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This course highlights initiation of inbound U.S. operations by foreign businesses and outbound foreign operations by U.S. businesses through a representative office, manufacturing branch, incorporation of a subsidiary or use of a joint venture, partnership or limited liability company. Become adept at completing U.S. tax reporting for outbound transactions and operations. Comply with U.S. Customs reporting and withholding tax reporting for inbound transactions and operations. Carefully examine U.S. international taxation rules, the latest planning techniques and legislative changes.
Objectives:731895
Chapter 1 - Export Income
Learning Objectives
• Describe how U.S. citizens are taxed on income earned abroad.
• Describe when income is recognized and how income is "sourced" for tax purposes.
Taxation of Export Income
U.S. corporations, as well as citizens and permanent residents, are generally taxed on their export income in the same manner as on their income from the United States. This chapter focuses on the tax position of businesses that earn income outside the United States.
U.S. businesses report income and deductions from export activities on the same tax returns used to report income from domestic sales. However, there are two significant differences:
1. Income may be considered earned by a U.S. business for purposes of U.S. taxation even though exchange or capital controls imposed by foreign governments restrict the ability of the business to use the proceeds of the export sale, and
2. There are special forms and schedules to be completed that reflect specific issues that arise only in international transactions.
Recognition and Source of Income
Recognition of Income
In general, businesses are considered to recognize income and are required to report the income for tax purposes when the business receives the income, accrues the income under generally accepted accounting principles, or has the right to obtain the income.
Time of Payment
Generally, income is recognized when received or accrued. Recognition of income may take place earlier than actual receipt, however, when funds are deposited in a bank account in the name of the business or otherwise made freely available to the business. Similarly, recognition of income may take place later than actual receipt if the funds are subject to future contingencies.
A business may recognize income even though payment is made to another company. The determination of whether the recipient is acting solely for the business depends on whether the recipient is a real entity engaged in a real transaction.
U.S. businesses are on the cash method of accounting with respect to amounts owed to a related foreign person except where the related foreign person is a controlled foreign corporation, a passive foreign investment company or a foreign personal holding company, in which case the U.S. business can deduct accrued amounts as of the day on which a corresponding amount of income is recognized by the controlled foreign corporation, the passive foreign investment company or the foreign personal holding company.
Effective October 22, 2004, accrued but unpaid amounts due from a U.S. business to a related controlled foreign corporation or passive foreign investment company cannot be deducted by the U.S. business until a corresponding amount in included in the gross income of a U.S. person(s) who owns stock, directly or through a foreign entity, in the controlled foreign corporation or the passive foreign investment company.
Delivery of Goods
In some situations, a U.S. business will recognize income when goods are delivered to a foreign person. If the purchaser makes advance deposits with the seller or the purchaser pays with an irrevocable letter of credit, delivery of the goods may trigger recognition of income to the U.S. business. However if the U.S. business ships goods on consignment to a foreign dealer, the U.S. business will recognize income after the goods are sold by the dealer.
731895
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