Cover

Title Page

Copyright Page

Preface

About the Authors

Acknowledgments

Table of Contents

PART I: BASIC PRINCIPLES

Chapter 1 Overview of U.S. Taxation of International Transactions

¶ 101 Basic Principles

.01 Tax Jurisdiction

.02 Source of Income Rules

¶ 102 Taxation of U.S. Person’s Foreign Activities

.01 Foreign Tax Credit

.02 Deemed Paid Foreign Tax Credit

.03 Anti-Deferral Provisions

.04 Foreign Currency Translation and Transactions

¶ 103 Taxation of Foreign Person’s U.S. Activities

.01 Foreign Persons Investing in the United States

.02 Foreign Persons Doing Business in the United States

¶ 104 Issues Common to Outbound and Inbound Activities

.01 Transfer Pricing

.02 Income Tax Treaties

Chapter 2: Tax Jurisdiction

¶ 201 Jurisdictional Issues

.01 Bases for Asserting Jurisdiction

.02 Territorial versus Credit Systems

.03 Tax Treaties

¶ 202 Overview of U.S. Jurisdictional System

.01 Foreign Activities of U.S. Persons

.02 U.S. Activities of Foreign Persons

¶ 203 Definition of Resident Alien

.01 Green Card Test

.02 Substantial Presence Test

.03 First Year of Residency

.04 Last Year of Residency

.05 Filing a Joint Return

¶ 204 Exclusion for Foreign Earned Income

.01 Exclusion versus Credit

.02 Qualified Individuals

.03 Computing the Exclusion

.04 Housing Cost Amount

.05 Electing the Exclusion

¶ 205 Mark-to-Market for Expatriates

¶ 206 Reporting of Foreign Financial Assets

¶ 207 A Policy Note Regarding the Current U.S. System

¶ 208 Appendix

Chapter 3: Source-of-Income Rules

¶ 301 Importance of Source Rules

.01 U.S. Persons

.02 Foreign Persons

¶ 302 Source Rules for Gross Income

.01 Introduction

.02 Interest Income

.03 Dividend Income

.04 Personal Services Income

.05 Rental and Royalty Income

.06 Income from the Disposition of Property

.07 Other Types of Income

.08 Distributive Share of Income from a Pass-Through Entity

¶ 303 Source Rules for Deductions

.01 Introduction

.02 Allocation

.03 Apportionment

.04 Specialized Apportionment Rules

PART II: TAXATION OF FOREIGN ACTIVITIES OF U.S. PERSONS

Chapter 4: Foreign Tax Credit

¶ 401 Introduction

.01 Computing the Foreign Tax Credit

.02 Credit versus Deduction

.03 Who Can Claim a Credit

¶ 402 Creditable Foreign Income Taxes

.01 Qualifying Foreign Levies

.02 Accounting Method

.03 Currency Translation

¶ 403 Excess Credit Versus Excess Limitation Positions

.01 Purpose of Limitation

.02 Exemption for Individuals with De Minimis Foreign Tax

.03 Importance of Relative Tax Rates

.04 Planning Implications

¶ 404 Strategies for Eliminating Excess Credits

.01 Foreign Tax Reduction Planning

.02 Increasing the Limitation

.03 Cross-Crediting

¶ 405 Separate Category of Income Limitations

.01 History

.02 Separate Category of Income Limitations

.03 Look-Through Rules

.04 Partnerships

.05 Allocating Foreign Income Taxes

¶ 406 Other Complexities of the Limitation

.01 Capital Gains and Losses

.02 Impact of Losses

.03 Oil and Gas Activities

.04 Special Source-of-Income Rules

¶ 407 Excess Credit Carryovers

¶ 408 Computing the Alternative Minimum Tax Foreign Tax Credit

¶ 409 Deemed Paid Foreign Tax Credit—Overview

.01 Gross Income

.02 Direct Foreign Tax Credit

