Transcript Slide 1

U.S. International Taxation
“SEMINARIO INVIERTA EN TEXAS”
ESTABLECIMIENTO Y OPERACIÓN DE NEGOCIOS
10 de Marzo 2010
Hotel Camino Real – Monterrey, Nuevo Leon, Mexico
© 2010 William H. Hornberger
William H. Hornberger
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
214-953-5857
[email protected]
IRS Circular 230 Notice: The statements contained herein are not intended to and do not constitute an opinion as to any tax or other
matter. They are not intended or written to be used, and may not be relied upon, by you or any other person for the purpose of avoiding
penalties that may be imposed under any Federal tax law or otherwise.
The International Tax Pyramid
STEP 1:
What U.S. Domestic
Tax Laws Apply?
a. What kind of tax system?
b. Who is subject to the tax?
c. How does the tax apply?
STEP 2:
How Does the U.S. International
Tax System Modify the
Domestic Tax Rules?
a. What kind of international tax system?
b. Who is subject to the tax?
c. How do the international tax rules apply?
STEP 3:
Does a tax treaty change the result?
a. What kind of tax treaty?
b. Who is subject to the treaty?
c. How does the treaty apply?
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TAXES OF THE UNITED STATES - - A GENERAL
OVERVIEW OF U.S. DOMESTIC TAX LAW (2006)
Taxes Imposed by the U.S. Government
Individual Income
Tax
Corporate Income
Tax
U.S. citizens and
resident aliens
subject to tax on
their worldwide
income
U.S. Corporations
subject to tax on
worldwide taxable
income
Other Form of
Business Enterprise
Social Security
Taxes
Taxes Imposed by States and Local Government
No Broad Based
Consumption Taxes
Estate & Gift Tax
FICA
Estate Tax
Old Age, Survivors
Disability Insurance
Tax on
Employee:
6.2% of
Wages up
to limit
Worldwide Taxable income:
regular income tax
Gross income (from whatever
source)
§
Certain deductions
Adjusted Gross Income
§
Certain Deductions &
Exemptions
Taxable Income
-----------------------------------------§
Rates are graduated up to
35%
§
Maximum capital gains
rate: 15%
Alternative Minimum Tax:
Taxable Income
+ Tax Preferences
+ Adjustments
Alternative Minimum
Taxable Income
----------------------------------Tax Rate: 26% - 28%
Sole
Proprietorship
----------------------Income Taxed to
Individual
Partnership
------------------------Partnership not
subject to tax;
income flows
through to partners
------------------------Partners taxed on
respective shares
of income
Tax on
Employer:
6.2% of
Wages up
to limit
S Corporation
------------------------Small business
corporation limited
to 100
shareholders
------------------------Taxable income
flows thru to
shareholders
Gift Tax
Hospitalization
Insurance
Tax on
Employee:
1.45% of
Wages
Estates and Trusts
------------------------Separate taxable
entities subject to
graduated rates up
to 35%
Tax on
Employer:
1.45% of
Wages
Other entities
subject to special
tax treatment (e.g.,
REIT, regulated
investment co.,
REMIC)
Graduated Rates up to 46%
(2006) on taxable estate:
Gross estate (fair market
value) (as allowable
deductions)
Estates Allowed $2,000,000
exception
Worldwide Taxable income:
Gross income (from
whatever source)
§
Allowable Deductions
Taxable Income
----------------------------------§
Rates are graduated
up to 35%
§
No special capital
gains rate
Imposed on
Donor
------------------Based on fair
market value
of property
transferred
------------------Graduated
rates up to
46% (2006)
------------------$1,000,000
lifetime
exception
(which applies
against estate
exemption)
Alternative Minimum
Tax
--------------------------Rate: 20% (with
exceptions for small
corporations)
Business
Taxes
Income
Taxes
Excise &
Sales Taxes
Inheritance
Taxes
Property
Taxes
Principal Inbound International
Tax Issues
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1. How is income sourced for U.S. federal income
tax purposes?
2. Will the foreign person be engaged in the
conduct of a U.S. trade or business?
3. Will income generated by the foreign person
be treated as effectively connected with a
trade or business conducted by such foreign
person?
Principal Inbound International
Tax Issues (con’t.)
5
4. If a foreign person does business or invests in
the U.S. through a U.S. or foreign entity, how
will the entity be treated for U.S. federal
income tax purposes?
5. If a foreign person’s taxable income is
effectively connected with the conduct of a
U.S. trade or business, what is the method and
rate of U.S. federal income taxation of such
income?
6. What is the branch profits tax and how does it
apply to foreign corporations doing business in
the U.S.?
Principal Inbound International
Tax Issues (con’t.)
6
7. What is the method and rate of U.S. federal
income taxation on a foreign person’s U.S.
source fixed or determinable annual periodical
income?
8. What special U.S. federal income tax
considerations apply to foreign persons owning
or disposing of a U.S. real property interest?
9. What special U.S. federal estate and gift tax
considerations apply to foreign persons doing
business or investing in the U.S.?
Principal Inbound International
Tax Issues (con’t.)
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10. What is the function of income tax treaties and
how do they modify the general U.S. rules of
federal income taxation?
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SOURCES OF INCOME — GENERAL RULES
U.S. source income
Foreign source income
Nature of Income
Interest
Debtor is U.S. person (except
80% U.S. person)
All other interest
Dividends
Paid by U.S. corporation or 25%
foreign corporation
All other dividends
Personal services income
Services performed in U.S.
unless: 90 day/$3,000/foreign
employer rule applies
Services performed outside the
U.S.
