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Chapter 16,
U.S,Taxation of
Foreign-Related
Transactions
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U.S,TAX OF FOREIGN-
RELATED TRANSACTIONS
?Jurisdiction to tax
?Taxation of U.S,citizens & residents
?Taxation of nonresidents
?U.S,taxation of foreign activity
?Foreign sales corporations
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Jurisdiction to Tax
?Taxpayer’s country of citizenship
?Taxpayer’s country of residence
?Type of income earned
?Location where the income is
earned
4
Taxation of U.S,Citizens
and Residents (1 of 3)
?U.S,citizens and resident aliens
taxed on worldwide income
?Income earned in foreign countries
or U.S,possessions receives special
treatment
?The foreign tax credit permits U.S,
taxpayers to avoid double taxation..,
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Taxation of U.S,Citizens
and Residents (2 of 3)
?Foreign tax credit
–Directly reduces U.S,tax liability
–FTC and FEI are mutually exclusive
–FTC restricted for some taxpayers
–FTC limited to lesser of
Foreign tax actually paid OR
((foreign taxable inc)/(worldwide taxable
income)) x (U.S,tax liability)
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Taxation of U.S,Citizens
and Residents (3 of 3)
?Foreign earned income exclusion (FEI)
–U.S,taxpayers who are bona fide
residents of another country may exclude
$78,000 of foreign earned income
–Taxpayer must be a foreign resident for
330 days of the tax year before qualifying
–FEI limited to lesser of
?Foreign earned income for current year OR
?$78,000 x # of qualifying days in current year
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Taxation of Nonresidents
(1 of 5)
?Resident aliens are taxed same as
U.S,citizens
?Nonresident aliens generally taxed
only on U.S,source income
?Taxpayer is a resident alien if they
meet one of the two tests
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Taxation of Nonresidents
(2 of 5)
?Resident alien tests
–Green-card test
?Permanent resident w/,green card” visa
–Physical presence test
?Present ? 31 days during current calendar
year and present ? 183 weighted average
days during a three year period
? Current year,1 day counted as 1 day
? Prior year,1 day counted as 1/3 day
? 2nd prior year,1 day counted as 1/6 day
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Taxation of Nonresidents
(3 of 5)
?Most U.S,source passive or
investment income is taxed
?Non-U.S,trade or business (USToB)
capital gains NOT taxed unless
individual physically present ? 183
days during tax year
?Non-USToB interest from banks or
other financial institutions not taxed
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Taxation of Nonresidents
(4 of 5)
?Portfolio interest is exempt
?Income from casual sale of personal
property is exempt
?Ordinary investment income and
capital gains taxed at 30% rate applied
to gross income amount if physical
presence test is met
?Individuals must itemize deductions
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Taxation of Nonresidents
(5 of 5)
?If income or capital gains not
connected to a USToB,no deductions,
expenses or losses may be taken,and
taxed at 30% of gross
?Normal deductions apply for items
“connected” to a USToB
–Gains from real property considered
“connected” to a USToB
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U.S,Taxation of Foreign
Activity (1 of 2)
?Controlled foreign corporations
(CFC) exempt from taxation on
foreign source income
?Qualifying FSCs partially exempt
from the U.S,tax,and corporate
shareholders may claim a
dividends received deduction
–No new FSCs after 10/1/2000
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U.S,Taxation of Foreign
Activity (2 of 2)
?Some corporations operated in
Puerto Rico or a U.S,possession
prior to 1/1/1996 can qualify for a
special tax credit that can exempt
part or all of their non-U.S,income
from U.S,taxation
–A new Puerto Rico Economic Activity
Credit applies for tax years beginning
after 12/31/1995 and before 1/1/2006
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Foreign Sales
Corporations
?In July 1999,the World Trade
Organization determined that FSC
export incentive is an illegal export
subsidy
?FSC rules replaced with
extraterritorial income rules
–WTO considers extraterritorial income
rules an illegal export subsidy
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