International Tax Blog

Attorney-Client Privilege Flowchart

Today our sister website, Tax-Charts.com, published a free flowchart of the attorney-client privilege.  The flowchart is shown below and is also available here.

Free Section 736 Flowchart

Today our sister website, Tax-Charts.com, published a free flowchart that deals with payments to a retiring partner or a deceased partner’s successor in interest under Code §736.  The flowchart identifies which payments should be considered Code §736(a) payments (distributive share or guaranteed payment) and which payments should be considered Code §736(b) payments (in exchange for the withdrawing partner’s interest in partnership property).

The flowchart is available for free here and a printable version of the flowchart can be found here.

Flowchart of LOB Article of Chile-U.S. Income Tax Treaty

Today our sister website, Tax-Charts.com, published a flowchart that deals with the limitation on benefits ("LOB") provisions included in Article 24 of the Chile-U.S. Income Tax Treaty.  Although the treaty has been signed, it has not yet been ratified and is not yet in force.

The limitation on benefits provisions are intended to prevent treaty shopping. The flowchart includes the various types of qualified persons and includes the Publicly Traded Test, the Ownership / Base Erosion Test, the HQ company test, the Active Business Test, Triangular Cases, etc.

The flowchart can be purchased on Tax-Charts.com for US$69.

 

 

Two New Flowcharts on Tax-Charts.com

Today our sister website, Tax-Charts.com, uploaded two new flowcharts.  One flowchart deals with the limitation of benefits clause of the Ireland-U.S. Income Tax Treaty and the other flowchart deals with the limitation of benefits clause of the Mexico-U.S. Income Tax Treaty.

The flowchart regarding the Mexico-U.S. Income Tax Treaty is available for free (here and a printable version of the flowchart can be found here) and the flowchart regarding the Ireland-U.S. Income Tax Treaty is available for purchase for $69 on Tax-Charts.com.

Flowchart of Rev. Proc. 93-27

Today our sister website, Tax-Charts.com, uploaded a free flowchart that deals with the taxation of profits interests under Rev. Proc. 93-27.  The flowchart includes the clarifications of Rev. Proc. 93-27 made in Rev. Proc. 2001-43, regarding the receipt of partnership interests that are not yet vested (as defined in Treas. Reg. §1.83-3(b)).

The flowchart can be found here and a printable version of the flowchart can be found here.

Two New Flowcharts

Today our sister website, Tax-Charts.com, published two new tax flowcharts.  One flowchart, available for free, deals with nonqualified preferred stock (“NQPS”) under Code § 351(g).  An earlier version of this flowchart was published on www.andrewmitchel.com several years ago.  However, the logic of the flowchart was flawed and therefore the chart was taken down.  We believe that the new chart is accurate, but, as stated on all of our flowcharts, the flowchart undoubtedly includes errors and omissions and should not be relied upon for any purpose whatsoever.

The second flowchart deals with the limitation on benefits clause in Article 16 of the Australia-U.S. Income Tax Treaty.  This chart is available for $69.

Free Flowchart of Rev. Proc. 2009-41

Today our sister website, Tax-Charts.com, published a new flowchart regarding relief for late entity classification elections.  The flowchart covers the requirements of Section 4.01 of Rev. Proc. 2009-41 to be eligible for a late entity classification election.

The flowchart is available for free.  Click on the image below to view the flowchart.  A printable version of the flowchart is also available.

 

Software Classification Flowchart

Today our sister website (Tax-Charts.com) published a new flowchart dealing with rules for classifying transactions related to computer programs under Treas. Reg. § 1.861-18.  The flowchart is available for purchase as a PDF file for $49.

The flowchart addresses the four types of transactions in the regulations, including services, know-how, copyright rights, and coyprighted articles.

