1. International Tax and Transfer
Pricing Topics
Jason Rauhe, CPA
February 9, 2016

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AGENDA
• General U.S. Tax Principles
• Income Tax Treaties
• Foreign Tax Credit
• General International Tax Filing Requirements
• Transfer Pricing Overview
• Foreign Bank Account Reporting / Foreign
Account Tax Compliance Act (“FATCA”) Overview

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General US Tax Principles

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JURISDICTION TO TAX
Source Jurisdiction
• Residents and nonresidents alike
are taxed on income from
economic activity within a
particular (sourced) country
Residence Jurisdiction
• All income accruing to
residents of a country,
regardless of source, is subject
to tax by that country

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STATUTORY FRAMEWORK
Who is a U.S. Person?
• U.S. citizens
• Green card holders (lawful
permanent residents)
• Residents for income tax purposes
 “Substantial presence” test
– Generally, 31 current days, plus 183 days in
current and prior two years
• Domestic corporation / partnership /
estate / trust
 Based on place of incorporation /
organization – U.S. state

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STATUTORY FRAMEWORK
Who is a Foreign Person?
• Anyone who is not a U.S. person
 Non-U.S. citizen
 Non-green card holder
 Does not satisfy “substantial presence test”
• Foreign corporation / partnership
(organized outside the U.S.)
• Foreign estate/trust
• Foreign government

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STATUTORY FRAMEWORK
U.S. Persons
• What income is taxed?
 U.S. person is taxed on worldwide income wherever sourced
 Does not matter where U.S. citizen lives
• How is income taxed?
 Net taxable income
 Progressive rates
 Double taxation avoidance
 Foreign tax credit (or deduction)

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STATUTORY FRAMEWORK
Foreign Persons
• What income is taxed?
 U.S.-sourced income that is:
– “ECI” — income “effectively connected” with
U.S. “trade or business”
– “FDAP” — “fixed, determinable, annual, or
periodic gains, profits, and income”
– Interest, dividends, rents, royalties, wages,
salary
– Gain on sale of U.S. real property

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U.S. TAX DEFERRAL
• U.S. shareholders of nonresident corporations are not subject
to U.S. taxation until distributions are received from the
corporation as a dividend
• Deferral benefit is the greatest when foreign tax on income of
the foreign corporation is low or none

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ANTI-DEFERRAL REGIMES
U.S. shareholders might be subject to U.S. tax even if income is
not actually distributed by the FC to the shareholder
• Foreign corporations
 Controlled Foreign Corporation (CFC) — Subpart F Income
– U.S. control required
 Passive Foreign Investment Company (PFIC)
– Income Test: 75% or more of gross income is passive
– Asset Test: 50% or more of a corporation’s assets are passive
– U.S. control NOT required

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FOREIGN CORPORATIONS
CONTROLLED
Definition
• A foreign corporation in which:
 More than 50% either
– Total combined voting power of all classes of
stock entitled to vote, or
– Total value of the stock
 Is owned by U.S. shareholders
 On any day of the foreign corporation’s
taxable year

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FOREIGN CORPORATIONS
CONTROLLED
U.S. Shareholders – a U.S. Person Who:
• Owns 10% or more voting power of all classes of stock, or
• Holds direct, indirect or constructive ownership

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SUBPART F
• Designed to prevent deferral of portable income
• Directed at two basic types of income:
 Passive investment income
 Income derived from dealings with related entities
• Applies to income derived by a CFC and is not country-specific
• Eligible for foreign tax credit

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SUBPART F
• Subpart F – income is included in income of U.S. shareholder
in year earned rather than when distributed
• §956 Income – earnings of CFC invested in U.S. property
treated as distribution
 Includes most loans to U.S. shareholders
 Applies when U.S. shareholder pledges stock as loan security
• Basis in CFC stock is adjusted for inclusion and distributions
• Not considered dividends, so not eligible for reduced
“qualified” tax rate or DRD deduction

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PREVIOUSLY TAXED INCOME
SUBPART F:
• Prevents double taxation that could occur upon an actual
distribution from a CFC
• Excludes from gross income any actual distributions of
earnings previously taxed as Subpart F income or
investments in U.S. property
• Foreign exchange gain or loss is recognized when actual
distribution occurs

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Income Tax Treaties

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PERMANENT ESTABLISHMENT
Taxation of Business Profits
General treaty rule:
Profits of a foreign corporation from
U.S. activities are taxable if it carries
on business in the U.S. through a
permanent establishment (PE). If
so, the profits may be taxed by the
U.S., but only to the extent they are
attributable to that PE.

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PERMANENT ESTABLISHMENT
PE – Specific Inclusions, U.S. Model, Article 5
• PE includes:
 Place of management, branch office, factory or workshop
 Place where natural resources are extracted (e.g., mine, oil or gas well,
quarry)
 Building site, construction or installation project that lasts longer than 12
months
 Drilling rig or ship used to explore for natural resources if that activity
lasts longer than 12 months

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PERMANENT ESTABLISHMENT
PE – Specific Inclusions, U.S. Model, Article 5
• PE does not include:
 Use of facilities solely to store, display or deliver goods belonging to enterprise
 Maintenance of a stock of goods solely for purpose of storage, display, delivery
or processing by another enterprise
 Maintenance of a fixed place of business solely to purchase goods or collect
information
 Maintenance of a fixed place of business solely for the purposes of carrying out
other activity of a “preparatory or auxiliary” nature (e.g., advertising)

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Foreign Tax Credit

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FOREIGN TAX CREDIT BASICS
• The purpose of the Foreign Tax Credit is to mitigate double
taxation
 Foreign income taxed at the higher U.S. or non-U.S. tax rate
• The foreign tax credit is generally available to:
 U.S. citizens
 Domestic corporations

