Gain/loss taxed at settlement date
• Branch Earnings
• QBUqualified business unit - trade or business
  for which books are kept
• Earnings divided into two parts - earnings sent
  back to home office and earnings kept in branch
• All earnings are taxable to U.S. home office
  regardless of whether sent back home

12
Review of Taxable Income on Foreign Sources

• 100 branch income/loss
• Foreign dividends received (grossed up for deemed
  direct tax)
• If no dividends received, and
• Not a CFC
• Recognition deferred until dividend received
• CFC
• Active or Passive?
• If passive, 100 taxed regardless of distribution

13
Tax Incentives

• Two types
• Incentives to encourage exporting
• Investment by foreign investors

14
Intl TaxTax Incentives

• Expatriates
• Residency in foreign country
• Physical presence 330 days of year
• Exclusion up to 82,400 (adjusted for cost of
  living)
• Tax credit is permitted

15
Intracorporate Transfer Pricing

• Tax considerations
• IRS - can distribute, apportion, or allocate
  gross income, deductions, credits, or allowances
  between related enterprises if it feels that tax
  evasion is taking place.
• IRS - prefers market-based transfer prices
• APA - Advanced Pricing Agreements

16
Tax Planning

• If loss expected (as often occurs in first
  years), set up unit as a branch
• Subsidiary form more valuable when unit starts
  being profitable since losses not deductible by
  U.S. parent
• Take advantage of tax treaties
• Hire competent tax accountants in all countries
  where you do business

17
Exercises

• VAT situation (Exercises 1-4)
• Exercise 5
• Exercise 6
• Multinational (Exercises 14-15)