Chapter 13

Question 1

Who are taxed on their worldwide income by the US? What kind of jurisdiction is this?

Answer 1

US citizens, residents, and certain US corporations

residence-based jurisdiction

Question 2

Who are only taxed on their US source income by the US? What kind of jurisdiction is this?

Answer 2

non US residents

source-based jurisdiction

Question 3

What is a resident for US tax purposes?

Answer 3

Country of incorporation for corporations.
Permanent resident (green card test)
Individual meets physical presence test (substantial presence test)

Question 4

What is the substantial presence test?

Answer 4

Individual is physically present in the US for at least 31 days during the current year and the days present in the current year + number of days present during the first preceding year/3 + number of days present during the second preceding year/6 >= 183

Question 5

What are the two categories of US source income earned by nonresidents?

Answer 5

Effectively connected income (ECI)
and
Fixed, determinable, annual, or periodic gains, profits, and income (FDAP)

Question 6

What is the ECI tax on and at what rate?

Answer 6

net income (gross income-deductions)
corporate tax rate or individual rates

Question 7

What form is used for ECI?

Answer 7

Corporations use 1120F and individuals use 1040NR

Question 8

What is taxed in FDAP and at what rate?

Answer 8

Gross income-deductions at 30% unless reduced by treaty

Question 9

Who pays the FDAP tax and what form is used?

Answer 9

The payer collects the tax (withholding tax) and remits/reports to the government on Form 1042

Question 10

Foreign Tax Credit (FTC) limitation formula

Answer 10

foreign source taxable income/total taxable income * precredit US tax on total taxable income

Question 11

What are the primary categories (baskets) of foreign source income?

Answer 11

Foreign branch income
Global intangible low-taxed income (GILTI)
Passive income
General income

Question 12

How can unused FTC be carried forward or back?

Answer 12

back one year
forward 10 years

Question 13

What kind of taxes can and cannot be claimed with the FTC?

Answer 13

foreign income taxes
withholding taxes
Not:
sales tax
property tax
etc.

Question 14

Why might one deduct foreign taxes instead of taking the FTC?

Answer 14

You may be able to deduct non-creditable foreign taxes

Question 15

What is important about the GILTI tax bucket?

Answer 15

Includes income that exceeds a “normal rate of return” (10%)
There is an 80% limitation on the credibility of foreign tax associated with GILTI

Question 16

What is foreign branch company income?

Answer 16

Income earned through unincorporated “business enterprises” outside the US
Actual branch or disregarded entity
Does not include passive income

Question 17

What is the source of interest income and what is the exception?

Answer 17

determined by residence of borrower
US banks distributing interest to nonresident is not taxed

Question 18

What is the source of dividend income?

Answer 18

determined by residence of corporation paying dividends

Question 19

What is the source of compensation for services?

Answer 19

determined by where the service is performed
includes compensation for labor and personal services including:
activities of employees, independent contractors, artists, entertainers, and athletes
Corporations offering personal services

Question 20

What is the Commercial Traveler Exception?

Answer 20

Personal service compensation earned by nonresidents with the US is not treated as US source if the individual meets certain criteria

Question 21

What is the source of rent income?

Answer 21

Sourced where the property generating the rent is located

Question 22

What is the source of royalty income?

Answer 22

Where the intangible property or rights generating the royalty is used (the country that protects the owner against unauthorized use)

Question 23

Source of gain or loss on sale of real property

Answer 23

in general, source based on where the property sold is located

Question 24

Source of gain or loss on sale of purchased personal property

Answer 24

source based on the seller’s residence
exceptions such as gross income from the sale of purchased inventory is sourced where title passes

Question 25

What is included in purchased personal property in determining source for gain or loss other than the obvious

Answer 25

intangible assets stock

Question 26

Source of gain or loss from sale of manufactured inventory

Answer 26

based on where the assets to manufacture the inventory are located

Question 27

General principle for allocation and apportionment of deductions for international

Answer 27

Definitely related deductions- allocated to specific income Not definitely related deductions- allocated to all income

Question 28

After allocated deductions to classes of income that such deductions were incurred to produce, how are the remaining deductions apportioned?

Answer 28

using a factor ratio such as sales or units

Question 29

In general, would US taxpayers seek to minimize or maximize deductions on foreign sourced income and why?

Answer 29

Minimize so as to maximize the foreign tax credit

Question 30

In general, when would non-US taxpayers seek to maximize deductions against US source income

Answer 30

When US tax rates are higher than taxes in the other country

Question 31

Which is always taxed in the US. foreign branch income or foreign subsidiary income?

Answer 31

foreign branch income but can be off-set by FTC

Question 32

What type of income from a foreign subsidiary is taxed in the US?

Answer 32

Subpart F income and GILTI earned by 10%-or-more US corporate shareholders of a "controlled foreign corporation" is taxable currently

Question 33

What is the percent for the dividends received deduction for dividends received from a foreign corporation for a US corporation that owes 10%-or-more of the foreign corporation?

Answer 33

100%

Question 34

What makes a corporation a controlled foreign corporation (CFC)?

Answer 34

US shareholders collectively own more than 50% of the voting power or value of the corporation's stock on any one day of the corporation's tax year. A US shareholder is a US person who owns or is deemed to own 10% of more of voting power or value of all classes of stock of such foreign corporation.

Question 35

What are US anti-deferral rules for foreign subsidiaries?

Answer 35

Subpart F US shareholders in a CFC include their pro rata share of the CFC's Subpart F income in gross income Includes foreign personal holding company income, foreign base company sales income and foreign base services income GILTI income in excess of a "normal rate of return" which is 10%