R5-M5 Multi-Jurisdictional Tax Issues

Question 1

what is the purpose of transfer pricing?

Answer 1

want all the income reported at the lowest tax rate entity

Question 2

what is controlled taxpayer?

Answer 2

is any one of 2 or more taxpayers owned/controlled directly/indirectly by the same INTERESTS. This also includes a taxpayer that owns or controls the other taxpayers = SUB

Question 3

what is controlled transaction/transfer?

Answer 3

any transaction or transfer between 2 or more members of the same GROUP of controlled taxpayers. Parent <=> SUB or SUB <=> SUB

Question 4

what is uncontrolled transaction?

Answer 4

any transaction between 2 or more taxpayers that are NOT members of the same group of controlled taxpayers. Company <=> outside customer

Question 5

what is arm’s-length standard?

Answer 5

• applies to related party transactions
• related party transaction results = company/customer transaction results
• applies to controlled transactions and controlled transfers
• comparable uncontrolled price (CUP): only for tangible property (sales, purchases, leases)
• comparable uncontrolled transaction (CUT): only for intangible property (regarding royalty payments)

Question 6

when does transfer pricing issues exist?

Answer 6

• a US based taxpayers transfers, sells, purchases, leases tangible or intangible property to or from an affiliate (related party) that either:
  + not subject to the US income tax
  + does not file a consolidated income tax return with the US based taxpayer
• enters into loan agreements or service contracts with an affiliate (related party) that either same as above
• shares costs with an affiliated (related party) that either same as above

Question 7

what circumstances can the federal limit the state’s right to impose income tax?

Answer 7

• think of sales tax. 3 circumstances present:
• solicitation of orders for sales of tangible personal property
• the orders are sent outside the state for acceptance or rejection
• if the orders are accepted, they are filled by shipment or delivery from a point outside the state.
• This law does not apply to:
  + sales and use taxes
  + franchise taxes
  + gross receipts taxes

Question 8

what are the examples of activities that may trigger nexus in a state in which a company operates?

Answer 8

• owning or leasing tangible personal or real property
• sending employees into the state for training or work
• soliciting sales in a state
• providing installation, maintenance..to customers within a state (even though a third party)
• accepting or rejecting sales orders within the state, or accepting returns

Question 9

what are rules of state allocation and apportionment of federal tax?

Answer 9

• Nonbusiness income: ALLOCATE it to home state
• Business income: APPORTION business income among states. 3 factors: property (property & rent), payroll, and sales from sources within the states

Question 10

what are classifications of foreign entity?

Answer 10

• Foreign branch:
  + earnings from branch is taxed by the foreign host country and US.
  + a credit against taxes or option to deduct is allowed
• Foreign subsidiary:
  + a separate legal entity
  + profits are taxed by the host country
  + income earned by the foreign sub is not taxed until the earnings are brought back to the USA inform of a dividend
  + follow rules of transfer pricing or penalty

Question 11

what is advance pricing agreement program APA?

Answer 11

is a binding contract between the IRS and the taxpayer by which the IRS agrees not to seek a transfer pricing adjustment for a covered transaction if the taxpayer files its return for a covered year consistent with the agreed transfer pricing method