Planning for Foreign-Owned United States Operations

Please complete the homework problems found below. These will help you to apply the concepts you have learned from the readings. They require you to think critically about hypothetical situations to determine how to handle the given problem for tax purposes.

Unit 4 Problems

1. Harold, a nonresident alien, owns 5% of USAco, a U.S. corporation. USAco pays Harold a $1,000 dividend during the current year. Harold also purchases an unassignable bond issued by USAco, and receives a $2,000 payment. Are there any U.S. withholding requirements with respect to these interest and dividend payments? Please explain.
2. Brewy is a foreign corporation that produces beer for sale worldwide. Brewy markets its beer in the United States through a U.S. limited liability company that is treated as a disregarded entity for U.S. tax purposes. The hybrid branch operates a sales office located in New York City. During the current year, Brewy’s effectively connected earnings and profits are $6 million, and its U.S. net equity is $12 million at the beginning of the year, and $8 million at the end of the year. In addition, a review of Brewy’s interest expense account indicates that it paid $320,000 of portfolio interest to an unrelated foreign corporation, $100,000 of interest to a foreign corporation, which owns 18% of the combined voting power of Brewy’s stock, and $240,000 of interest to a domestic corporation.

Compute Brewy’s branch profits tax, and determine its branch interest withholding tax obligations. Assume that Brewy does not reside in a treaty country.

1. Chad Singerr, a citizen and resident of country H, conducts a four-concert tour in the United States. A multi-talented individual, Singerr sells tickets to his concert from the ticket booth before his concert begins. During intermission, he sells beverages from the concession stand. Afterwards, Singerr sells T‑shirts at the concession stand.
   1. Is Singerr engaged in a U.S. trade or business? Explain.
   2. If Singerr is engaged in a U.S. trade or business, what income is subject to U.S. tax? When does Singerr pay any U.S. tax? What form does he need to file?
2. ForParentCo plans to locate a new factory in the United States. Wanting to limit its liability in the U.S. against litigation, ForParentCo will structure the new facility as a wholly owned U.S. subsidiary, DomSub. ForParentCo anticipates financing DomSub with an equity investment. ForParentCo projects that in DomSub’s first year of operations, DomSub will generate $20 million of taxable income, all from active U.S. manufacturing activities. In conducting this analysis, further assume the following:

• The U.S. corporate tax rate is 21%.
• ForParentCo’s only item of income during that first year is income derived from DomSub.
• Foreign country F taxes its residents on its worldwide income, with the sole exemption for dividends received from corporations outside their country (these dividends would be exempt from tax). Although country F offers a direct credit for income taxes paid in countries outside of their country, a credit is not available for taxes paid to other countries related to dividends received from companies that reside in those countries (deemed paid or withheld).
• The corporate income tax rate in foreign country F is 23%.
• FORco will need $10 million in post-tax cash to fund its foreign operations.
• Country F has a tax treaty with the United States that results in U.S. withholding tax of 5% on dividends and 0% on interest.

ForParentCo does have the opportunity to structure the operations with up to $50 million of debt from ForParentCo to DomSub, which would incur an annual interest payment of $5 million. ForParentCo wants cash after-tax of $10 million to fund foreign operations. Which capitalization method provides the lowest tax cost of the repatriation?

Reference

Misey, J., & Schadewald, M. S. (2018). Practical guide to U.S. taxation of international transactions (11th ed.). CCH.