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U.S. Tax Aspects of Doing Business Abroad gives you practical information you need to understand the intricate federal income tax laws for foreign business and investment.
Easy to read and organized for quick reference, this guide clarifies applicable tax laws, alerts you to problem areas, and provides tax planning suggestions.
The new sixth edition has been updated to include coverage of the American Jobs Creation Act of 2004 (AJCA). The AJCA makes some important changes, especially for manufacturers and those with foreign income, including:
This edition is divided into five parts:
Introduction
Purpose and Scope of the Study
U.S. and non-U.S. persons intending to expand on business and investment ventures abroad will find the foreign setting very different from that in the United States. The foreign landscape differs considerably in tax, economic, political, legal, and cultural conditions. Moreover, the U.S. tax laws applicable to income earned within or without the United States have peculiarities of their own. The purpose of this publication is to provide an introduction and practical guide to the intricacies of the federal income tax laws that apply to U.S. persons investing or doing business outside the United States and to non-U.S. persons investing or doing business within the United States. This study seeks to explain these applicable tax laws, identify complexities and ambiguities, and provide tax planning suggestions and caveats. The scope of the analysis is limited primarily to the federal income tax laws applicable to the taxation of foreign income earned directly and indirectly by U.S. persons (here defined as U.S. corporations, U.S. citizens, U.S. trusts and estates, and resident aliens). This publication also reviews the U.S. tax laws applicable to the taxation of nonresident individuals and foreign corporations.
U.S. Tax Aspects of Doing Business Abroad The wide scope of this publication does not permit in-depth analyses of the areas mentioned above. Rather, the presentation is intended to provide readers with a general working knowledge of the areas so that they can identify important variables, analyze a problem or situation in its proper perspective, and be able to focus and continue research on points not discussed here.
The study is divided into five parts. The first part (chapters 1 through 4) contains an overview of the U.S. taxation of international operations. Readers unfamiliar with this subject should read these chapters to gain a better understanding of the technical matters in this area and to put the laws in a proper perspective. Chapter 1 highlights the general policy considerations that influence the formation of host country tax laws, discusses controversies created between governments when they tax income outside their own countries, and treats those necessary jurisdictional links used by the United States to tax foreign income associated with U.S. persons, as well as income arising from sources within the United States associated with foreign persons.
Chapter 2 discusses the importance of a careful selection of a taxable or flow-through entity through which to channel foreign-source income, including the timing of income or loss recognition for U.S. tax purposes, as well as the amount to be recognized. In chapter 2, the selection of tax entities available for operating abroad is identified, and the entities are classified according to their tax-saving or tax-deferral potential.
Transacting business in the United States can be quite different from transacting business abroad. Nontax factors such as market, political, and legal structures; the skills and availability of labor forces; and the necessary infrastructure can vary considerably from country to country. Nontax factors germane to the international environment must be given proper attention in the total decision-making process. In chapter 3, several points regarding the international environment are discussed, salient differences between countries are pointed out, and factors to consider when choosing a country or countries in which to base operations are suggested.
Different tax systems in the countries that are major trading partners with the United States are compared in chapter 4. Similarities and differences between foreign tax systems and the U.S. system are examined. Relevant tax statistics of those countries that are members of the Organization for Economic Cooperation and Development (OECD) are shown. In chapter 4, various tax issues in doing business abroad are examined, such as tax accounting issues, dividend repatriations, tax rates, tax incentives, and taxation of noncitizens. The final section of chapter 4 contains an overview of the value-added tax.
The second part of this book (chapters 5–7) covers source rules for income and deductions, income tax treaties, and the foreign tax credit. Readers should be cognizant of the pervasive effect of these provisions on special entities such as controlled foreign corporations (CFCs) or on U.S. persons working abroad, as well as their effect on the minimization or deferral of U.S. income taxes.
