Today, 90% of all US exporting and importing is done by small and medium-sized c
ID: 2420266 • Letter: T
Question
Today, 90% of all US exporting and importing is done by small and medium-sized companies. If structured properly, if profits are not repatriated back to the US, a US entity does not have to pay US taxes on those foreign profits.
Research Questions:
What are the tax rules of the repatriation and IRC § 952 subpart F income laws that avoid paying tax in the US? How do the IRC § 482 transfer tax rules work and what should they know about them?
Discussion Questions:
Do you think it's fair that companies not pay tax on foreign profits? Also, read the attached article and provide an opinion if US corporations indeed are paying to much tax.
Explanation / Answer
Tax rules of the repatriation and IRC § 952 subpart F income laws that avoid paying tax in the US:
If you have c controlled foreign corporation (CFC) the income of a foreign subsidiary generally is not subject to U.S. taxation. A CFC's earnings and profits are included in the gross income of its U.S. shareholders when there are actual distributions (but only to the extent of the earnings) or when there are deemed distributions under subpart F. Under Subpart F, earnings of a CFC are included in the income of the U.S. shareholders to the extent the CFC has Subpart F income or is considered to invest its earnings in U.S. property.
Earnings that are subject to taxation under Subpart F as a deemed dividend are not taxed again when actual distributions are made to the U.S. shareholders.
In determining the U.S. taxation of a CFC earnings, rules are necessary to coordinate the different inclusion rules, which are : a) Subpart F Income b) Dividends c) Investments in U.S. property.
Under the ordering rules steps are:
IRC 482 Transfer tax rules
The taxpayers clearly reflect income attributable to controlled transactions and to prevent avoidance of taxes regarding such transactions. Under section places a controlled taxpayer on a tax parity with an uncontrolled taxpayer by determining true taxable income.. In determining the true taxable income of a controlled taxpayer, the Service is not restricted to the case of improper accounting, to the case of a fraudulent transaction, to reduce or avoid tax by shifting or distorting income, deductions, credits, or allowances. Transactions between controlled taxpayers which may involve an IRC section 482 issue include the following:
One entity performs services for another entity without charge or at a charge which does not reflect an arm's-length payment,
One entity makes a loan or advance to another entity and charges no interest or does not charge an arm's-length interest rate,
One entity leases property to another entity at a rental charge that is not an arm's-length rental charge,
One entity sells poperty to another entity at a sales price that is not an arm's-length price.
There are few adjustments which has to be made: a) to accomplish tax parity, the service may allocate items of income or expense among controlled taxpayers. The initial adjustment which ordinarily increases the income of one or more members is the primary adjustment and the corresponding decrease in income of the other member is the correlative adjustment.
Agreed Issues:
1. All related parties must be in full agreement with the IRC section 482 issue.
2. Obtain a signed agreement or payment of the deficiency from the primary-adjustment taxpayer.
3. Make the correlative adjustments and obtain agreements for the overassessment.
4. The taxpayers will be advised that their cases can be more expeditiously adjusted and closed if the taxpayers scheduled to receive refunds will voluntarily consent in writing to have the refunds applied against the proposed deficiencies.
So these are the tax rules