South-Western Federal Taxation, 2009 Edition s1

South-Western Federal Taxation, 2009 Edition

Comprehensive Volume

ISBN: 0324660529

Chapter 25

Taxation of International Transactions

Branch profits tax. A tax on the effectively connected earnings and profits of the U.S. branch of a foreign corporation. The tax is levied in addition to the usual § 11 tax, in an amount equal to 30 percent of the dividend equivalent amount. Treaties can override the tax or reduce the withholding percentage. Earnings reinvested in the U.S. operations of the entity are not subject to the tax until repatriation.

Controlled foreign corporation (CFC). A non-U.S. corporation in which more than 50 percent of the total combined voting power of all classes of stock entitled to vote or the total value of the stock of the corporation is owned by ‘‘U.S. shareholders’’ on any day during the taxable year of the foreign corporation. For purposes of this definition, a U.S. shareholder is any U.S. person who owns, or is considered to own, 10 percent or more of the total combined voting power of all classes of voting stock of the foreign corporation. Stock owned directly, indirectly, and constructively is used in this measure.

Dividend equivalent amount (DEA). The amount subject to the branch profits tax, it is equal to the effectively connected E & P of the U.S. branch of a foreign corporation, reduced/(increased) by an increase/(reduction) in U.S. net equity.

Effectively connected income. Income of a nonresident alien or foreign corporation that is attributable to the operation of a U.S. trade or business under either the asset-use or business-activities test.

FIRPTA. Under the Foreign Investment in Real Property Tax Act, gains or losses realized by nonresident aliens and non-U.S. corporations on the disposition of U.S. real estate create U.S.-source income and are subject to U.S. income tax.

Foreign tax credit. A U.S. citizen or resident who incurs or pays income taxes to a foreign country on income subject to U.S. tax may be able to claim some of these taxes as a credit against the U.S. income tax. §§ 27 and 901–905.

Functional currency. The currency of the economic environment in which the taxpayer carries on most of its activities, and in which the taxpayer transacts most of its business.

Inbound taxation. U.S. tax effects when a non-U.S. person begins an investment or business activity in the United States.

Nonresident alien. An individual who is neither a citizen nor a resident of the United States. Citizenship is determined under the immigration and naturalization laws of the United States. Residency is determined under § 7701(b) of the Internal Revenue Code.

Outbound taxation. U.S. tax effects when a U.S. person begins an investment or business activity outside the United States.

Qualified business unit (QBU). A subsidiary, branch, or other business entity that conducts business using a currency other than the U.S. dollar.

Subpart F. That subpart of the Code that identifies the current tax treatment of income earned by a controlled foreign corporation. Certain types of income are included in U.S. gross income by U.S. shareholders of such an entity as they are generated, not when they are repatriated.

Tax haven. A country in which either locally sourced income or residents of the country are subject to a low rate of taxation.

Tax treaty. An agreement between the U.S. Department of State and another country, designed to alleviate double taxation of income and asset transfers, and to share administrative information useful to tax agencies in both countries. The United States has income tax treaties with over 40 countries, and transfer tax treaties with about 20.

Treaty shopping. An international investor attempts to use the favorable aspects of a tax treaty to his or her advantage, often elevating the form of the transaction over its substance (e.g., by establishing only a nominal presence in the country offering the favorable treaty terms).

U.S. shareholder. For purposes of classification of an entity as a controlled foreign corporation, a U.S. person who owns, or is considered to own, 10 percent or more of the total combined voting power of all classes of voting stock of a foreign corporation. Stock owned directly, indirectly, and constructively is counted for this purpose.

U.S. trade or business. A set of activities that is carried on in a regular, continuous, and substantial manner. A non-U.S. taxpayer is subject to U.S. tax on the taxable income that is effectively connected with a U.S. trade or business.