USCorporations Foreign Tax

Under I.R.C. Section 7701(b), an individual is considered a US resident for tax purposes if they are physically present in the US on at least 1) 31 days during the current year, and 2) 183 days during the three year period that includes the two years immediately before that, counting, all days of current year, 1/3 of days in first year before the current year, and 1/6 of days in the second year before the current year (Substantial Presence Test, 2013). Because Mr. Murray was physically in the US from June through December 2012, 210 days, he is considered a US resident under the substantial presence test for income tax purposes for the year 2012. All his income of $65,000 would be reported on Form 1040 and be taxed as if he was a United States resident.

“The United States has the highest corporate tax rate of the 34 developed, free-market nations that make up the Organization for Economic Cooperation and Development (OECD). The marginal corporate tax rate in the United States is 35% at the federal level… according to the 2013 OECD Tax Database. The global average is much lower, at 25%” (Fontinelle, 2014). Even though there are ways for businesses to decrease or even avoid these payments, this high figure deters foreign investors from considering the United States for business and sends them looking in more favorable countries like Canada or Ireland. Adding to pushing away potential foreign investors, U.S. firms flee to those tax favorable places to avoid it. “When these companies move their headquarters or create foreign subsidiaries, jobs and profits move overseas” (Fontinelle,

A Federal Tax Law comprises of statutory provisions, administrative support and court decisions in certain cases. The first and foremost task of any Federal Tax Law is raising revenue for Federal and various state governments to absorb the cost of government operations. The role of social, economic, equity and political factors couldn’t be ignored while discussing various tax consequences during particular budget period. Nevertheless, the amount of revenue raised through this method decides the amount of services that the government can afford to provide. The forum topics for this week are explained in following broad heads:

2. The primary means in which a corporation is able to do so is to qualify for benefits in the 1996 U.S. Model Treaty. There are actually a couple of different ways in which corporations can access these benefits in international transactions. One of the ways is if that corporation is regarded as a fiscally transparent partnership in another

There are tax treaties available to reduce the US taxes of residents of foreign countries; however certain exceptions may not reduce the US taxes of US citizens or residents. Generally treaty provisions are mutual and apply to both treaty countries. Thus, a US citizen or resident may be eligible to certain credits, deductions, exemptions, and reductions in the tax rates of the foreign countries on income received from a treaty country that have taxes imposed by foreign countries.

The income earned by the U.S. individuals and corporations in the foreign countries or foreign source are taxed by the U.S. government, even though other countries also tax any income earned within their borders. To offset this double taxation of income by two different countries, the U.S. grants both individuals and corporations a foreign tax credit (FTC) that can be used to offset income taxes assessed by a foreign country on the income earned there (Foreign Tax Credit, FTC, n.d.). The FTC is allowable for foreign income taxes and other similar taxes, such as excess profit and war profit taxes. However, only income taxes qualify for the credit. The Value Added Taxes (VAT) and property, sales and severance taxes do not qualify, although they may be deductible.

The U.S. Taxation of Foreign Corporations has set substantial guidelines for which dictate the regulations by which taxation is initiated. It is no secret that organization are constantly looking for new ways to ‘deduct’ their bottom line, reducing their tax liabilities. The U.S. has been diligent in ensuring that all considerations are covered, however from time to time issues arise that challenge the system in its current status. This papers will strive to answer the question can a foreign taxpayer argue substance over form? In many cases this is a taxpayers catch-22. The basis of the law allows for substance and form allows room for individual interpretation. There are

883(a)(5) provides for a special rule that does not take into account any failure of a foreign country to grant an exemption to a corporation organized in the United States if the corporation is subject to tax by the foreign country on a residence basis pursuant to provisions with the foreign law. Simply put, if a foreign country neglected to tax a United States corporation who qualifies to be a resident of the country, it is not factored into the tax treatment from the United States.

The Foreign Tax Credit is designed to be very simple in nature, as it only requires basic math skills to compute the tax liability with the credit. As mentioned above, income that is earned in a foreign location may be taxed by the respective government of that location. Therefore, because the United States utilizes a global tax system, the individual or entity may be taxed by the foreign government and definitely taxed by the United States government. Therefore in order to reduce the double taxation liability, the government allows U.S. taxpaying entities to reduce U.S. income tax “dollar for dollar (credited) by the amount that has been paid in income tax by a U.S. person to a foreign government” (Adams). Furthermore, there are two limitations on this credit that a U.S. taxpaying entity must be aware of. The first limitation states that only income tax is only susceptible to the credit. To further explain, this means “taxes like Value Added Tax, property taxes, taxes on capital or assets, and any other tax which the U.S. does not consider a tax on income are excluded from the foreign tax credit” (Adams). (However, a valuable tax planning strategy will note that these taxes may be deductible on an individual’s Schedule A for Itemized Deductions. In addition, if an individual owns a business or rents out a building abroad, he/she can deduct these expenses on his/her Schedule C or Schedule E). The second limitation states that an

High corporate income tax rates encourage US companies to store their foreign earnings abroad instead of investing it into expansion and employment in the United States. A May 16, 2012 study by J.P. Morgan found that 60% of the cash held by 602 US multi-national companies is sitting in foreign accounts. If an income tax cut is offered to companies that return this cash, the study estimates that $663 billion would be invested into business expansion and job growth in the United States. (“Corporate Tax Rate & Jobs,” 2016)

Regarding corporate tax system that Multinational Enterprises (MNEs) have to obligate to fulfill their tax responsibility to a country that MNEs conducts their business, also they must pay their tax obligation to their home country as well. Thus, tax structure, tax rate, and the tax system are the essential aspects for MNEs. Thus business organizations need to understand how structural taxation and laws of the particular that

The U.S. has the highest marginal tax rate on business. It follows that if U.S. businesses are leaving profits overseas because of high business taxes, then the solution to this problem is to lower the business tax, and make it more competitive with countries

It is an undisputed fact that the United States has one of the highest corporate tax rates of Organization of Economic Cooperation and Development (OECD) countries. As a result many American multinationals resort to tax inversions or other methods to try to reduce their tax rate. Consider Apple, which has funnelled profits through Ireland for years rather than repatriate those profits to the United States and pay America’s corporate tax rate. Apple even accesses the American debt market to pay shareholder dividends rather than bring profits home to do it. This tax avoidance is very costly for the government, they must resolve this issue in order to

Governments around the world impose their own taxes, with their own requirements and procedures. International companies, most of these companies have their headquarters established in the United States, but many field offices all over the world; which they have to pay taxes in the country where they reside and in the country of earning foreign- source income.

The CTB regulations affect two important aspects of tax planning for U.S.-based foreign operations: (1) deferral and (2) foreign tax credits. Deferral happens when foreign investments are owned by foreign corporations. The taxable income earned by a foreign company is not taxable in the United States until it returns to the corporation 's U.S. corporate parent by way of a corporate dividend or a sale of the stock in the foreign subsidiary. When a foreign company operates in a low tax jurisdiction, the U.S. parent can achieve U.S. tax deferral. When a dividend is paid or the stock of a subsidiary is sold, the parent corporation may be entitled to a foreign tax credit.