.03 Deemed Paid Foreign Tax Credit

.04 Gross-Up for Deemed Paid Foreign Taxes

¶ 410 Who Can Claim a Deemed Paid Credit

¶ 411 Computing the Deemed Paid Credit

.01 Tracing Foreign Taxes to Dividend Distributions

.02 Credit Derived from Lower-Tier Foreign Corporations

.03 CFC and 10/50 Company Look-through Rules

.04 Deemed Paid Credits for Subpart F and QEF Inclusions

¶ 412 Compliance Requirements

¶ 413 Planning for Dividend Repatriations

.01 Cross-Crediting

.02 Minimizing Foreign Withholding Taxes

.03 Alternatives to Dividend Repatriations

¶ 414 Appendix

Chapter 5: Anti-Deferral Provisions

¶ 501 Subpart F

.01 Background

.02 Subpart F Overview

.03 Definition of a Controlled Foreign Corporation

.04 Subpart F Income—Overview

.05 Insurance Income

.06 Foreign Base Company Income

.07 Special Exclusions and Inclusions

.08 Investment of Earnings in U.S. Property

.09 Deemed Paid Foreign Tax Credit

.10 Mechanisms to Prevent Double Taxation

.11 Currency Translation

.12 Earnings and Profits

.13 Information Reporting for CFCs

¶ 502 Passive Foreign Investment Companies

.01 Background

.02 Definition of a PFIC

.03 Taxation of a PFIC

.04 Information reporting for PFICs

¶ 503 Gain from the Sale or Exchange of a CFC’s Stock

¶ 504 Appendix

Chapter 6: Foreign Currency Translation and Transactions

¶ 601 Introduction

¶ 602 Foreign Currency Translation

.01 Qualified Business Unit

.02 Functional Currency

.03 Foreign Branches

.04 Foreign Corporations

.05 Foreign Income Taxes

.06 Hyperinflationary Currencies

¶ 603 Foreign Currency Transactions

.01 Applicable Transactions

.02 Tax Consequences

.03 Hedging Transactions

.04 Foreign Currency Transactions for Personal Use

Chapter 7: Export Benefits

¶ 701 The Export Benefits Saga

¶ 702 Introduction to the IC-DISC

.01 Taxation of an IC-DISC and Its Shareholders

.02 Tests to Qualify as an IC-DISC

¶ 703 Sales of Export Property

.01 The Manufacturing Requirement

.02 The Destination Test

.03 The Maximum of 50 Percent Foreign Content Requirement

¶ 704 Determining the IC-DISC Benefit

¶ 705 Maximizing the IC-DISC Income

.01 Grouping

.02 Marginal Costing

.03 Expense Allocations

.04 Loss Sales

¶ 706 IC-DISC Comprehensive Example

¶ 707 Domestic Production Deduction

.01 Determining Domestic Production Gross Receipts

.02 Allocable Costs and Qualified Production Gross Income

.03 Deduction Limited to 50 Percent of W-2 Wages

¶ 708 Appendix

Chapter 8: Planning for Foreign Operations

¶ 801 Introduction

¶ 802 Evolution of a U.S. Exporter

.01 Entering a Foreign Market

.02 Basic Tax Issues

¶ 803 Determinants of Host Country Taxation

¶ 804 Structuring the Foreign Operation

.01 Branches

.02 Subsidiaries

.03 Branch versus Subsidiary

.04 Hybrid Entities

.05 Reverse Hybrid Entities

.06 Dual Consolidated Loss Rules

.07 Information Reporting for Foreign Partnerships

¶ 805 Basics of Outbound Tax Planning

.01 Export Tax Benefits

.02 Operating in Low-Tax Foreign Jurisdictions

.03 Operating in High-Tax Foreign Jurisdictions

.04 Foreign Tax Reduction Planning

.05 Tax-Efficient Supply Chain Management53

.06 Foreign Holding Companies

.07 Check-the-Box Elections and Qualified Dividend Income Derived by U.S. Citizens and Resident Aliens

