2008 CCH Comp Topics Ch25

2008 CCH Comp Topics Ch25 - Chapter 25 Multijurisdictional...

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Unformatted text preview: Chapter 25 Multijurisdictional Taxation: International and State and Local Transactions 2007 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com Chapter 25 Exhibits State and Local Taxation 1. Types of State and Local Taxes 2. Corporate State Income Tax Formula for Multistate Corporation 3. Adjustments to Federal Taxable Income 4. Nexus 5. Public Law 86-272 6. Multistate Tax Commission (MTC) 7. Uniform Division of Income for Tax Purposes Act (UDITPA) 8. Business Income 9. Nonbusiness Income 10. Apportionement under UDITPA 11. Throwback Rule 12. Unitary Business Concept 13. Internet Tax Freedom Act 14. Example--Complexity of Relationships in E-commerce 15. State Income Tax Filing Requirements Chapter 25, Exhibit Contents A CCH Federal Taxation Chapter 25 Exhibits International Taxation 16. Jurisdiction 17. U.S. Jurisdiction 18. Selected Foreign Income Tax Treaty Partners 19. U.S. Model Income Tax Treaty Provisions 20. Tax Rates of Selected Treaty Countries 21. General Sourcing Rules 22. Subject to U.S. Tax Law 23. Income Effectively Connected with U.S. Business 24. Controlled Foreign Corporation (CFC) 25. Subpart F Income 26. Exclusion and Credit Available for U.S. Taxation of Foreign Income 27. Annual Exclusion for Foreign Earned Income 28. Items Excluded from Qualified Housing Expenses 29. Payments Ineligible for Foreign Tax Credit 30. Overall Limitation on the Direct Foreign Tax Credit Chapter 25, Exhibit Contents B CCH Federal Taxation Chapter 25 Exhibits 31. 32. 33. 34. 35. 36. Separate Limitations for Foreign Tax Credit Income Baskets Indirect FTC Transfer Pricing Forms Used in Reporting Tax Havens Chapter 25, Exhibit Contents C CCH Federal Taxation State and Local Taxation Chapter 25 CCH Federal Taxation Types of State and Local Taxes Individual income taxes Corporate income taxes General sales taxes Gross Receipts taxes Franchise taxes Real Property taxes Personal property taxes Unemployment taxes Use taxes Excise taxes Transfer taxes Severance taxes Chapter 25, Exhibit 1a CCH Federal Taxation Types of State and Local Taxes Type of Tax Individual Income Taxes Corporate Income Taxes General Sales Taxes Gross Receipts Taxes Franchise Taxes Real Property Taxes Chapter 25, Exhibit 1b Description of Tax Tax imposed on taxable income of state residents and nonresidents Tax imposed on taxable income of corporations conducting business in the state Tax levied on retail sales Tax levied on the total revenue of a business operating in the state Tax on the right to conduct business in the state, usually based on the company's net worth Tax on the assessed value of land and improvements in the taxing jurisdiction CCH Federal Taxation Types of State and Local Taxes Types of Tax Personal Property Taxes Unemployment Taxes Use Taxes Excise Taxes Transfer Taxes Severance Taxes Chapter 25, Exhibit 1c Description of Tax Tax on the assessed value of personalty located or used in the taxing jurisdiction Tax on a percentage of employee wages, designed to fund state unemployment programs A tax on property purchased outside a taxing jurisdiction but used in the taxing jurisdiction that has not otherwise been subject to a sales tax Another sales tax typically imposed on alcohol, tobacco, and gasoline Included in this category of taxes are gift, estate, and inheritance taxes and taxes imposed on sales of real property Tax imposed on the right to extract or sell natural resources from the jurisdiction CCH Federal Taxation Corporate State Income Tax Formula for Multistate Corporation + x + x Federal income tax base State adjustments (such as interest on state and local bonds) State adjustments (such as interest on federal obligations) State income tax base Allocable income (income specifically allocated to a single state) Total income eligible for apportionment State apportionment percentage State apportioned income Allocated income State income tax base State's income tax rate Tentative state income tax Tax credits State income tax liability CCH Federal Taxation Chapter 25, Exhibit 2 Adjustments to Federal Taxable Income Interest Income on Federal Obligations Interest Income on State Obligations Expenses Related to Generating Interest on Federal or State Obligations Depreciation Adjustments (e.g., some states prohibit accelerated depreciation methods) Gain/Loss Adjustments Attributable to Differences between State and Federal Cost Recovery Methods State Income Taxes Foreign Income Taxes Election Adjustments (e.g., differences between state and federal installment sales rules) NOL Adjustments Income Tax Refunds of State Taxes (to extent included in federal taxable income) Capital Gain and Loss Treatment Mortgage Interest vs. Renters' Deductions Non-business Interest Expense Chapter 25, Exhibit 3 CCH Federal Taxation Nexus The Due Process and Commerce clauses of the United States Constitution prohibit a state from taxing a nonresident unless the nonresident has sufficient connection ("nexus") to the state. The Due Process Clause requires some "minimum connection" between a state and the person, property, or transaction it seeks to tax The Commerce Clause requires a "substantial nexus" between a state and the activity being taxed Chapter 25, Exhibit 4 CCH Federal Taxation Public Law 86-272 Public Law 86-272, enacted in response to the U.S. Supreme Court's decision in Quill Corporation, prohibits states from taxing a nondomiciliary business if: The person's only business activities within the state consist of the solicitation of orders for sales of tangible personal property Any orders are sent outside the state for approval or rejection Any orders approved are filled by shipment or delivery from a point outside the state Chapter 25, Exhibit 5 CCH Federal Taxation Multistate Tax Commission (MTC) The MTC develops business income tax allocation and apportionment regulations, promoting "uniformity and compatibility in significant components of tax systems." Chapter 25, Exhibit 6 CCH Federal Taxation Uniform Division of Income for Tax Purposes Act (UDITPA) Uniform Division of Income for Tax Purposes Act (UDITPA) provides rules for allocating and apportioning a multistate or multinational enterprise's business and non-business income among states and foreign countries. Most states have adopted UDITPA or similar provisions. Chapter 25, Exhibit 7 CCH Federal Taxation Business Income Business income means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from property if the acquisition, management, and disposition of the property are integral parts of the regular trade or business. Chapter 25, Exhibit 8 CCH Federal Taxation Nonbusiness Income Nonbusiness income encompasses portfolio income, such as interest, dividends, rents, and royalties. Chapter 25, Exhibit 9 CCH Federal Taxation Apportionment under UDITPA Apportioned Income x ((Property Factor + Payroll Factor + Sales Factor) / 3) Chapter 25, Exhibit 10 CCH Federal Taxation Throwback Rule To prevent taxpayers from having "nowhere income" (i.e., income that is not allocable to any jurisdiction that will tax the income), many states have a throwback rule: Rule makes a sale taxable in the state it was made if the state where the goods were delivered does not tax the taxpayer Under a double throwback rule, the state where an order was taken may tax the sale if the sale otherwise would not be taxed by the state from which the goods were shipped or the state where the goods were delivered Chapter 25, Exhibit 11 CCH Federal Taxation Unitary Business Concept Some states ignore the legal entities of related business entities and consider the unitary business of the group of entities. In these states, if one company in the group has nexus with the state, the state's apportionment factor is applied to the unitary income of the group. Chapter 25, Exhibit 12 CCH Federal Taxation Internet Tax Freedom Act The Act placed a moratorium on any new state or local sales or use taxes on Internet access or related services and any multiple or discriminatory taxes on e-commerce. The Internet Tax Nondiscrimination Act has extended the moratorium for most taxes until November 1, 2007. Chapter 25, Exhibit 13 CCH Federal Taxation Example Complexity of Relationships in E-commerce Information stored on server in the District of Columbia Seller in Virginia Web site developed and maintained in California Warehouse in Connecticut Customer in New York Chapter 25, Exhibit 14 CCH Federal Taxation State Income Tax Filing Requirements There are four categories of returns into which the state reporting and filing requirements of a multistate corporation fall: Consolidated return Nexus consolidated return Combined return Separate returns Chapter 25, Exhibit 15 CCH Federal Taxation International Taxation Chapter 25 CCH Federal Taxation Jurisdiction A government has jurisdiction over income taxation when the "person": Is a citizen or resident Has an economic relationship with the country Chapter 25, Exhibit 16a CCH Federal Taxation Jurisdiction A person is an individual or a business A citizen or resident includes partial-year residency, for individuals and for business entities with places of business in the country An economic relationship exists if the person derives income from activities or from property that is located in the country CCH Federal Taxation Chapter 25, Exhibit 16b U.S. Jurisdiction In the United States, U.S. persons are subject to federal income taxation on all income from whatever source derived. "U.S. persons" includes: U.S. citizens or residents A domestic partnership A domestic corporation Any estate other than a foreign estate Any trust over which U.S. courts have jurisdiction Chapter 25, Exhibit 17a CCH Federal Taxation U.S. Jurisdiction U.S. activities of foreign persons that generate U.S. income are also subject to taxation by the United States. "Foreign persons" include: Nonresident aliens Foreign corporations Foreign partnerships Foreign estates that do not have effectively connected income Foreign trusts Chapter 25, Exhibit 17b CCH Federal Taxation Selected Foreign