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FOREIGN TAX CREDIT BASICS
• The Foreign Tax Credit is elective
 Taxpayers can choose on an annual basis to either claim the foreign tax
credit or claim a tax deduction for foreign taxed paid
• In any given tax year, taxpayers must either credit or
deduct all foreign taxes
 No partial credit and partial deductions permitted in the same tax year

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FOREIGN TAX CREDIT BASICS
What taxes are credible?
• Only income or excess profits taxes (essentially income
taxes) are credible
• Tax must resemble U.S. income tax (Reg. § 1.901-2)
• Penalties, fines, interest, custom duties, VAT, capital and
asset taxes do not qualify for the credit
• Tax payment must also be compulsory to be credible for U.S.
federal tax purposes
• During compliance process, foreign tax returns should be
requested and maintained in order to support the foreign tax
credit claimed upon audit

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SEPARATE BASKETS
FOREIGN TAX CREDIT LIMITATION:
• Under IRC § 904(d), the credit limitation must be
determined separately for foreign taxes on each
separate limitation category (basket)
• For taxable years beginning after December 31, 2006,
there are only two baskets:
 General category income
 Passive category income

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MISCELLANEOUS ITEMS
FOREIGN TAX CREDIT:
• Excess foreign tax credits can be carried backwards and
forward
 One-year carry-back
 10-year carry-forward
• AMT foreign tax credit calculated separately

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DCT FOREIGN TAX CREDITS
§902
• Withholding – tax deemed paid by income recipient even
though payment could be made by withholding agent
• Income tax on compensation
• Income tax paid on business profits of flow-through entity
(e.g., branch, partnership)

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TAX CREDIT
INDIRECT FOREIGN
(“Deemed Paid Credit”) - §901
• What taxes are credible?
• Income taxes paid by foreign corporations
• Who is eligible to take the credit on their U.S. tax return?
• Allowed to certain domestic corporations (10% ownership
requirement)
• Not allowed for individuals, partnerships or S corporations
• Allows for indirect foreign tax credit on dividends received
from foreign corporations, although tax is paid by the foreign
corporation, not the recipient

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TAX CREDIT
INDIRECT FOREIGN
(“Deemed Paid Credit”) - §902
• Calculation of Deemed Paid Credit:
 Dividend income received deemed to
have foreign taxes repatriated with it
 Determine the amount of a distributing
corporation’s pre-tax earnings attributable
to the dividend (IRC §78 “gross up”)
 Tax “pre-tax” earnings and allow credit

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TAX CREDIT
INDIRECT FOREIGN
§78 Gross-up
• Tax deemed paid and treated as income
• Not eligible for dividend received deduction

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General International
Filing Requirements

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FORM 5471/8865/8858
When and Where to File?
• Form 5471/8865/8858 is attached to the taxpayer’s income tax return and
is due when the income tax return is due, including extensions
• Type of form to be prepared:
Foreign corporation Form 5471
Foreign partnership Form 8865
Foreign disregarded entity Form 8858

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• A $10,000 penalty is imposed for each annual
accounting period of each foreign corporation for
failure to furnish the required information within the
time prescribed
 If the information is not filed within 90 days after the IRS has mailed a
notice of the failure to the U.S. person, an additional $10,000 penalty
(per foreign corporation) is charged for each 30-day period, or fraction
thereof, during which the failure continues after the 90-day period has
expired up to a maximum of an additional $50,000 penalty
FORM 5471/8865/8858
PENALTIES

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Transfer Pricing
Overview

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OVERVIEW
• Increased global scrutiny of related party transactions
• Transfer pricing regulations and penalties vary by country, as
well as documentation requirements
• Three branches of transfer pricing to reduce intercompany
transaction exposures and risks:
 Documentation / compliance
 Planning
 Controversy

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AUDIT TRIGGERS
• Certain intercompany Transactions:
Intangible property (e.g., technology,
patents, know-how)
Services (e.g., management,
engineering, G&A)
• Cost sharing arrangements (CSA)
• Losses earned for consecutive
years

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PRICING STRATEGIES
TRANSFER
Documentation
• First line of defense under audit
• Documentation rules vary by country
• Requirements, filing deadlines, language, method selection,
accepted comparable companies / transactions, etc.
• In general, reports will contain:
 Industry analysis
 Functional analysis (i.e., a detailed narrative of a company’s functions, assets
and risks)
 Economic analysis (i.e., a method used to test transaction, pertinent regulations
and benchmarking results

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PRICING STRATEGIES
TRANSFER
Compliance
• In the U.S., taxpayers:
 Must file Forms 5471 and 5472 for related party
transactions
 May need to file Form 8275 for disclosure
 Must report Uncertain Tax Positions (UTP) on
Schedule UTP
– Includes description of transaction and size of
associated reserve
– FIN48 documentation

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PRICING STRATEGIES
TRANSFER
Controversy
• Audit defense
• Dispute resolution
• APAs
• Competent authority
• Arbitration

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Foreign Back Account
Reporting Overview

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ACCOUNT (FBAR) — FinCEN
FOREIGN BANK
• Individuals and entities with a financial interest in or
signature authority over foreign accounts
• Must report via Form 114, if aggregate value in
foreign accounts exceeds $10,000
• Significant penalties can apply

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ACCOUNT (FBAR) — FinCEN
FOREIGN BANK
• New enacted due dates for Form 114
• For tax years beginning after December 31, 2015
 Form 114 will be due April 15
 Maximum extension for a six-month period ending October 15

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CONTACT ME
Jason Rauhe, CPA
Principal – Skoda Minotti
(248) 763-4711
jrauhe@skodaminotti.com