.08 Operating in Tax Havens

¶ 806 Financial Reporting Implications of International Tax Planning

.01 Operations in High-Tax Foreign Jurisdictions

.02 Operations in Low-Tax Foreign Jurisdictions

¶ 807 Comprehensive Example

¶ 808 Survey of Foreign Entity Classification

¶ 809 Appendix

PART III: TAXATION OF U.S. ACTIVITIES OF FOREIGN PERSONS

Chapter 9: Foreign Persons Investing in the United States

¶ 901 U.S. System for Taxing Foreign Persons

.01 Overview

.02 Impact of U.S. Taxes on Total Tax Costs

¶ 902 Withholding on U.S.-Source Investment-Type Income Under the FATCA Regime

¶ 903 Withholding on U.S.-Source Investment-Type Income Under the FDAP Regime

.01 Introduction

.02 General Rules

.03 Exemptions and Special Rules

.04 Coordination of Withholding Between the FATCA and FDAP Regimes

¶ 904 Withholding Procedures Under the FDAP Regime

.01 Introduction

.02 Determining the Beneficial Ownership

.03 Presumptions in the Absence of Documentation

.04 Foreign Intermediaries

¶ 905 Taxation of U.S. Real Property Interests

.01 Introduction

.02 U.S. Real Property Interests

.03 Special Rules for Certain Dispositions to Prevent Tax Avoidance

.04 Withholding Requirements

¶ 906 Appendix

Chapter 10: Foreign Persons Doing Business in the United States

¶ 1001 Taxation of a U.S. Trade or Business

.01 Determinants of U.S. Taxation U.S. trade or business.

.02 Effectively Connected Income Overview.

.03 Applicable Tax Rates

.04 Foreign Tax Credit

.05 Alternative Minimum Tax

¶ 1002 The Branch Taxes

.01 The Branch Profits Tax

.02 Dividend Equivalent Amount

.03 Treaty Reductions and Exemptions

.04 Taxes on Branch Interest

¶ 1003 Anti-Earnings Stripping Provisions

.01 What Is Earnings Stripping?

.02 Calculating the Non-Deductible Interest

.03 Timing Restriction on Deductions of U.S. Subsidiaries

¶ 1004 Returns and Payment of Tax

¶ 1005 Appendix

Chapter 11: Planning for Foreign-Owned United States Operations

¶ 1101 Introduction

¶ 1102 Evolution of a Foreign-Owned U.S. Business

.01 Entering the United States

.02 Determinants of U.S. Taxation

¶ 1103 Choice of Entity for U.S. Operations

.01 Branches

.02 Subsidiaries

.03 Branch versus Subsidiary

.04 Domestic Hybrid Entities

.05 Domestic Reverse Hybrid Entities

¶ 1104 Basics of Inbound Tax Planning

.01 Dividends

.02 Debt Financing

.03 Royalties

.04 Service Fees

.05 Transfer Pricing

¶ 1105 Comprehensive Example

¶ 1106 Survey of U.S. Entity Classification

PART IV: ISSUES COMMON TO OUTBOUND AND INBOUND ACTIVITIES

Chapter 12: Transfer Pricing

¶ 1201 What Is Transfer Pricing?

¶ 1202 Transfer Pricing Methods

.01 Basic Principles

.02 Transfers of Tangible Property

.03 Transfers of Intangible Property

.04 Loans and Advances

.05 Performance of Services

.06 Use of Tangible Property

.07 Correlative Adjustments and Setoffs

¶ 1203 Information Reporting Requirements

¶ 1204 Transactional and Net Adjustment Penalties

.01 Preparing Transfer Pricing Documentation

.02 Information Gathering

.03 Identification of the Best Method

.04 Economic Analysis

¶ 1205 Developing a Transfer Pricing Strategy

¶ 1206 Appendix

Chapter 13: Tax Treaties

¶ 1301 Introduction

¶ 1302 Common Treaty Provisions

.01 Definition of Resident

.02 Business Profits and Permanent Establishments

.03 Personal Services Income

.04 Dividends, Interest, and Royalties

.05 Gains from the Disposition of Property

.06 Income from Real Property

.07 Associated Enterprises Provisions

.08 Anti-treaty Shopping Provisions (Limitation on Benefits)