Income Tax Treaty Partners Australia Austria Belgium Canada China, Republic of Czech Republic Denmark Egypt France Germany Greece Hungary Iceland India Indonesia Ireland Israel Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Pakistan CCH Federal Taxation Poland Portugal Romania Russia South Africa Spain Sweden Switzerland Thailand Turkey United Kingdom Chapter 25, Exhibit 18 U.S. Model Income Tax Treaty Provisions Income Category Gains from Real Property Business Profits Treaty Treatment Income from real property is taxed by the country where the property is situated. Profits from an enterprise conducting business in the country are taxable in that country to the extent they are attributable to a permanent establishment. Profits from the operation of ships or aircraft in international traffic are taxable only in the domestic country. Dividends may be taxed in both countries if paid by a resident of one country to a resident of another country. Interest income and royalties arising in one country but owned by a resident of the other country are only taxable by the other country. Shipping and Air Transport Dividends Interest & Royalties Chapter 25, Exhibit 19a CCH Federal Taxation U.S. Model Income Tax Treaty Provisions Income Category Directors' Fees Treaty Treatment Fees and commissions attributable to services rendered as a member of the board of directors of a company that is a resident of the other country are taxable by that country. Income from services rendered is taxable in the country of domicile unless the individual has a fixed based in the other country. Income such as salaries and wages are taxable by the country of residence unless the employee was present in the country where the work was performed for more than 183 days during any 12month period commencing or ending in the tax year. Social security payments are taxed by the country making payments; annuities are taxed by the country of the owner's citizenship or residence Child support is exempt from taxation in both countries, but alimony that is deductible by a resident of a contracting country is included in the income of a recipient of another country. CCH Federal Taxation Independent Personal Services Dependent Personal Services Pension, Social Security, & Annuities Child Support & Alimony Chapter 25, Exhibit 19b Tax Rates of Selected Treaty Countries Country Australia Canada Czech Republic Germany Japan Mexico New Zealand Russia Switzerland United Kingdom Income Tax Rates 15-45% 15.25-29% 12-32% 15-42% 10-37% 3-29% 19.5-39% 13% 0-11.5% 10-40% Treaty Withholding Rates on Interest 10% 10% 0% 0% 10% 15% 10% 0% 0% 0% Treaty Withholding Rates on Dividends 15% 5-15% 5-15% 5-15% 5-10% 5-10% 15% 5-10% 5-15% 5-15% Chapter 25, Exhibit 20 CCH Federal Taxation General Sourcing Rules The two steps involved in sourcing income are: Source the income into the appropriate statutory category Classify the income as domestic or foreign Chapter 25, Exhibit 21a CCH Federal Taxation General Sourcing Rules Income Category Personal Services Rents and Royalties Interest Dividends Disposition of Realty Disposition of Intangibles Disposition of Personalty: Securities Depreciable property Chapter 25, Exhibit 21b U.S.-Source Services performed in U.S. Property located or used in U.S. Debtor is U.S. resident or domestic corporation Payer is U.S. corporation Property is located in U.S. Seller is U.S. resident Foreign-Source Services performed abroad Property located or used abroad Debtor is foreign resident or foreign corporation Payer is foreign corporation Property is located abroad Seller is foreign resident Seller is U.S. resident Title passes in U.S. CCH Federal Taxation Seller is foreign resident Title passes abroad General Sourcing Rules Income Category U.S.-Source Sale of Inventory Title passes in U.S. (if taxpayer manufactures the property, income is allocated) Currency Exchanges Taxpayer owning underlying item is U.S. resident International 50% of income of U.S. Communications person Transportation Transportation begins and ends in U.S. 50% of income from transportation beginning or ending abroad Entity has U.S.-source Distributive Share of Income from Pass-through income Entity Chapter 25, Exhibit 21c CCH Federal Taxation Foreign-Source Title passes abroad Taxpayer is foreign resident 50% of income of U.S. person All income of foreign person 50% of income from transportation beginning or ending abroad Entity has foreign-source income Subject to U.S. Tax Law Subject to U.S. tax law are: Nonresident alien individuals with investment income from U.S. sources Nonresident aliens with income effectively connected with a U.S. trade or business Foreign corporations with income effectively connected with the conduct of a U.S. trade or business or income from U.S. source Chapter 25, Exhibit 22 CCH Federal Taxation Income Effectively Connected with U.S. Business If a person was engaged in a U.S. trade or business during the tax year, all income, gain, and loss (other than certain investment income) for the tax year that is realized from U.S. sources is treated as effectively connected