TaxConnections is fortunate to have of a community of intelligent and gifted tax authors. Recently, a book authored by one of our members named William Richards Jr. International Commerce – Financial And Taxation Law caught my attention.
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Tax Book Recommendation – International Commerce – Financial And Taxation Law By William Richards Jr.
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As a general proposition, when a United States person makes a transfer of property to a foreign corporation to which Sections 354, 356, and 361 of the Internal Revenue Code, hereinafter the Code, would be applicable the transferee foreign corporation is not considered a corporation for statutory purposes. (1) It is this general rule that provides domestic corporations’ nonrecognition treatment by virtue of Section 354, 356, and 361 of the Code and requires a foreign corporation to recognize gain when it would otherwise be accorded a tax-free reorganization.
Reorganizations are only those transactions constructed in Section 368 of the Code. (2) It is Read more
The income taxation treatment of foreign trusts and beneficiaries takes into account whether the party or entity has entered United States taxing jurisdiction. It is essential to draw a distinction between a foreign trust and a United States, domestic trust. A foreign trust is defined as one that is not a domestic trust. (1) The term trust itself embraces the notion of an inter vivos declaration in which trustees take title to property for the purpose of protecting or conserving it for beneficiaries in accordance with ordinary rules applicable in chancery or probate courts. (2)
The income taxation of a foreign trust requires there be certain contact factors. The factors to be considered, prior to the 1996 Tax Act, (Small Business Job Protection Act of 1996) in this Read more
An effective operational offshore company often used is the leasing company. Leasing has been utilized in the acquisition of assets and there is a split benefit gained through a leasing company. Tax benefits accrue in the way of substantial depreciation deductions reducing taxable income to one party, while the other party may also be entitled to amortization benefits. This is a cross-border effect of the virtues of depreciation. (1)
The leasing company in the United States context is governed by the Foreign Base Company Income category of Foreign Personal Holding Company Income. (See TaxConnections/TaxBlogoshere/September 20, 2013/Foreign Corporations and Subpart F Income-Part III). Foreign Personal Holding Company Income consisting of rental income Read more
Because of the nature of the global economy and the reality that it relies upon the equilibrium and floating mechanism of rates, financial collapse of a country’s currency has become a real financial risk. A world economy integration remains in its earliest stages of development. Developed, emerging, and underdeveloped economies have become bound by the General Agreement of Tariffs and Trade, GATT and the World Trade Organization, WTO. Trade and currency valuations are intertwined in total coherence.
Each nation experiences populism that brings about a pressure to provide employment and higher standards of living. Some have conceded to alarming national fiscal financial irresponsibility. Exporting to enhance current account surpluses and thwart balance of payment has become paramount. These imbalances shatter currency positions and Read more
A Licensing Company is a type of offshore company that involves intangible property and the licensing of its use. It involves a variety of issues relating to country disparity. This use of the offshore situs usually is a result of a particular foreign situs imposing withholding tax upon royalty income and is not treaty accommodating. Also, one may find peculiar foreign situs rules that effect the disposition of industrial property rights.
Licensing Companies seek International Financial Centers that provide more reliable substantive judicial systems to protect intangible and substantive rights, as compared to a country situs of licensing use. Licensing Companies also provide flexibility. The flexibility lies in the contracting for rights to use in different foreign locations. The issues of Subpart F Income, source of income concepts, and arm’s length pricing of related parties are the focus of structural planning. Read more
Just as with respect to Foreign Base Company Service Income (The Foreign Service Corporation in Transnational Corporate Structures, October 21, 2013/Corporate/Federal/International/Tax Blogosphere/TaxConnections/United States) the Foreign Base Company Sales Company is subject to the Subpart F Income provisions. But there are safe harbors where a controlled foreign corporation can avert the controlled legislation by structuring its activities. This enables one to establish cost saving efficiency and avail itself of a low tax jurisdiction in achieving that result.
This writing is organized to set forth these governing provisions and bring them together to provide a practical application to the Foreign Sales Company Income and its utility in the corporate structure in international enterprise. This basic introduction to offshore financial corporate structuring should assist in a logical approach in applying these overall concepts. The operational phase incorporates planning options in relation to the obstacles brought to bear by Subpart F Income treatment.
Foreign Base Company Sales Income and Manufacturing and Production
One of the more conventional corporate structures and use of Offshore Financial Centers is the establishment of a sales company. The main purpose is to attribute part of the sales functions to a separate enterprise to avail itself of low tax jurisdiction and improved proximity in foreign markets. Read more
Injecting a conduit offshore corporate entity in a transnational corporate structure can implement cost savings. One useful purpose is characterized as an offshore corporate entity that provides services within the organizational structure.
