Chapter 25 Multijurisdictional Taxation: International and State and Local Transactions

State and Local Taxation Chapter 25 CCH Federal Taxation Comprehensive Topics

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 Types of State and Local Taxes Chapter 25, Exhibit 1a CCH Federal Taxation Comprehensive Topics

Type of Tax Individual Income Taxes Corporate Income Taxes General Sales Taxes Gross Receipts Taxes Franchise Taxes Real Property Taxes 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 Types of State and Local Taxes Chapter 25, Exhibit 1b CCH Federal Taxation Comprehensive Topics

Types of Tax Personal Property Taxes Unemployment Taxes Use Taxes Excise Taxes Transfer Taxes Severance Taxes 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 Types of State and Local Taxes Chapter 25, Exhibit 1c CCH Federal Taxation Comprehensive Topics

Corporate State Income Tax Formula for Multistate Corporation Federal income tax base + State adjustments (such as interest on state and local bonds) • State adjustments (such as interest on federal obligations) • Income tax base to be allocated and apportioned - Allocable income(income specifically allocated to particular states) Total income eligible for apportionment x State apportionment percentage State apportioned income + Allocated income State income tax base x State's income tax rate Tentative state income tax - Tax credits State income tax liability Chapter 25, Exhibit 2 CCH Federal Taxation Comprehensive Topics

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 Comprehensive Topics

New Jersey • New Jersey is what’s known as a ‘gross income’ state. • Calculation does not begin with Federal Income • Only includes losses to the extent of a gain offset. • No Local or Per Capita tax. CCH Federal Taxation Comprehensive Topics

Reciprocity • If you live in State A and work in State B, and a reciprocity agreement has been negotiated by the states, then you can elect to have State A’s tax withheld and not pay to State B. • i.e., NJ and Pennsylvania CCH Federal Taxation Comprehensive Topics

Internet Tax Freedom Act The 2007 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 moratorium has been extended to November 1, 2014. Chapter 25, Exhibit 13 CCH Federal Taxation Comprehensive Topics

ExampleComplexity of Relationships in E-commerce Seller in Virginia Information stored on server in the District of Columbia Web site developed and maintained in California Warehouse in Connecticut Customer in New York Chapter 25, Exhibit 14 CCH Federal Taxation Comprehensive Topics

International Taxation Chapter 25 CCH Federal Taxation Comprehensive Topics

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 Comprehensive Topics

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 Chapter 25, Exhibit 16b CCH Federal Taxation Comprehensive Topics

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 Comprehensive Topics

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 Comprehensive Topics

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 Income Tax Treaty Partners • Poland • Portugal • Romania • Russia • South Africa • Spain • Sweden • Switzerland • Thailand • Turkey • United Kingdom Chapter 25, Exhibit 18 CCH Federal Taxation Comprehensive Topics

Income Category Gains from Real Property Business Profits Shipping and Air Transport Dividends Interest & Royalties 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. U.S. Model Income Tax Treaty Provisions Chapter 25, Exhibit 19a CCH Federal Taxation Comprehensive Topics

Income Category Directors' Fees Wages Pension, Social Security, & Annuities Child Support & Alimony 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. Wages derived by a resident of one country may be taxed only by that country unless the employment is in the other party to the treaty. However, remuneration derived by a resident of one country with respect to employment in the other treaty party may be taxed only by the country of residence if the recipient is present in the country for no more than 183 days in any 12-month period commencing or ending in the tax year, the remuneration is paid by or on behalf of any employer who is not a resident of the country, and the remuneration is not borne by a permanent establishment that the employer has in the country. 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. U.S. Model Income Tax Treaty Provisions Chapter 25, Exhibit 19b CCH Federal Taxation Comprehensive Topics

Country Australia Canada Czech Republic Germany Japan Mexico New Zealand Russia Switzerland United Kingdom Income Tax Rates 0-45% 15-29% 15% 0-45% 5-40% 0.5-28% 19.5-39% 13% 0-11.5% 10-40% Tax Rates of Selected Treaty Countries 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 Comprehensive Topics

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 Comprehensive Topics

Income Category Personal Services Rents and Royalties Interest Dividends Disposition of Realty Disposition of Intangibles Disposition of Personalty: Securities Depreciable property 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 Seller is U.S. resident Title passes in U.S. General Sourcing Rules 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 foreign resident Title passes abroad Chapter 25, Exhibit 21b CCH Federal Taxation Comprehensive Topics

Income Category Sale of Inventory (if taxpayer manufactures the property, income is allocated) Currency Exchanges International Communications Transportation Distributive Share of Income from Pass-through Entity 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 General Sourcing Rules U.S.-Source Title passes in U.S. Taxpayer owning underlying item is U.S. resident 50% of income of U.S. person Transportation begins and ends in U.S. 50% of income from transportation beginning or ending abroad Entity has U.S.-source income Chapter 25, Exhibit 21c CCH Federal Taxation Comprehensive Topics

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 Comprehensive Topics

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 Comprehensive Topics

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 Comprehensive Topics

Calendar Year 2006 2007 2008 Exclusion Amount Is $82,400 $85,700 $87,600 Annual Exclusion for Foreign Earned Income Chapter 25, Exhibit 27 CCH Federal Taxation Comprehensive Topics

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 Chapter 25, Exhibit 28 CCH Federal Taxation Comprehensive Topics

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 Chapter 25, Exhibit 29 CCH Federal Taxation Comprehensive Topics

America Samoa Andorra Anguilla Antigua and Barbuda Aruba Bahamas Bahrain Barbados Belize Bermuda British Virgin Islands Campione d’Italia Canary Islands Cayman Islands Cook Islands Costa Rica Cyprus Dominica Dubai Fiji Islands Gibraltar Grenada Guernsey Hong Kong Isle of Man Jersey Liberia Liechtenstein Luxembourg Madeira Maldives Malta Mauritius Monaco Montserrat Nauru Netherlands Antilles Tax Havens • Niue • Panama • Qatar • Samoa • Seychelles • Singapore • Soloman Islands • South Africa • St. Lucia • St. Kitts and Nevis • Switzerland • Tahiti • Tonga • Turks and Caicos • Vanuatu Chapter 25, Exhibit 36 CCH Federal Taxation Comprehensive Topics

Chapter 25 Multijurisdictional Taxation: International and State and Local Transactions