.09 Non-Discrimination Provisions

.10 Mutual Agreement Procedure

.11 Exchanges of Information

¶ 1303 Disclosure of Treaty-Based Return Positions

.01 Specific Disclosure Requirements

.02 Waiver of Disclosure Requirements

¶ 1304 United States Model Income Tax Convention of November 15, 2006

¶ 1305 Appendix

Chapter 14 Section 367—Outbound, Inbound and Foreign-to-Foreign Transfers of Property

¶ 1401 Outbound Transfers of Property to a Foreign Corporation

.01 Outbound Toll Charge

.02 Active Foreign Business Use Exception

.03 Branch Loss Recapture Rule

.04 Deemed Royalty Regime for Intangible Property

.05 Liquidation of a Domestic Subsidiary into Its Foreign Parent

.06 Information Reporting for Outbound Transfers

.07 Transfers to Non-Corporate Foreign Entities

¶ 1402 Inbound Liquidation of a Foreign Subsidiary into Its Domestic Parent

¶ 1403 Acquisitive Reorganizations—Background

¶ 1404 Outbound Transfers in an Acquisitive Reorganization

.01 Outbound Type A Statutory Merger

.02 Outbound Type B Share-For-Share Acquisitions

.03 Outbound Type C Share-For-Asset Acquisitions

.04 Outbound Forward Triangular Mergers

.05 Outbound Reverse Triangular Mergers

¶ 1405 The Anti-Inversion Provisions of Code Sec. 7874

¶ 1406 Inbound Transfers in an Acquisitive Reorganization

.01 Inbound Type A Statutory Merger

.02 Inbound Type B Share-For-Share Acquisitions

.03 Inbound Type C Share-For-Asset Acquisitions

.04 Inbound Forward Triangular Mergers

.05 Inbound Reverse Triangular Mergers

¶ 1407 Foreign-To-Foreign Transfers in an Acquisitive Reorganization

.01 Foreign-To-Foreign Type A Statutory Merger

.02 Foreign-To-Foreign Type B Share-For-Share Acquisitions

.03 Foreign-To-Foreign Type C Shares-For-Asset Acquisitions

.04 Foreign-To-Foreign Forward Triangular Mergers

.05 Foreign-To-Foreign Reverse Triangular Mergers

¶ 1408 Appendix

Chapter 15: State Taxation of International Operations

¶ 1501 Overview of State Corporate Income Taxes

¶ 1502 Review of Federal Taxation of Income from Foreign Subsidiaries

¶ 1503 Worldwide Versus Water’s-Edge Combined Reporting

¶ 1504 Dividends from Foreign Subsidiaries

.01 Inclusion in Apportionable Income

.02 Dividends-Received Deductions

.03 Dividends-Received Deductions in a Water’s-Edge Combined Report

.04 Apportionment Factor Relief

.05 Subpart F Inclusions and Code Sec. 78 Gross-up Income

¶ 1505 Check-the-Box Foreign Branches

¶ 1506 Treatment of Foreign Income Tax Payments

¶ 1507 State Versus Federal Nexus Standards for Foreign Corporations

.01 Background Regarding State Nexus Standards

.02 Nexus Standards for Foreign Corporations

Chapter 16: International Tax Practice and Procedure

¶ 1601 Introduction

¶ 1602 Organization of the Internal Revenue Service International Offices

¶ 1603 International Examinations

.01 Coordinated Industry Case Examinations

.02 Other Examinations

.03 LB&I Pre-Filing Agreements

.04 Industry Issue Focus?

