TitleIntroduction to U.S. International Taxation Presented by: Jonathan D. Grossberg, Esq., LL.M. (224) 381-4007
grossberg@rowan.edu
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Learning Objectives
At the end of this course, you will be able to: • Differentiate between a territorial system and a worldwide system • Describe how the TCJA included movement towards a territorial system in
some respects and strengthening of the worldwide system in other respects.
• Define basic terms such as: FTC, CFC, PFIC, Subpart F, GILTI, BEAT, FDII. • Recognize how to classify source of income for various types of income
including interest, dividends, capital gains, and sales of various types of property.
• Identify how to determine the residency of a taxpayer based upon place of organization or incorporation, ownership, entity status, and other relevant factors.
• Overview of Two Main Taxation Systems: Worldwide vs. Territorial
• Major systemic changes resulting from the Tax Cuts and Jobs Act (TCJA)
• Definition of Terms: FTC, CFC, PFIC, Subpart F, GILTI, BEAT, FDII, etc.
• Residency Classification: Individuals and Businesses
• Source of Income Rules
What We’ll Cover
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• Worldwide Taxation • Taxation of all income earned by a person no matter where it is earned.
• Internal Revenue Code Language: Section 61: “from whatever source derived”
• History: Cook v. Tait, 265 U.S. 47 (1924): “The contention was rejected that a citizen’s property without [outside] the [territorial] limits of the United States derives no benefit from the United States.”
• Territorial Taxation • Taxing persons only on activity within the territorial boundaries of a country.
• Section 245A moves toward this for some corporate taxpayers.
Overview of Two Main Systems: Worldwide vs. Territorial
• Worldwide Taxation • Direct Investments and business operations by U.S. persons abroad
• Foreign Tax Credit
• Territorial Taxation • Treaties sometimes create territorial basis
• Section 245A provides a territorial element for certain types of income earned by U.S. corporations
Current Aspects of Worldwide and Territorial Taxation
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• Treaty countries: primarily developed countries.
• Major articles: residence, permanent establishment, business profits, gains, interest, dividends
• FATCA: information sharing: different!
A Digression on Tax Treaties
Section 245A allows individual taxpayers to exempt from U.S. taxation dividends received from controlled foreign corporations.
a. True
b. False
• Moves Toward Worldwide Taxation: GILTI
• Promotion of U.S. Products and Services Abroad: FDII: A Long History
• Protecting Against Base Erosion: BEAT
• Changes to Foreign Tax Credit
Major Systemic Changes from the Tax Cuts and Jobs Act (TCJA)
• 100% Dividends Received Deduction (DRD)
• Foreign Source
• U.S. asserts taxing jurisdiction over U.S. source income
• No relief for individuals
• Distribution is first out of previously taxed income/E&P (PTI or PTEP)
Moves Toward Territorial Taxation: Section 245A
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• GILTI: acronym: Global Intangible Low-Taxed Income
• Not quite accurate: meant to be a sort of minimum tax
• Need not be from intangibles
• Code Section 951A: net CFC tested income exceeds a “net deemed tangible income return”
• 50% deduction for GILTI amounts included
• 80% credit for any foreign taxes imposed on GILTI amounts
• Therefore, no GILTI inclusion generally if foreign taxes are at a rate of 13.125% or higher
GILTI
• FDII: acronym: Foreign-derived Intangible Income
• Again, not just about intangibles
• Deduction: property/services: foreign use
• Complex regulations
• Possible Reforms
Promotion of U.S. Products and Services Abroad: A Long History: Now FDII
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• Another minimum tax
• Large C Corporations: Taxpayer pays tax calculated under ordinary rules or a tax at a rate of 10% x (Taxable Income Plus Base Erosion Items), whichever is greater. Assumes base erosion items are at least 3% of total deductible expenses
• Base Erosion Items: Payments to related (25% owned) non-U.S. persons of interest, rents, royalties, management fees, and similar items
• Possible Reforms
• Now four baskets: • GILTI category income
• Foreign branch income
• Passive category income
• General category income
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a. Promote U.S. exports.
b. Tax large U.S. C corporations that made large payments of interest, fees, and similar items to related parties.
c. Tax CFCs on intangible income earned abroad.
Polling Question #2
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• Subpart F: This is the part of the Internal Revenue Code that contains the provisions related to controlled foreign corporations. Specifically: United States Code Title 26 (IRC), Subtitle A, Chapter 1, Subchapter N, Part III, Subpart F (Sections 951-965)
• CFC: Controlled Foreign Corporation
Definition of Terms: U.S. Taxpayer Activities Abroad
• FTC: Foreign Tax Credit
• FDII: Foreign-Derived Intangible Income
• FIRPTA: Foreign Investment in Real Property Tax Act
Definition of Terms: A Grab Bag
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FATCA requires that you personally make special reports when you purchase international stocks in your domestic brokerage account.
