International Taxation in a Nutshell (Nutshells) by Herzfeld, Mindy -- Read -- Imperial Library of Trantor

Index

Personal Note v Preface vii Table of Cases xxvii Table of Internal Revenue Code Sections xxix Table of Revenue Rulings and Treasury Regulations xli Chapter 1 Introduction 1

§ 1.01 International Trade and International Tax 1 § 1.02 Economics of International Trade 1 § 1.03 The Central Problem of International Taxation 3 § 1.04 Economics of Juridical Double Taxation 4 § 1.05 Overview of Worldwide International Tax Systems 8 § 1.06 Recent Changes to the International Tax System 12

Chapter 2 Basic U.S. Jurisdictional Tax Principles 15

§ 2.01 Introduction to U.S. Taxing Provisions 15 § 2.02 Outbound Transactions 15 § 2.03 Inbound Transactions 18

(A) Individuals 19 (B) Corporations 21 (C) Partnerships 23

§ 2.04 Citizenship and Residency 23

(A) Individuals 23 (B) Corporations 27

§ 2.05 Expatriates 29 § 2.06 Introduction to U.S. Income Tax Treaties 31

Chapter 3 Source Rules 33

§ 3.01 The Income Source Rules 33

(A) Interest 34

(1) Domestic Payor 34 (2) Foreign Payor 34

(B) Dividends 35

(1) Domestic Payor 35 (2) Foreign Payor 36

(1) Purchased Inventory 45 (2) Produced Personal Property 47 (3) Intangible Property 48 (4) Depreciable Personal Property 49 (5) Other Personal Property 50 (6) Sales Through Offices or Fixed Places of Businesses in the United States 52

(G) Other Gross Income 53 (H) Residence for Source Rule Purposes 55

§ 3.02 Deduction Allocation Rules 56

(A) In General 56 (B) Interest 61

(1) U.S. Corporations 61 (2) Foreign Corporations Engaged in a U.S. Trade or Business 66 (3) Deductibility of Interest Expense 69

Chapter 4 Taxing Rules 75

§ 4.01 Overview 75 § 4.02 “Engaged in a Trade or Business” in the United States 75 § 4.03 “Effectively Connected” Income 81

(A) U.S. Source Income 81 (B) Foreign Source Income 83 (C) Income Effectively Connected to a Pre-Existing Trade or Business 86 (D) Effectively Connected Income Election 88

§ 4.04 Nonbusiness Income from U.S. Sources 88

(A) Interest 90

(1) Original Issue Discount 91 (2) Portfolio Interest 91 (3) Conduit Financing 94 (4) Bank Deposits 96 (5) Interest Substitutes 97 (6) Interest Stripping (I.R.C. § 163(j)) 97

(B) Dividends 100 (C) Rents and Royalties 101 (D) Income from Services 101 (E) Social Security Benefits 103 (F) Other FDAP Income 103 (G) Capital Gains 103

§ 4.05 The Branch Profits Tax 104

(A) The Branch Profits Tax on Branch Earnings 104 (B) The Branch Profits Tax on Interest 107 (C) The Branch Profits Tax and Secondary Withholding on Dividends 109 (D) The Branch Profits Tax and Income Tax Treaties 110

§ 4.06 Foreign Investment in U.S. Real Property 110

(A) Operational Income 110 (B) Dispositional Income 112

§ 4.07 Transportation Income 118 § 4.08 The Base Erosion and Anti-Abuse Tax 120 § 4.09 Taxation of Foreign Governments 123

Chapter 5 The Role of Income Tax Treaties 127

§ 5.01 The Bilateral Income Tax Treaty Network 127 § 5.02 The Treaty Making Process in the United States 129 § 5.03 The Relationship of Income Tax Treaties and the Code 130 § 5.04 Development of Model Income Tax Treaties 131 § 5.05 Income Tax Treaty Provisions 134

(A) Interpretation of U.S. Income Tax Treaties 134 (B) Scope of the Treaty 135 (C) Definitions 137 (D) Classification and Assignment Rules 142

(1) Business Income 142 (2) Personal Services Income 150 (3) Investment Income 153 (4) Other Income 157

(E) Avoidance of Double Taxation 158 (F) Limitation on Benefits 159 (G) Nondiscrimination 165 (H) Mutual Agreement Procedure 167 (I) Exchange of Information and Administrative Assistance 169

