c24 - Chapter 24 The U.S Taxation of Multinational...

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Chapter 24 The U.S. Taxation of Multinational Transactions SOLUTIONS MANUAL Discussion Questions 1. [LO 1] Distinguish between an outbound transaction and an inbound transaction from a U.S. tax perspective. An outbound transaction occurs when a U.S. person engages in a transaction outside the United States or one that involves a non-U.S. person. An inbound transaction occurs when a non-US. person engages in a transaction within the United States or one that involves a U.S. person. 2. [LO 1] What are the major U.S. tax issues that apply to an inbound transaction? The major U.S. tax issues that apply to an inbound transaction involve 1) whether the non- U.S. person has nexus in the United States (is subject to U.S. taxation), 2) whether the income earned by the non-U.S. person is from U.S. sources, 3) the type of U.S. source income earned (income effectively connected with a U.S. trade or business (ECI) or income that is fixed, determinable, annual or periodic (FDAP), and 4) whether a treaty applies to change the U.S. taxation of the transaction that otherwise would apply. 3. [LO 1] What are the major U.S. tax issues that apply to an outbound transaction? The major U.S. tax issues that apply to an outbound transaction involve 1) whether the income earned by the U.S. person is from foreign sources, 2) whether the U.S. person incurs a foreign income tax on the income that is eligible for a credit, 3) the type of foreign source income earned (passive category or general category), and 4) what deductions taken on the U.S. tax return must be allocated and apportioned to foreign source income for foreign tax credit purposes. 4. [LO 1] How does a residence-based approach to taxing worldwide income differ from a source-based approach to taxing the same income. Under a residence-based approach, a country taxes the worldwide income of the person earning the income. Under a source-based approach, a country taxes only the income earned within its boundaries. 5. [LO 1] Henri is a resident of the United States for U.S. tax purposes and earns $10,000 from an investment in a French company. Will Henri be subject to U.S. tax under a residence-based
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approach to taxation? A source-based approach? Henri will be subject to U.S. tax on the income under a residence-based approach. Henri will not be subject to U.S. tax on the income under a source-based approach because the income is not U.S. source income. 6. [LO 1] What are the two categories of income that can be taxed by the United States when earned by a nonresident? How does the United States tax each category of income? U.S. source income earned by a nonresident is classified as either effectively connected income (ECI) or fixed and determinable, annual or periodic income (FDAP). Income that is effectively connected with a U.S. trade or business is subject to net taxation (that is, gross income minus deductions) at the U.S. graduated tax rates. FDAP income, which is generally passive income such as dividends, interest, rents, or royalties, is subject to a withholding tax regime applied to gross income.
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