International Taxation Discussion Paper
1.A U.S. domestic corporation is considering structuring its foreign operations (outbound) as either a branch or a separate foreign corporate subsidiary.
a) What are three tax advantages of operating in the foreign jurisdiction through a separately incorporated foreign subsidiary?
b) What are three tax advantages of operating in the foreign jurisdiction through an unincorporated branch located in the foreign jurisdiction?
c) What three general business factors should be considered when choosing between the branch and subsidiary forms of doing business in the foreign jurisdiction?
2. USAco, a domestic corporation, received the following items a) through c) during 2020.
For each item, indicate 1) whether it is USSI or FSI, 2) the reason for the sourcing determination AND 3) the relevant IRC section or Treasury regulation that supports the determination:
a) $250,000 received from its wholly owned CFC with a functional currency other than the USD, all income from which has been reported in prior years as subpart F income;
b) $900,000 gain ($2,000,000 sales price less $1,100,000 adjusted basis on an original cost of $1,400,000 in 2013) on the sale of a warehouse located in New York to an unrelated French citizen and resident of Paris, France; and
d) $10,000 gain on the disposition of goodwill, which was generated in India.
3.Regarding the following forms, 1) indicate the reporting purpose of the form, i.e. used to report _______and 2) list the potential penalties that may be incurred as a result of failure to file/timely submit the form:
a) Form 926
b) Form 1120-F
c) Form 5471
d) Form 5472
e) Form 8858
f) Form 8938
g) FinCEN Form 114
4. ForCo, a German corporation, conducts operations in the United States through a branch. The branch employs a number of people and maintains an office in New York City and a warehouse in New Jersey. During the current year, the U.S. branch’s financial statements report the following items of income and related expenses:
|Interest income on CD deposits with U.S. banks
|Dividends from U.S. corporations
|Income from sales of merchandise
|Rental income on excess warehouse space
The $3,000,000 of sales revenue represents inventory purchased from an unrelated third party made up of $2,500,000 from sales to U.S. customers and $500,000 of sales to customers in Canada (title passage occurred in Canada) through the U.S. office, and that the warehouse ships
Assume that the U.S. branch has no liabilities, and that effectively connected taxable income and effectively connected E&P are the same. The branch had U.S. net ECI equity of $5,000,000 at the beginning of the year and U.S. net ECI equity of $5,500,000 at the end of the year. Further assume that FDAP type income is not of a type that it would automatically be included in ECI.
a. Assuming that no tax treaty applies, determine the total amount of U.S. tax that ForCo will pay as a result of the operations of its U.S. branch. Show all work. (HINT: Remember the various types of income tax that may result from these activities. Note that sections I, II and III of Form 1120-F may be helpful.)
b. Briefly discuss how the existing tax treaty between the United States and Germany might impact your answer in (a).
c. Briefly discuss how your answers to a. and b. might change if the U.S. operations were conducted through a subsidiary as opposed to a branch.
d. Briefly discuss SALT issues associated with FORco’s U.S. operations.
5. Name and briefly explain three separate mechanisms that the U.S. uses to prevent the double taxation of the income of a U.S. person doing business outside of the United States.
6. Briefly discuss the concept of “nexus” and how it affects 1) U.S. income tax liabilities and 2) state income tax liabilities.
7. Assume you are on the staff of a U.S. Senator. The Senator is interested in reforming the U.S. tax system and has asked you for your opinion of the current system for taxing the foreign operations of U.S. companies, as well as potential alternative systems for taxing such income. The Senator is particularly interested in the relative effects of these different systems on U.S. tax revenues and the competitiveness of U.S. companies in foreign markets. Prepare a short memorandum (1/2 to 1 page in length) to brief the Senator on your opinion and recommendations.