§ 5.06 Treaty Abuse, the U.S. Model Treaty and the Global Tax Treaty Landscape 171

Chapter 6 Filing, Withholding, and Reporting Requirements 173

§ 6.01 Filing Requirements 173 § 6.02 Sailing Permits 178 § 6.03 The Need for Withholding 178 § 6.04 Withholding on Dividends, Interest, and Other Periodic Payments 179

(A) Income Subject to Withholding 181 (B) Reduced Rates of Withholding 185 (C) Who Is a Withholding Agent? 186 (D) Payments Involving Partnerships, Trusts and Estates 187 (E) Payments to Foreign Intermediaries 192

§ 6.05 FIRPTA Withholding 200 § 6.06 Information Reporting 202 § 6.07 FATCA Reporting and Withholding 203

(A) Background 203 (B) Withholdable Payments 205 (C) Foreign Financial Institution (FFI) 206 (D) Non-Financial Foreign Entity (NFFE) 208 (E) FATCA Obligations 209

§ 6.08 Penalty Provisions 211

Chapter 7 Introduction to U.S. Business Activity in Foreign Countries 215

§ 7.01 Introduction 215 § 7.02 Citizens and Residents of the United States Living Abroad 217

(A) Introduction 217 (B) Foreign Income Exclusion 218 (C) Housing Cost Amount 220

§ 7.03 Export Incentives 222

(A) Background 222 (B) A New Export Incentive 224

§ 7.04 Participation Exemption 227

Chapter 8 Taxation of U.S. Persons’ Business Income from Controlled Foreign Corporations and Other Related Provisions 229

§ 8.01 Overview 229 § 8.02 Definitions 231 § 8.03 Income Taxable to Shareholders 235

(A) Subpart F Income 237

(1) Foreign Personal Holding Company Income 239 (2) Foreign Base Company Sales Income 245 (3) Foreign Base Company Services Income 251 (4) Oil and Gas Income 254 (5) Allocation and Apportionment of Deductions 254 (6) Relief Provisions 255 (7) Insurance Income 258 (8) Ordering Rules 259

(B) Global Intangible Low-Taxed Income 260 (C) Increase in Earnings Invested in U.S. Property 267

§ 8.04 Adjustments to Stock Basis 273 § 8.05 Sale of CFC Stock 274 § 8.06 Special Concerns Relating to Individuals 276 § 8.07 Transition Tax 277 § 8.08 Passive Foreign Investment Companies (PFICs) 279

Chapter 9 The Foreign Tax Credit 289

§ 9.01 Overview 289

(A) Relieving Double Taxation 289 (B) The Statutory Framework 296

§ 9.02 Eligibility 299 § 9.03 Creditable Taxes 300

(A) Is the Foreign Levy a Tax? 300 (B) Is the Tax a Separate Tax or Part of a Broader Tax? 305 (C) Is the Tax an Income Tax? 306 (D) Taxes in Lieu of an Income Tax 311 (E) Who Can Claim the Foreign Tax Credit? 313 (F) When Can the Foreign Tax Credit Be Claimed? 315 (G) What Is the Amount of the Creditable Foreign Income Tax? 316

§ 9.04 Computing the Direct Credit 321 § 9.05 Computing the Indirect Credit 321

(A) Overview 321 (B) Ownership Requirements 323 (C) Amount of Tax Deemed Paid 324

§ 9.06 Limitations on the Foreign Tax Credit 326

(A) Overview 326 (B) Separate “Baskets” 331

(1) Passive Income Basket 335 (2) Look-Through Rules 337 (3) General Basket 339

§ 9.07 The TCJA and the Foreign Tax Credit 346

(A) The GILTI Basket 346 (B) The Foreign Branch Basket 351 (C) Section 956 352 (D) Distributions of PTI 353 (E) Special Shareholder Issues 354

§ 9.08 Tax Redeterminations 354 § 9.09 Effect of Treaties on the Foreign Tax Credit 356

Chapter 10 Intercompany Pricing 357

§ 10.01 Overview 357 § 10.02 The Arm’s Length Standard 362

(A) The Groundwork of I.R.C. § 482 362 (B) OECD Standards 364 (C) I.R.C. § 482 Control 366 (D) OECD Transfer Pricing Guidelines and BEPS 368

