Bài giảng môn Kế toán, kiểm toán - Chapter 11: International taxation

Describe differences in corporate income tax and withholding tax regimes across countries

Explain how overlapping tax jurisdictions cause double taxation

Show how foreign tax credits reduce the incidence of double taxation

Demonstrate how rules related to controlled foreign corporations, subpart F income, and foreign tax credit baskets affect U.S. taxation of foreign source income


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Chapter 11: International Taxation Learning ObjectivesDescribe differences in corporate income tax and withholding tax regimes across countriesExplain how overlapping tax jurisdictions cause double taxationShow how foreign tax credits reduce the incidence of double taxationDemonstrate how rules related to controlled foreign corporations, subpart F income, and foreign tax credit baskets affect U.S. taxation of foreign source income11-2Learning ObjectivesDescribe some of the benefits provided by tax treatiesExplain and demonstrate procedures for translating foreign currency amounts for tax purposesDescribe tax incentives provided by countries to attract foreign direct investment and stimulate exports11-3Impact of Taxes—International Business DecisionsImpact of TaxesInternational location decisionsLegal form of operationMethod of financing11-4Types of Taxes and Tax RatesTypes of taxesCorporate income taxesImposed by governmentsTax rates varyZero percent in tax havensOver forty percentWithholding taxesTaxes on dividendsOther amounts paid to foreign citizens11-5Corporate Income TaxCorporate income tax ratesSignificant variation worldwideProvides tax planning opportunityBasis of taxabilityType of activityNationality of the company ownersVariation inMethods of calculating taxable income Differences Deductibility of expenses11-6Corporate Income TaxTax HavenAbnormally low corporate income tax ratesNo corporate income tax at all Minimum worldwide income taxes Bahamas and the Isle of Man No corporate income tax LiechtensteinTax rates from 7.5 percent to 15 percent11-7Withholding Tax RegimesApplication to Dividends Interest RoyaltiesVary across countries Type of payment Recipient Impacts tax planningTax-planning strategyThin capitalization11-8Value-added taxSubstitute for sales taxesAdded into Price of productPrice of service At each stage ofProductionDistributionUsed in Australia, Canada, China, Mexico, Nigeria, Turkey, and South Africa11-9Tax JurisdictionTaxation approachesWorldwide (nationality) approachTax on all income ofResidentCompany of a countryRegardless of place of earningTerritorial approachTax only onIncome earned in that countryCommon approachThe worldwide approach11-10Tax JurisdictionBasis for taxationSourceFollowed by most of countries CitizenshipTaxes citizens regardless ofSourceResidenceResidenceTaxes residents regardless of SourceCitizenship11-11Tax JurisdictionBasis for taxation – The U.S. approachThe basis of U.S. taxes SourceCitizenshipResidenceGreen card testU.S. taxesForeign branchIncludes income in U.S. parentNot foreign subsidiaryOnly dividend paid taxed11-12Double taxationSame income taxed In a foreign country andCountry of residenceDiscouragesCapital-export neutralityMechanisms for eliminationBilateral tax treatiesForeign tax credits11-13Double taxationSolutionsAdoption of territorial approachExemption of foreign source income Deduction of taxes By parent company Paid to foreign governmentsTax credit To parent companyFor tax paid to foreign governmentsU.S. allowsDeduction of taxesCredit approach11-14Double taxationFTC – ExampleAssume : GCO, a U.S. company has a branch in Mexico where corporate income tax rate is 33%The U.S. corporate income tax rate is 35%GCO has foreign source income in Mexico of $50,000GCO pays $16,500 of corporate income tax in Mexico and $20,000 of other taxesGCO decides to do a calculation to choose between using taxes paid in Mexico as a deduction or tax credit11-15Double taxationFTC – Example Deduction CreditForeign source income $50,000 $50,000Deduction for all taxes paid $36,500 $ 0U.S. taxable income $13,500 $50,000U.S tax before tax credit $4,725 $17,500Foreign tax credit $ 0 $16,500Net