Rents and royalties
Property situated or used in U.S.
Property situated or used outside
U.S.
Real estate sales
Real property in U.S.
Real property not in U.S.
Sale of non-inventory personal
property
Seller is U.S. resident
Seller is nonresident
Sales of inventory purchased in
U.S.
Title passes in U.S.
Title passes outside the U.S.
unless nonresident seller and sale
made through U.S. office
Sales of inventory property
produced in the U.S.
Allocation and appointment
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U.S.
Nonresident
Alien
---------Foreign
Corporation
When is a Nonresident Alien or Foreign Corporation
Engaged in the Conduct of a U.S. Trade or Business?
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Classification Issues
NONRESIDENT ALIENS:
• Nonresident alien -- Neither a U.S. citizen nor a
U.S. resident alien
• Resident Alien:
– Greencard Test
– Substantial Presence Test:
• 31 days in the current year; AND
»
»
»
»
(1) # of days in the current year, plus
(2) 1/3 of # of days in first preceding year, plus
(3) 1/6 of # of days in second preceding year
> 183 days
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Classification Issues (con’t.)
ENTITIES:
• Determine Whether a Separate Entity
Exists for Federal Income Tax Purposes.
• If a Separate Entity Exists, Determine
Whether the Entity is a Trust or a
Business Entity.
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Classification Issues (con’t.)
3. If the Entity is a Business Entity, Determine
Whether it is Automatically Classified as a
Corporation.
4. If the entity is a business entity and it is not
automatically classified as a corporation,
classify the entity according to the regulations.
− Election
− Default Rules
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Examples of Alternative Forms of
Business in the U.S.
Sole Proprietorship
General Partnership
Limited Partnership
A
A
Individual
General
Partner
Business
B
Limited
Liability
Company
General
Partner
Limited
Liability
Company
Limited
Partnership
S Corporation
A
C Corporation
B
S Corporation
C
D
General
Partnership
Limited Liability Company
A
B
B
A
B
C Corporation
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DISREGARDED LIMITED LIABILITY COMPANY
Individual
disregarded for FIT
unless election made to
treat as corporation
Texas Limited
Liability Company
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DISREGARDED LIMITED LIABILITY COMPANY STRUCTURE
A
Limited
Liability
Company
33%
LP
1% GP
B
33%
LP
C
Limited
Partnership
A
100%
Disregarded
Limited Liability
Company
Assets
33%
LP
ONE PERSON PARTNERSHIP – REV. RUL. 2004-77
Taypayer
100%
LP
LLC
GP
Limited
Partnership
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Limited Partnership With More Than Two Limited Partners
Limited Partner
No. 1
Texas Limited
Liability Company
Limited Partner
No. 2
1%
GP
49.5%
LP
Texas
Limited
Partnership
49.5%
LP
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LLC With More Than Two Members
Member No. 2
Member No. 1
Member No. 3
25%
25%
Member No. 3
25%
25%
Limited Liability
Company
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U.S.
Foreign
Corporation
Branch Profits Tax Applies to Foreign Corporation
Doing Business in the U.S.
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Compare Sale of Goods
ROC
Shareholders
ROC
Shareholders
ROC Corporation
ROC Corporation
Intercompany
Sale of Goods
Cayman Islands
Corporation
U.S. Corporation
Consequences of
Solicitation and Sale in
the U.S.?
U.S. Business
Example of Foreign-Owned
U.S. Investment Structure
Nonresident Alien
Nonresident Alien
Non-U.S.
Corporation
U.S.
Corporation
U.S. Investment
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Illustration of Partnership
Investment Structure
U.S.
Investor
A
U.S.
Investor
B
U.S.
Investor
C
Nonresident
Alien
A
U.S. Limited
Liability Company
Limited
Partner
General
Partner
U.S.
Limited
Partnership
U.S. Business
Nonresident
Alien
B
Limited
Partner
Illustration of Tiered
Partnership Structure
Foreign
Corporation
Nonresident
Alien
Foreign
Partnership
U.S.
Investor
U.S.
Investor
U.S.
Partnership
U.S. Business
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Illustration of Sale of U.S. Real Estate &
Liquidation of U.S. Corporation
Nonresident
Alien
Nonresident
Alien
Nonresident
Alien
Cayman Islands
Corporation
Cayman Islands
Corporation
Cayman Islands
Corporation
liquidation of U.S.
Corporation
U.S. Corporation
U.S. Corporation
sale of real estate
in taxable sale
Sole asset
of U.S.
Corporation
U.S. Real Estate
$
(gain subject to U.S.
Federal income tax)
(capital gain on
liquidation not currently
subject to U.S. Federal
income tax)
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U.S. International Taxation
“SEMINARIO INVIERTA EN TEXAS”
ESTABLECIMIENTO Y OPERACIÓN DE NEGOCIOS
10 de Marzo 2010
Hotel Camino Real – Monterrey, Nuevo Leon, Mexico
© 2010 William H. Hornberger
William H. Hornberger
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
214-953-5857
[email protected]
IRS Circular 230 Notice: The statements contained herein are not intended to and do not constitute an opinion as to any tax or other
matter. They are not intended or written to be used, and may not be relied upon, by you or any other person for the purpose of avoiding
penalties that may be imposed under any Federal tax law or otherwise.