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.
U.S. Outbound Tax Concepts
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])
Knowledge check
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.
U.S. Inbound Tax Concepts
Investment or passive types of income from U.S. sources (for example, fixed, determinable, annual, or periodical [FDAP]) — Sections 871 and 881
Effectively connected income (ECI) derived from a U.S. trade or business (ECI from a U.S. trade or business) — based on IRC, U.S. case law, and IRS rulings
Business profits attributable to a U.S. permanent establishment (PE) — based on U.S. tax treaties and conventions
Interest expense limitation or the thin capitalization and anti-earnings stripping rules, Section 163(j)
Debt versus equity U.S. tax law
Foreign Investment in Real Property Tax Act (FIRPTA) — the disposition of a U.S. real property interest by a foreign person (the transferor) is subject to U.S. source withholding tax. FIRPTA authorized the United States to tax foreign persons on dispositions of U.S. real property interests. Sections 897 and 1445. PATH Act revisions
Base erosion and anti-abuse tax (BEAT) — Section 59A
Modified Section 1446(f) and new Section 864(c)(8) reverses the holding within the Grecian Magnesite Mining case, and reverts to the original holding in Rev. Rul. 91-32 for U.S. income tax treatment of foreign partners who sell their interest in an operating U.S. partnership (that is, a U.S. partnership that has ECI from engaging in a U.S. trade or business)
Other fundamental U.S. international tax concepts
Choice of entity classification, U.S. “check-the-box” rulesSection 7701, and Treasury Regulation 301.7701-1, -2U.S. tax law governs the classification of a form of foreign business organization for U.S. tax purposes. The check-the-box regulations under Section 7701, generally effective January 1, 1997, provide that any “business entity” that is not required to be treated as a corporation is an “eligible entity” that may choose its classification. The regulations provide default classification rules. Eligible entities may elect out of the default rules. Entities that wish to change their previous classification must also do so by filing an election that qualifies for purposes of Section 7701.Form 8832 is known as the “check-the-box” election form, or the entity classification election form.
Sourcing of income and (allocation of) expenses
Tax treaties and conventionsTax treaties generally reduce withholding tax rates between Treaty partner jurisdictions and contain provisions that allow for procedures to avoid double taxation on one item of income by the same taxpayer by two different taxing jurisdictions and or States.
Transfer