U.S. tax liability $ 4,725 $ 1,00011-16Calculation of Foreign Tax Credit 11-17FTC basketsCreated by Tax Reform Act of 1986Nine FTC basketsForeign source incomeFTC calculated separately for eachNetting FTCs across baskets—not allowedExcess FTC allowed to beCarried backCarried forwardOffset additional taxes paid on income basketReduction of number of baskets to twoGeneral incomePassive incomeReduced likelihood of excess FTC’s going unusedReduction by The American Jobs Creation Act of 200411-18Indirect FTC (for subsidiaries)Indirect FTC Allowed by U.S. On foreign taxes Paid by foreign subsidiaryU.S. parent companyBefore-tax amount of dividendQualification for indirect FTCU.S. companyMinimum 10% of voting stockForeign company11-19Controlled Foreign CorporationsControlled Foreign Corporations Foreign corporation U.S. shareholder Owning at least 10 percent of the stockU.S. shareholders own more than 50% ofCombined voting power Or fair value of the stockCFC income Referred as Subpart F incomeTaxable currentlyThere is a safe harbor for such income in jurisdictions with tax rate > 90% of the U.S. rate11-20Subpart F IncomeIncome from Insurance of U.S. risksCountries engaged in international boycottsCertain illegal paymentsForeign base company incomeAmount of Subpart F income taxableLess than 5% of total incomeNo income taxableBetween 5% to 70 % of total incomeProportion of Subpart F income to total is taxableGreater than 70 % of total income100% of the CFC’s income taxed currently11-21 Summary of foreign source income taxation To determine foreign incomeFactors consideredLegal form of the foreign operationOperation qualify as CFCLocation in tax havenIncome qualifies as Subpart F income11-22Tax TreatiesBilateral agreementsTax on individuals of one countryIncome earned in other countryAlleviate double taxation problemsFacilitate international trade and investmentInformation sharing between governmentsHelps in domestic enforcement11-23Model treatiesOECD model treaty Basis for most bilateral treaties of developed countriesTax if permanent establishment In the countryRecommends reduction of withholding tax ratesRecommended withholding tax rates5% of direct investment dividends15% of portfolio dividends10% of interest0% of royalties11-24U.S. Tax TreatiesZero percent withholding tax Interest and royalties 15 percent Dividend paymentsTreaties with over 50 countriesOne notable exception BrazilLack of Brazilian investment in the U.S.Treaty shoppingTax reduction tacticBenefit of tax treaty between country11-25Translation of foreign branch incomeNet income Translated into U.S. dollars Use of average exchange rate of the yearNet income after foreign taxes paidAdded Taxes paid to the foreign governmentPayment date exchange rateGrossing upEarnings are repatriated to the U.SConverted to U.S. dollarsDifference due to exchange rateForeign exchange gain or loss11-26Translation of foreign subsidiary incomeDividends paid to U.S. parent Translated at the spot rate On the date of paymentAdded Taxes deemed paid on the dividendPayment date spot rate Grossed upTranslated deemed taxes paid Determines foreign tax credit11-27Tax IncentivesTax holidaysIncentive used by a government Partially or completely exempts a taxpayer A period of timeOffered by many Asian countriesEncourages foreign direct investmentMNEs enjoy significant tax reductions If profits are not repatriated11-28U.S. export incentivesPrevention of tax avoidance CFC and Subpart F income Domestic international sales corporation (DISC) Short-lived export incentive program For U.S. companiesRepealed due to foreign oppositionForeign sales corporation (FSC) Short-lived export incentive program For U.S. companiesReplaced by Extraterritorial Income Exclusion Act (ETI) Repealed due to foreign opposition11-29American Jobs Creation Act of 2004 (AJCA)American Jobs Creation Act Attempt to spur job growth In the U.S. manufacturing sectorProvides deduction Effectively reduces income tax rates For domestic manufacturersAvailable even to companies that don’t exportAllows for significant tax breaks On repatriations of foreign source income11-30End of Chapter 1111-31

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