§ 10.03 Arm’s Length Principle 368 § 10.04 Transfer Pricing Methodologies 370

(A) Transaction-Based Methodologies 372

(1) Comparable Uncontrolled Price Method 372 (2) Comparable Uncontrolled Transaction Method 373 (3) Resale Price Method 374 (4) Cost Plus Method 376

(B) Profit-Based Methodologies 378

(1) Profit Split Methods 378

(C) Best Method Rule 380 (D) Arm’s Length Range 380 (E) Comparability Analysis 381 (F) Controlled Services Transactions 382

(1) Services Cost Method 383 (2) Shared Services Arrangements 384 (3) Additional Transfer Pricing Methods for Controlled Services Transactions 385

(G) Customs Considerations 386

§ 10.05 Special Problems with Intangibles 386

(A) The Commensurate with Income Standard 386 (B) Cost Sharing Agreements 388 (C) Buy-in Payments 390 (D) Temporary I.R.C. § 482 Regulations 392 (E) TCJA Changes 393 (F) OECD Intangibles Guidelines 394

§ 10.06 Documentation Requirements and Penalties 395

(A) Contemporaneous Documentation Requirements 395 (B) Country by Country Reporting 397

§ 10.07 Advance Pricing Agreements 400 § 10.08 Resolving Transfer Pricing Disputes 402

(A) Correlative Adjustments 402 (B) I.R.C. § 482 and U.S. Treaties 404 (C) The Mutual Agreement Procedure 406

Chapter 11 Foreign Currency 409

§ 11.01 Overview 409 § 11.02 Functional Currency 413 § 11.03 Foreign Currency Transactions 417

(A) Acquisition and Disposition of Foreign Currency 418 (B) Lending and Borrowing Foreign Currency 420 (C) Acquisition and Disposition of Assets Denominated in Foreign Currency 423 (D) Accounts Receivable and Payable 424 (E) Forward, Futures and Option Contracts 425 (F) Hedging 426

§ 11.04 Foreign Currency Translation 432

(A) Foreign Branches 432

(1) 2016 Final Regulations 435 (2) The Final and Temporary 2016 Regulations 443 (3) 1991 Proposed Regulations 445

(B) Foreign Corporations 446

§ 11.05 Treatment of Individuals 451

Chapter 12 International Tax-Free Transactions 453

§ 12.01 Overview 453 § 12.02 Outbound Transactions 458

(A) General Rule 458 (B) The Active Trade or Business Exception 461 (C) Branch Loss Recapture Rule 461 (D) Intangible Assets 464 (E) The Stock or Securities Exception —Foreign Corporation 470 (F) The Stock or Securities Exception —U.S. Corporation 472 (G) Inversion—U.S. Corporation 475 (H) Interplay of I.R.C. §§ 367(a) and 7874 483 (I) Outbound Spin-Offs 484 (J) Outbound Liquidations 485 (K) Transfers to Estates, Trusts and Partnerships 486

§ 12.03 Non-Outbound Transactions 487 § 12.04 Carryover of Tax Attributes 495

Chapter 13 Tax Arbitrage and Government Responses 497

§ 13.01 Introduction 497 § 13.02 The Check-the-Box Regulations 501 § 13.03 Arbitrage and Its Progeny 504

(A) Who Is the Taxpayer 504 (B) Entities 507

(1) Check-the-Box Elections 507 (2) Dual Resident Corporations 513 (3) Tax-Exempt Entities 519

(1) Timing Differences 529 (2) Permanent Differences 530

§ 13.04 Economic Substance and Other Doctrines 533 § 13.05 Tax Governance and Transparency 541

(A) Reportable Transactions and Listed Transactions 541 (B) Uncertain Tax Positions (UTP) 545 (C) Transfer Pricing Documentation 546 (D) Financial Accounting Standards 547

Chapter 14 International Boycott and Foreign Bribery Provisions 549

§ 14.01 Overview of International Boycott Provisions 549 § 14.02 Boycott Participation 551 § 14.03 Examples of Penalized Conduct 553

(A) Discriminatory Refusals to Do Business 553 (B) Discriminatory Hiring Practices 555 (C) Discriminatory Shipping and Insurance Arrangements 555

§ 14.04 Tax Effect of Boycott Participation 556 § 14.05 Foreign Bribery Provisions 560

Index 563

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