.05 Statute of Limitations

¶ 1604 IRS Procedural Tools

.01 Information Document Requests

.02 On Site Inspections

.03 The Summons Power

.04 Designated Summonses

.05 Formal Document Requests

.06 Code Secs. 6038A and 6038

.07 Exchanges of Information Under Tax Treaties

¶ 1605 Conclusion of an Examination

.01 Settling Issues

.02 Accelerated Issue Resolution

.03 Early Appeals Referral

¶ 1606 Appeals Division of the IRS

.01 Protest Requirements

.02 Procedure at the Appeals Division

.03 Appeals Process for a Coordinated Industry Case

.04 Settlement Agreements

¶ 1607 Competent Authority Procedure

.01 Mutual Agreement Procedure

.02 Simultaneous Appeals Procedure

.03 Accelerated Competent Authority Procedure

¶ 1608 Civil Actions by Taxpayers

¶ 1609 Uncertain Tax Positions and Form UTP

¶ 1610 Offshore Initiative

.01 Potential FBAR Filers

.02 Statement of Specified Foreign Financial Assets

.03 Penalties for Underpayment Attributable to Undisclosed Foreign Financial Assets

¶ 1611 Appendix

Index

A

B

C

D

E

F

G

H

I

J

K

L

M

N

O

P

Q

R

S

T

U

V

W

X

Y

List of Appendices

Form 870 Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment

Form 870-AD Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment

Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation

Form 1040NR U.S. Nonresident Alien Income Tax Return

Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

Form 1042-S Foreign Person’s U.S. Source Income Subject to Withholding

Form 1042-T Annual Summary and Transmittal of Forms 1042-S

Form 1116 Foreign Tax Credit

Form 1118 Foreign Tax Credit—Corporations

Schedule UTP (Form 1120) Uncertain Tax Position Statement

Form 1120-F U.S. Income Tax Return of a Foreign Corporation

Schedule H (Form 1120-F) Deductions Allocated To Effectively Connected Income Under Regulations Section 1.861-8

Schedule I (Form 1120-F) Interest Expense Allocation Under Regulations Section 1.882-5

Schedules M-1 and M-2 (Form 1120-F) Reconciliation of Income (Loss) and Analysis of Unappropriated Retained Earnings per Books

Form 1120-IC-DISC Interest Charge Domestic International Sales Corporation Return

Schedule K (Form 1120-IC-DISC) Shareholder’s Statement of IC-DISC Distributions—2012

Schedule P (Form 1120-IC-DISC) Intercompany Transfer Price or Commission

Form 1125-A Cost of Goods Sold

Form 1125-E Compensation of Officers

Form 2039 Summons

Form 2039 Service of Summons, Notice and Recordkeeper Certificates

Form 2555 Foreign Earned Income

Form 4564 Information Document Request

Form 4564 Formal Document Request

Form 4876-A Election To Be Treated as an Interest Charge DISC

Form 5471 Information Return of U.S. Persons With Respect To Certain Foreign Corporations

Schedule J (Form 5471) Accumulated Earnings and Profits (E&P) of Controlled Foreign Corporation

Schedule M (Form 5471) Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons

Schedule O (Form 5471) Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of its Stock

Form 5472 Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

Form 8233 Exemption From Withholding on Compensation forIndependent (and Certain Dependent) Personal Services of a Nonresident Alien Individual

Form 8288 U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests

Form 8288-A Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests

Form 8288-B Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests

Form 8621 Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

Form 8802 Application for United States Residency Certification

Form 8804 Annual Return for Partnership Withholding Tax (Section 1446)

Form 8805 Foreign Partner’s Information Statement of Section 1446 Withholding Tax

Form 8813 Partnership Withholding Tax Payment Voucher (Section 1446)

Form 8832 Entity Classification Election

Form 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)

Form 8858 Information Return of U.S. Persons With Respect To Foreign Disregarded Entities

Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships

Schedule O (Form 8865) Transfer of Property to a Foreign Partnership

Form 8938 Statement of Specified Foreign Financial Assets

Form TD F 90-22.1 Report of Foreign Bank And Financial Accounts

Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding

Form W-8ECI Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States

Table 1: Withholding Tax Rates on Income Other Than Personal Service Income Under Chapter 3, Internal Revenue Code, and Income Tax Treaties—For Withholding in 2013

Table 2: Compensation for Personal Services Performed in United States Exempt from U.S. Income Tax Under Income Tax Treaties

Table 3: List of Tax Treaties

United States Model Income Tax Convention of November 15, 2006

Rev. Proc. 2006-54 Outline

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