with the U.S. trade or business Income, gain, and loss from foreign sources, with limited exceptions, will not be treated as effectively connected with the conduct of a trade or business within the United States Chapter 25, Exhibit 23 CCH Federal Taxation Controlled Foreign Corporation (CFC) A foreign corporation is a controlled foreign corporation (CFC) if more than 50% of the total combined voting power of all classes of stock or the total value of the stock is owned, directly, indirectly, or constructively, by U.S. 10%-shareholders on any day during the tax year. Chapter 25, Exhibit 24 CCH Federal Taxation Subpart F Income A CFC's subpart F income for any taxable year consists of the sum of: Insurance income The income derived that constitutes foreign base company income The income derived from disfavored countries in an amount equal to the product of: Income other than income that is attributable to earnings and profits included in the gross income of a U.S. person multiplied by The international boycott factor The sum of any illegal bribes, kickbacks, or other payments paid, directly or indirectly, to an official, employee, or agent in fact of a government Chapter 25, Exhibit 25 CCH Federal Taxation Exclusion and Credit Available for U.S. Taxation of Foreign Income Foreign earned income exclusion Housing cost exclusion Foreign tax credit Direct foreign tax credit Deemed paid foreign tax credit Chapter 25, Exhibit 26 CCH Federal Taxation Annual Exclusion for Foreign Earned Income Calendar Year 2006 2007 Exclusion Amount Is $82,400 $85,700 Chapter 25, Exhibit 27 CCH Federal Taxation Items Excluded from Qualified Housing Expenses Cost of house purchase, improvements, and other capital expenditures Cost of purchased furniture or accessories Cost of domestic labor, including maid, gardeners, etc. Amortized principal payments on home mortgage Depreciation of taxpayer-owned housing Deductible interest and taxes Expenses of more than one foreign household Moving expenses Cost of pay television subscription Meals and lodging furnished for the convenience of the employer and otherwise excludible CCH Federal Taxation Chapter 25, Exhibit 28 Payments Ineligible for Foreign Tax Credit Penalties Fines Interest Customs duties Payments that result in economic benefits to the taxpayer Pension fund payments Unemployment fund payments Disability fund payments Soak-up taxes Taxes paid to governments supporting international terrorism Taxes paid to countries requiring participation in international boycotts CCH Federal Taxation Chapter 25, Exhibit 29 Overall Limitation on the Direct Foreign Tax Credit U.S. Tax on Worldwide Income x (Foreign-Source Income/Worldwide Income) Chapter 25, Exhibit 30 CCH Federal Taxation Separate Limitations for Foreign Tax Credit U.S. Tentative Tax x (Foreign-Source Income in Basket/ Worldwide Income) Chapter 25, Exhibit 31 CCH Federal Taxation Income Baskets Passive category income Income treated as foreign-source income under an income tax treaty but treated as U.S.-source income under the Code Income attributable to sources within a country whose government the United States does not recognize General category income Chapter 25, Exhibit 32 CCH Federal Taxation Indirect FTC A domestic corporation with a foreign subsidiary is unable to directly claim credit for foreign taxes paid; however, controlling shareholders (10% ownership, either direct or indirect) are eligible for a deemed paid FTC for dividends received from a subsidiary. Chapter 25, Exhibit 33 CCH Federal Taxation Transfer Pricing The typical multinational corporation engages in many intercompany transactions, such as manufacturing and distributing a product abroad that is licensed and engineered in the United States. Transfer pricing is the process of computing prices for these transactions across the company and its subsidiaries. Transfer prices only affect the income of the individual group members rather than the combined income of the group as a whole. Chapter 25, Exhibit 34 CCH Federal Taxation Forms Used in Reporting Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation Form 1040NR, U.S. Nonresident Alien Income Tax Return Form 1116, Foreign Tax Credit Form 1118, Foreign Tax CreditCorporations Form 1120-F, U.S. Income Tax Return of a Foreign Corporation Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business CCH Federal Taxation Chapter 25, Exhibit 35 Tax Havens Antigua Aruba Bahamas Bahrain Barbados Bermuda British Virgin Islands Cayman Islands Cook Islands Costa Rica Gibraltar Grenada Hong Kong Isle of Man Liberia Liechtenstein Luxembourg Monaco Nauru Netherlands Antilles Samoa Singapore St. Kitts Switzerland Tonga Turks and Caicos Vanuatu Chapter 25, Exhibit 36 CCH Federal Taxation ...
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This note was uploaded on 10/23/2009 for the course ACCTG 16 taught by Professor Juliekim during the Summer '09 term at Santa Monica.

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2008 CCH Comp Topics Ch25 - Chapter 25 Multijurisdictional...

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