2. Accounting 4570/5570 n Chapter 16 - International Taxation Issues

3. Direct Taxes n 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

4. Direct Taxes n Corporate Income Tax –Worldwide Approach Double Taxation Tax credits Deferral of taxation of foreign source income Tax treaties

5. Direct Taxes n Determination of expenses –Timing an issue Capitalize Expense Treatment varies depending on country Differences in book and tax –Tax rates different throughout the world n Withholding tax

6. Indirect Taxes n 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 n Other taxes –Capital gains –Excise taxes –Estate and gift taxes –Employment taxes

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

8. Double Taxation Issues n 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 n Tax treaties - reduce or eliminate taxes (61 treaties )

9. U.S. Taxation of Foreign Source Income n Export income n Foreign branch income - 100% taxable n Deferral - dividends taxes only when received n Credit allowed for foreign tax paid n Tax Haven…A place where foreigners may receive income or own assets without paying high rates of tax.

10. Tax Havens n Controlled Foreign Corporation (CFC) –CFC = U.S. shareholders own > 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

11. Subpart F Income n 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

12. U.S. Taxation n Foreign currency translation –Gain/loss taxed at settlement date n Branch Earnings –QBU…qualified 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

13. Review of Taxable Income on Foreign Sources n 100% branch income/loss n Foreign dividends received (grossed up for deemed direct tax) n If no dividends received, and –Not a CFC Recognition deferred until dividend received –CFC Active or Passive? If passive, 100% taxed regardless of distribution

14. Tax Incentives n Two types –Incentives to encourage exporting –Investment by foreign investors

15. Int’l Tax…Tax Incentives n 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

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

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

18. Exercises n VAT situation (Exercises 1-4) n Exercise 5 n Exercise 6 n Multinational (Exercises 14-15)