a. True
b. False
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• Individuals are U.S. Residents for tax purposes, and thus subject to taxation on their worldwide income, if:
• They are U.S. citizens
• They meet the physical presence test
Residency Classification for Individuals
• Individuals are U.S. Residents for tax purposes, and thus subject to taxation on their worldwide income, if:
• They are U.S. citizens
• They meet the physical presence test
Residency Classification for Individuals
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• Actual physical presence for 183 days or more during the calendar year
• 31 days during a given year and a total of 183 days using the following formula: counting each day during a particular year as a whole day, the prior year as 1/3 of a day, the year before that as 1/6 of a day
• Example: Present in the U.S. for 140 days during 2020, 120 days during 2019, 60 days during 2018. This ends up as 190 days
• If you are always in the U.S. for 121 days or less during any year, you are never a permanent resident under this test
Substantial Presence Test
If present for fewer than 183 days during the actual year, then an individual is not treated as a U.S. resident if:
1. Has a “tax home” in a foreign country and
2. Has a “closer connection” to that foreign country
Tax Home Exception
• Corporations: Place of Incorporation (or “charter”)
• Partnerships: place of laws under which organized (easier for entities like LLCs than general partnerships) • However, this usually does not matter for partnerships because they are
mostly treated as flow-through entities
Residence of Business
An individual that is a Swiss citizen and is present in the U.S. for 130 days can never be a U.S. resident for tax purposes.
a. True
b. False
Source of Income Rules
• Interest is sourced to the residence of the payor for an individual, partnership, or trust
• Interest is sourced to the place of incorporation for a corporate payor
Interest
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• Dividends are sourced to the place of incorporation of the payor
• 25% rule: • If more than 25% of a foreign corporation’s gross income is “effectively
connected” with a U.S. trade or business
• Then the dividends have U.S. source to the same proportion of U.S. source income to worldwide income
• Foreign corporation earns $1 billion worldwide and $500 billion of that is from a U.S. trade or business, then for a dividend of $1 per share, $0.50 is U.S. source
Dividends
Interest is sourced according to the residence of the payee.
a. True
b. False
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• Payments for personal services are generally sourced to the place of performance
• Complexity when lots of individuals are performing work on a contract (a corporation with a bunch of employees). Days in a location are important.
Payments for Personal Services
• Rental of tangible personal property: place of use
• Royalties from intangible property: place of use
Rents and Royalties
• Purchased inventory: place where legal title passes
• Produced inventory: sourced based on location of production even if other additive activities elsewhere
• for partial production: sourced based on production asset percentages
• Other tangible property: residence of the seller (“tax home”)
• Intangible property: depends on contingency on use, amortization
Sale of Property
c. Use
• Capital Gains
• U.S. source business income
• Interest, Dividends, Rents, Royalties
• Interest: portfolio interest exception
• Dividends: exception for foreign corporation (with deemed U.S. source, refer to source rules) payments to non-U.S. residents
• 30% withholding tax
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• Sourced to residence of seller
• Rare exception for those present in U.S. but not treated as U.S. residents for other purposes (teachers, students, foreign government officials)
• Sale of patent and patent rights treated as capital gains even if contingent on productivity, use, or disposition
Capital Gains
• 10% withholding tax on gross sale price of U.S. real property interest (USRPI) (land, unsevered natural products, improvements, personal property associated with land)
• USRPHC: 50% or more of assets are USRPI
• The buyer has a withholding obligation
Foreign Investment in Real Property Tax Act (FIRPTA)
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U.S. individuals engaged in a trade or business in the U.S. (or, if a treaty country resident, with a permanent establishment) are taxed at graduated rates on Effectively Connected Income (ECI)
U.S. Source Business Income
Under FIPRTA, a buyer of real estate is required to withhold 10% of the net gains upon sale to a non-U.S. person.
a. True
b. False
Introduction to Outbound Taxation (U.S. Persons Abroad)
• Foreign Tax Credit for income taxes (U.S. definition) paid to foreign governments on foreign source (U.S. definition) income
• That is why source and residency (discussed above) are so important
Foreign Tax Credit
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• Credits are limited (simplified version) to U.S. rate of tax on foreign source income (Section 904(a)) earned in each of four categories (or baskets) under Section 904(d)
• Four categories (baskets): • GILTI
• Foreign Branch Income
• Passive Category Income
• General Category Income
Section 904(a) limitation
• 100% DRD for 10% U.S. corporate shareholder for active foreign business income from a foreign corporation.
• Possible Reform: Limitation to U.S. shareholders of CFCs.
Section 245A
• Congress currently considering changes to GILTI: Limiting Deduction for QBAI, Country-by-Country Limitation.
• Global Minimum Tax (OECD BEPS Project)
• Pillar I: Nexus and Allocation of Taxing Rights
• Pillar II: Imposing Minimum Tax on Parent Companies
Changes to GILTI? New Global Minimum Tax?
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How many categories (baskets) for the Foreign Tax Credit limitation are provided for in Section 904(d)?
a. 2
b. 4
c. 9
Email: grossberg@rowan.edu