International Taxation Outline

Professor Yariv Brauner
University of Florida Tax LLm Program
Fall 2011- International Taxation
 
 
International Tax Outline
Introduction
1st Question – Whether the U.S. tax system has jurisdiction at the individual level?
Technical terminology: source claim – country that feels they have a claim to the income.
Residence – ability of US to tax its residents on income.
Taxation based on residence means there is an allegiance between the receiver of the income and the country of which he or she is a resident.
Passive income – part of the US capital because money you invested in foreign company came from US.
2nd Question – Do we have income, what is income?
§61 – in US it might be income but in another country it might not be income
3rd Question – How much income?
Must know tax accounting rules – US GAAP, International standards.
Accounting rules also dictate the issue of timing.
EX) US manufacturer and Argentina sells the product. Costs $10 to US part and $10 to Argentinean part and Customer will pay $100. How much income does US manufacturer have?
2 tax payers for tax purposes (legal fiction because actually one company).
In action it is a single economic enterprise.
You must allocate the income.
There is profit of $80.
Because there is one economic unit, the parent can dictate to the subsidiary whatever price it is going to pay.
Transfer pricing rules
4th Question: What type of income?
This matters because different types of income are taxed at different rates.
Some types of income are very easy to convert from one kind to another.
Easy to convert dividend to capital gain and to interest.
Assuming we have a dividend of $100 and assume it is income, you apply the tax rules of the various countries.
A country taxes foreigners only on their domestic source income.
What is the source of that income?
Must know type of income first because source rules are different for different types of income.
Residence tax vs. source income
Mexican citizen/resident (everything in Mex) gets dividend from a US corp. IBM.
Mexico will want residence tax and US will want source tax b/c income is sourced in US.
The source of income for dividends is the residence of the payor IBM ie the US
The treaties are there to prevent double taxation
They are called the relief rules
US says if you earned money abroad then we will give you a credit for the that you paid in the foreign country
5th step: Look to the treaties and go through them all again
 
 
 
CHAPTER 1 –
 
Review Problems – Chapter 1:
§1(c) says there is an income tax imposed on every individual.  Everyone in the world is taxed (i.e. individuals).  Then go to §2(d). Then § 871 what is the tax that is imposed. Nonresident is taxed differently Subchapter N tells us how nonresidents aliens are taxed. US citizens are always resident of the US. All US treaties has this in all treaties that it is a part of.
§7701(a)(1) defines “person” as to mean and include an individual, a trust, estate, partnership, association, company or corporation.
So we see that §1(c) applies to A.  Keep in mind that §55 and §56 applies an alternative minimum tax on individuals and corporations.  Always think of this AMT as an alternative way of taxation.  A is possibility subject to the AMT.
All US citizens are taxed on their world wide income.  However foreigners are taxed only on the domestic source – i.e. countries are expected to not tax foreigners on foreign income.  What is the source on that?
§2(d) says that in the case of a nonresident alien individual, the taxes imposed by sections 1 and 55 shall apply only as provided by section 871 or 877.  We have a similar section apply to corporations – §11(a) – (d).
Does §2(d) special treatment apply to A?  This section applies to nonresident aliens but since A is a citizen of the US she is not an alien (see defn. in §7701(b)). 
If you are a citizen of the US you are a resident under the Code and are thus taxed as such. 
#2 A)
Three tests for residence under §7701(b)
1. §7701(b)(1)(A)(i)  is green card test and if met that person is a resident.
Citizenship is also a way to determine residence.  A is a citizen and therefore a resident.
2. Substantial presence test – §7701(b)(1)(A)(ii)
§7701(b)(3)(A)(i)-(ii):
Step 1: Present in US for more than 31 days in calendar year? à If yes go on to step 2.
Step 2: 183 day past three year test
Current year days (1) + previous year days (1/3) + year before that days (1/6). Say the actual days 30, 31, 30 in the first 3 months. 135 days is the total.
This is only for 2010 the current tax year. We do not know
If both met, substantial presence test met and is US resident for tax purposes in that year.
§7701(B)(7) clarifies what a day is (if in US for even one second, that equals a day).
3. Election test – §7701(b)(1)(A)(iii)
Look at §7701(3)(B) and –(C).  Part (B) exception is not relevant in this case b/c she is a citizen of the US already.
In the case of an individual who is a lawfully permanent resident of the United States at any time during the calendar year, but does not meet the substantial presence test of paragraph (3), the residency starting date shall be the first day in such calendar year on which he was present in the United States while a lawful permanent resident of the United States. §7701(b)(2)(A)(iii).
This has huge implications – always keep this in mind if substantial presence test is met.
§7701(b)(2)(C) – certain nominal presence disregarded. 
IRS wants you to come to US and is willing to allow you 10 days disregarded for resident tax purposes. 
(i)   In general for purposes of subparagraphs (A)(iii) and (B), an individual shall not be treated as present in the United States during any period for which the individual establishes that he has a closer connection to a foreign country than to the United States.
(ii)   Not more than 10 days disregarded.  Clause (i) shall not apply to more than 10 days on which the individual is present in the United States.  
So for the first 10 days the residency tests don’t start but at day 11 it relates back and you use those 11 days in the (i) 31 day calculation. 
This kind of goes against a literal reading of the code.  Ex. come to US for 10 days then go back to country.  In same year come back for 30 days – IRS says part (i) met b/c 11th day trigger met and person in US for 40 days which longer than 31 days.
Remember residency status goes year by year – making good tax planning to postpone sale until next year where don’t meet substantial presence test (i.e. only in US for less than 30 days during next year).  Based on passport stamp.  
Part B. A spends 360 days in the US in each of 2008 and 2011, and the whole month in June of 2010?  Is A resident for 2010?  No! B/c doesn’t meet 31 day test for 2010!  Only spent 30 days in US for 2010.  Assuming no citizenship in US and no greencard.
301.7701(b)-1(e) provides several examples (that’s where these questions come from).
Part C.  A spent 20 days in US in each of 2008-11. What is maximum # of days he can stay in US in 2010? 172 using (ii) calculation test that would bring him under 183 days.
Note that we don’t round for fractions b/c not a rule that you round for fractions. 
122 days (or about 4 months) is about the time you can stay in the US to avoid paying US taxes
Question 3.   So look at substantial presence test again.  She meets prongs (i) and (ii).   So meets substantial presence test.  BUT look at §7701(b)(3)(B) exception – so here she only in US during 2010 for 181 days so look at tax home under §911(d)(3).  But if she was here for 183 then the exception would not apply.
Under this section, the term “tax home” means, with respect to any individual, such individual's home for purposes of section 162(a)(2) (relating to traveling expenses while away from home).
An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States.  Let’s assume her tax home is in Argentina.  Now we have the “closer connection” part of the exception.  Look in regs to see defn.  § 301.7701(b)-2  (closer connection exception).  Look at the situation in (d).  Looks like she meets this exception. 
General explanation of the residence rules. Example: foreign engineer whose company asks him to move to the US. When is he considered a US resident for tax purposes?  Never lived in the US before.
Does starting date of residence matter? Start on 2/15/10 and bringing family over in March. 
If coming for preliminary visit, make sure it doesn’t extend beyond 10 days (it is nominal).
Practically, people come at beginning of the year, but not exactly on January 1.
Legally, the first day of residence is the day you arrive for the first time.
What if you know you’ll have a lot of business in the US and you’re sent to US from time to time and don’t want to be taxed in US.  What do you do?
If you can avoid being 31 days or more in the US, you’ll clearly not be a resident (useful advice).
But what if they’ll be here more than that?
Must explain the whole test and must count the days accurately.
But give clien