As stated in a previous segment, (Foreign Corporations and Subpart F Income – Part II on TaxConnections, 17/September 2013 – Corporate – International – Tax Blogosphere) the essence of this type of corporate planning is to combine the concept of ownership structure that subjects a foreign corporation to controlled status and activities of the corporate entity. The two concepts are intertwined in the implementation of Subpart F Income tax consequences.
If a foreign corporate entity has Subpart F Income because it has Foreign Base Company Income, but it is not deemed a controlled foreign corporation by virtue of ownership, it is not subject to Subpart F Income treatment. Those are two distinct planning features.
Conversely if the aspect of controlled ownership or the characterization of corporate activity of Subpart F Income treatment is averted by virtue of it not being deemed Foreign Base Company Income, it achieves the same planning result. The elimination of either enables the corporate taxpayer to remove itself from the application of Subpart F Income treatment. The gist of this Read more
With all the attention that is focused upon the inability of the United States government to facilitate harmony and solution in the legislative and executive branches regarding national debt, it might be a moment to reflect upon just where the implications of debt default arise. In a more indirect way, those implications do have a bearing upon taxation and governmental policy. They present real issues for accountant’s managing international business structures. (For reference see Currency and International Financial Centers, 30/September 2013, TaxConnections, International, Tax Blogoshere, United States.)
Government policy impacts and has transmission effects that ripple across foreign investment considerations regarding direct investment in the United States from offshore. That impacts integration of the global market place. As will be touched upon, the international financial system is integrated to the extent that a decision by a sovereign as to its monetary policy, alone, impacts its base currency, its eurodollar currency, and all the cross currency relationships across the globe. The uncertainty created by loggerhead dramatics does not promote global stability requisite to sound financial taxation planning.
EFFECTS OF FOREIGN SOVEREIGN IMMUNITY AND ACT OF STATE DOCTRINE
In connection with considerations given to these financial effects, it is appropriate to engage the concepts referred to as Sovereign Immunity and the Act of State Doctrine. These concepts are enforcement barriers in litigation. Equally important, the Act of State Doctrine impacts one of the vital considerations of sovereigns and policy. To adequately explain the Act of State Doctrine, it is helpful to contrast it with the doctrine of Foreign Sovereign Immunity. Read more
The normal assumption in domestic business transactions is the expectation that there will not be a movement in terms of a currency’s accelerating or declining value during the interim of a financial transaction. In an international transaction there is an expectation the currency will have volatility. The use of financial instruments has as its purpose, a prudence of assurance that delivery of currency on a contract date certain will enable the sale or purchase of goods to be unaffected by a fluctuation. To accommodate the necessity in the international market place to hedge international transactional risks, a business enterprise often utilizes an offshore corporate conduit to carryout the financial management of this function.
Financial instruments frequently are companion to a business transaction and utilized to manage the market risk inherent in the currency fluctuations of the floating exchange system. A purchase or sale of goods in conjunction with transnational agreements is in many instances a secondary transaction that poses a risk by virtue of a financial instrument being tied to the transaction. Where a purchase of merchandise requires payment in a currency other than the vendee, financial instruments insure against currency fluctuations. The purchase of such financial instruments is incidental to the transaction and can result in gain or loss of the actual financial instrument utilized to manage the risk.
One party to a transaction may anticipate a currency to accelerate in value and purchase a currency contract reflecting that expectation. Contrarily, a counter party may sell a currency contract anticipating a currency will Read more
It is in the context of summons and subpoenas that contestable issues occur promoting the need for the government in its supervisory role to utilize what is referred to as a Formal Document Request procedure and the use of treaty agreements. In understanding Formal Document Requests and treaty agreements, it is advantageous to first understand the glitches and defenses to the process available in the international context regarding summons and subpoenas.
There are two (2) basic taxpayer’s defenses asserted in resistance to summons and subpoenas. One such defense is that the taxpayer lacks the necessary control of the information sought to verify in satisfaction of the reporting requirements. The second basic defense is that to comply with the issued summons or subpoena would violate blocking statutes of a particular country. It is the success of the taxpayer with these basic defenses that create the necessity of the government to utilize Formal Document Requests and treaty agreements.
The crux of a taxpayer’s posture in its effort to avoid compliance with a summons or a subpoena is sometimes based on the lack of United States or other country’s jurisdiction, premised upon a lack of due process. The issue is raised as to the question of proper in personam jurisdiction in the service of summons and subpoenas on a foreign taxpayer. In determining a due process issue, the government is asserting judicial jurisdiction, in personam, based on due process of law. In this jurisdictional sense, due process arises when a statutory provision or constitutional authorization purports to provide a United States court a jurisdictional basis, and the assertion complies with due process notions. Read more