The geographical source of income and deductions can affect the amount a U.S. taxpayer must recognize, as well as the rates of taxation, the timing for recognition, and the amount of the foreign tax credit. The source of income and deductions also can have a significant impact on the U.S. tax liability of foreign persons with U.S. business operations or
U.S. investments. Criteria for determining the source of income and deductions vary, depending on the types of income and deductions involved. Chapter 5 provides an analysis of the source rules. The international tax scene is multidimensional, encompassing the unilateral tax laws of the United States and other countries and possibly bilateral tax treaties between the United States and another country that modify various laws. The United States has entered into approximately sixty income and estate tax treaties, as well as nontax treaties, such as friendship and commerce, that contain provisions with tax implications. Chapter 6 provides an analysis of provisions contained in most U.S. tax treaties and their effect on (1) the foreign tax liabilities of U.S. taxpayers having economic contacts in the other “contracting” country and (2) the
U.S. tax liabilities of foreign persons with economic contacts in the United States. The foreign tax credit is the principal vehicle in U.S. tax law that ensures that income from foreign sources will not be subject to full multiple taxation by two or more countries. Considered in chapter 7 are such issues as whether to take foreign income taxes as a credit or a deduction, what kinds of taxes qualify for the credit, who can take the credit, how to calculate the credit, when credits can be taken, and limitations to the amount of the credit.
The third part of the study (chapters 8–14) focuses on taxable entities unique to the international scene and provides an analysis of tax rules pertaining to these entities, along with suggestions for tax planning. The taxable entities discussed in these chapters are the controlled foreign corporation (CFC) (chapter 8), extraterritorial income exclusion (ETI) U.S. Tax Aspects of Doing Business Abroad regime, the foreign sales corporation (FSC) and domestic international sales corporation (DISC) (chapter 12), the foreign personal holding company (FPHC) (chapter 9), the passive foreign investment company (PFIC) (chapter 10), and possessions corporations (chapter 14). Congress made significant changes to these topics in the American Jobs Creation Act of 2004, which generally go into effect beginning in 2005. In particular, Congress repealed the FPHC regime and phased-out the ETI/FSC regimes in favor of a deduction related to gross income from domestic production activities (new section 199). These chapters contain discussions on qualification requirements, how income is taxed, and other advantages or disadvantages of treatment under these provisions. Because the measurement of earnings and profits of these various entities is extremely important for a determination of ultimate tax liability to U.S. persons owning stock in these entities, this topic is examined in chapter 11. In addition, provisions relating to bribe and boycott activities are discussed in chapter 13.
The fourth part of the study (chapters 15 through 18) deals with additional laws and complexities arising in the international tax area. These chapters can be read selectively as they apply to a particular situation. Chapter 15 covers the special rules applicable to formation, liquidation, and reorganizations involving foreign corporations. These rules are somewhat different from those governing these transactions involving solely domestic corporations. The treatment presumes that the reader has knowledge of the laws pertaining to these transactions as they relate to domestic corporations and their U.S. shareholders.
Foreign operations need capable and experienced personnel (especially for strategic positions). Opportunities frequently arise for U.S. citizens or residents to be sent by their employers to work abroad. In addition, there are considerable numbers of expatriate Americans who choose to live and work outside the United States, either in their own business or for a foreign entity. Such citizens and residents are subject to U.S. income tax laws on their worldwide income, but special exclusions and rules exist that affect their U.S. tax liabilities. Chapter 16 considers those special tax provisions applicable to U.S. citizens or residents working abroad.
One area that continues to receive considerable attention in recent years is intercompany transfer pricing. The Internal Revenue Service (IRS) frequently investigates, and makes recommendations for, adjustments of the prices charged in intercompany transactions involving commonly controlled companies, particularly cross-border transactions. The law related to section 482 of the Internal Revenue Code is analyzed in chapter 17. Section 482 allows the IRS to reallocate income, deductions, and credits among related taxpayers when such allocation is necessary to clearly reflect the income of each taxpayer.
Floating currencies carry both economic and tax consequences to taxpayers who are exposed to these risks. Chapter 18 discusses the tax aspects of currency fluctuations as they affect transactions in foreign currency, borrowing or lending in foreign currency, hedging exposure to currency fluctuations, maintenance of branch records, translation of dividends from foreign corporations, and related foreign tax issues.
Investments in the United States by nonresident aliens and foreign entities provide an additional dimension to international taxation. In the fifth and last part (chapters 19–21), the tax aspects of both passive investments and operations of active U.S. trades or businesses by foreign interests are discussed. The final chapter (chapter 22), which deals with filing and record keeping requirements, relates to most of the previous chapters in the book.
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