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International Taxation

International Taxation. Introduction Howard Godfrey, Ph.D., CPA. International Taxation The U.S. imposes taxes on “worldwide” income of U.S. taxpayers (citizens, resident aliens and corporations organized in the U.S.).

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International Taxation

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  1. International Taxation Introduction Howard Godfrey, Ph.D., CPA

  2. International Taxation • The U.S. imposes taxes on “worldwide” income of U.S. taxpayers (citizens, resident aliens and corporations organized in the U.S.). • The U.S. imposes taxes on non-resident aliens (not U.S. citizens) and non-resident entities on income earned in the U.S. • A foreign person, who becomes a U.S. resident, is taxed like a U.S. citizen (on worldwide income). • A foreign owned corp. that is organized in this country is subject to U.S. income taxes. Etc.

  3. 1. Intro. To International Tax

  4. Notes for case for Bud • Please note that the case for Bud involves a U.S. tax person. Same principles apply for a U.S. corporation with a branch in the foreign country, or a U.S. proprietorship with a branch operation in the foreign country. • These concepts do not apply to a foreign person with income earned in the U.S.(Alien working in U.S., etc.)

  5. Please note the variety of ways the tax systems of various countries may interact with each other. In a territorial system, each country imposes taxes on income earned in its territory. In a world-wide or global system, a county taxes income earned worldwide by its citizens. This may cause income to be taxed in more than one country. Double taxation. Credits allowed, etc.

  6. The following slides involve the taxation of income earned in the U.S. and income earned in the U.K. The tax rates are hypothetical and various assumptions are made regarding the nature of the tax systems: territorial, world-wide, etc. The examples are designed to illustrate important concepts and may not accurately reflect the tax systems actually in effect in the countries.

  7. Note: you can repeat the slides above for a U.S. Corporation. The U.S. corporation has net income from U.S. operations of $100,000 and net income from a branch office in a foreign country. • The same principles apply. • Other rules apply for foreign Sub.

  8. Note: The first slide (results) for Bud involves him simply excluding the income earned in a foreign country. That is the essence of Sec. 911, which allows a worker in a foreign country to exclude $80,000 per year, as well as certain housing costs.

  9. Look at Example 16-3 and the preceding formula for the tax credit limit. What happens if she also earns some interest income in a foreign country that does not impose an income tax. Would that cause the value of the fraction on the tax credit formula slide to be larger, leading to a larger credit limit? No. See Tax Credit Limits – example 16-4 Baskets and separate limits for them!!!!!

  10. Foreign Tax Credit Jackson Corp.’s taxable income for 2006 from all of its global operations was $500,000, resulting in U.S. federal income tax of $200,000 before credits. Jackson’s taxable income from foreign sources was $125,000 during 2006. Jackson paid income taxes of $60,000 to foreign governments. What is Jackson’s foreign tax credit limitation for 2006? a. $200,000 b. $60,000 c. $50,000 d. $12,500

  11. Foreign Earned Income Exclusion CHOOSING A DEDUCTION, CREDIT OR EXCLUSION A taxpayer should carefully choose between: (1) a deduction for foreign income taxes, (2) a credit on for foreign income taxes, or (3) an exclusion of up to $80,000 of foreign earnings from U.S. gross income.

  12. Case 1-1 Case 1. A U.S. citizen has the opportunity to earn an extra $100,000, and that income is earned in a foreign country. The taxpayer’s U.S. income tax is $30,000 (marginal rate of 30%) on the foreign income and the foreign government imposes an income tax of $20,000 on that income.

  13. Case 1-3 The Code provides a deduction for foreign income taxes paid. A deduction of $20,000 for these taxes will generate a tax savings of $6,000 (30% of $20,000). However, a tax credit for these foreign taxes will yield a savings on U.S. income tax of $20,000. The greatest saving is realized by excluding $100,000 from U.S. income, thereby saving U.S. income tax of $30,000.

  14. Case 1-4 Best situation is to earn tax-free income in foreign country and exclude it from the U.S. income tax computations.

  15. Foreign Earned Income Exclusion Section 911 provides an (a): (1) exclusion of up to $80,000 of foreign earned income (2) exclusion for foreign housing costs by employees and (3) deduction of certain foreign housing costs by self-employed individuals.

  16. Foreign Earned Income Exclusion Sara applies for and receives a work assignment in England for Big Corp. She moved to London on 1-1-2006. She worked and lived there continuously until the middle of 2007, when she returned to the U.S. Her salary is $200,000 per year, in both 2006 and 2007. What is the amount of her foreign earned income exclusion for 2007? a. $0 b. $40,000 c. $60,000 d. $80,000

  17. Foreign Earned Income Exclusion A taxpayer working in a foreign country reports total world-wide income on Form 1040 and then takes a deduction “for AGI” for the exclusions provided by Section 911. In effect, the exclusions are taken via deductions on the Form 1040.

  18. Foreign Earned Income Exclusion The terms “foreign,” “abroad” and “overseas” refer to a situation in which a taxpayer lives and works in a foreign country.

  19. Foreign Earned Income Exclusion Regular Tax Rules Continue to Apply. A taxpayer working abroad is subject to all of the tax rules applicable to those living in this country, and must deal with additional rules that are uniquely applicable those with foreign income.

  20. Foreign Earned Income Exclusion Regular Tax Rules Continue to Apply. Worldwide income is reported on the Form 1040, even though the foreign income may be subject to foreign income taxes as well.

  21. Foreign Earned Income Exclusion A taxpayer working abroad is subject to the regular rules that require inclusion in income of all fringe benefits that do not qualify for exclusion under Section 132 or other sections of the code. For example, fringe benefits in the form of the right to use the employer’s property or facilitiesare fully taxable unless excluded under Section 119.

  22. Foreign Earned Income Exclusion Case 1. A taxpayer lives in Japan and is employed there all year. He receives a salary of $6,000 a month. He lives rent-free in a house provided by the employer that has a fair rental value of $3,000 a month. The house is not provided for the employer’s convenience. The taxpayer has $72,000 salary from foreign sources plus $36,000 fair rental value of the house, for a total of $108,000 of foreign earned income. These amounts may be excluded as foreign housing costs or as part of foreign earned income.

  23. Foreign Earned Income Exclusion Self-Employment Tax. A self-employed taxpayer is generally subject to the same rules for paying self-employment tax whether he lives in the United States or abroad.

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