Learning Goal: I’m working on a accounting presentation and need an explanation and answer to help me learn.
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
- 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. - 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.
- 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.- Is Singerr engaged in a U.S. trade or business? Explain.
- 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?
- 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
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