Tax-Charts.com now has a total of 14 flowcharts, including:

1. Section 152: Dependents (Free)
2. Section 302: Distribution in Redemption of Stock (Free)
3. Section 367 & More: Exceptions to Nonrecognition for Cross-Border Transfers ($499)
4. Reg. 1.861-18: Classification of Transactions Involving Computer Programs ($49)
5. Sections 871(h) & 881(c): Portfolio Interest Exception ($49)
6. Section 877A(g): Covered Expatriate Under Section 877A(g) ($49)
7. Section 954(d): Foreign Base Company Sales Income ($169)
8. Section 954(e): Foreign Base Company Services Income ($49)
9. Section 956: Investments in U.S. Property ($49)
10. Section 2501: U.S. Gift Taxes on “Cross-Border” Gifts ($49)
11. Foreign Trust & Gift Reporting Under Sections 6048 & 6039F ($49)
12. Section 7701(b): U.S. Individual Income Tax Residency ($49)
13. Permanent Establishment: Article 5 of the OECD Model Income Tax Treaty ($49)
14. Limitation on Benefits: Article 22 of the U.S. Model Income Tax Treaty ($49)

Hybrid Entities and Reverse Hybrid Entities

U.S. tax planners often refer to “hybrid entities” and “reverse hybrid entities.”  This blog entry briefly discusses the meaning of these terms.

From a U.S. tax perspective, a hybrid entity is an entity that is “fiscally transparent” for U.S. tax purposes but not fiscally transparent for foreign tax purposes.  In general, an entity is fiscally transparent if the entity’s current year profits are currently taxable to the owners of the entity, regardless of whether the entity made any distributions to its owners during that year.  (See Treas. Reg. § 1.894-1(d)(3)(ii) and (iii) for a more extensive definition.)

Partnerships are typically fiscally transparent entities.  Corporations are typically not fiscally transparent entities.  Limited liability companies and various types of foreign entities may or may not be fiscally transparent.

A reverse hybrid entity is the “reverse” of a hybrid entity in that the entity is fiscally transparent for foreign tax purposes but not fiscally transparent for U.S. tax purposes.  Entities that are treated the same for U.S. and foreign tax purposes are not “hybrid” entities.

Shown below is a flowchart/decision tree that helps determine whether an entity is a hybrid entity or a reverse hybrid entity.  The flowchart also indicates some of the special U.S. tax rules that may apply to domestic and foreign, hybrid and reverse hybrid entities. (Click here for a full-size PDF file of the chart)

U.S. Model Treaty: Limitation on Benefits Flowchart

Today our sister website, Tax-Charts.com, offered a new flowchart for sale, covering limitation on benefits ("LOB") provisions of Article 22 of the 2006 U.S. Model Income Tax Treaty.  U.S. income tax treaties generally include rules that limit the benefits of the treaties to prevent treaty shopping.  These rules are typically called "limitation on benefits" or "LOB" provisions. 

Tax-Charts.com now has a total of 12 flowcharts, including : Section 302: Distribution in Redemption of Stock (Free).

Covered Expatriate Flowchart

Today our sister website, Tax-Charts.com, published a new flowchart regarding the term “covered expatriate” under Code § 877A.  Under this section, certain individuals that renounce their U.S. citizenship or cease to be long term U.S. residents are deemed to have sold their worldwide assets just prior to expatriation.  Tax is due on the deemed sale to the extent that net gain exceeds $627,000 (for 2010).

Only “covered expatriates” are subject to the deemed sale rules.  The flowchart guides one through the logic of whether an individual is an “expatriate” and then if the individual is a “covered expatriate.”  The flowchart does not go through the details of calculating the gain or the special rules regarding deferral of the tax, deferred compensation, deferred tax accounts, and nongrantor trusts.

Tax-Charts.com now has a total of 11 flowcharts, including:

1. Section 152: Dependents (Free)
2. Section 302: Distribution in Redemption of Stock (Free)
3. Section 367 & More: Exceptions to Nonrecognition for Cross-Border Transfers ($499)
4. Sections 871(h) & 881(c): Portfolio Interest Exception ($49)
5. Section 877A(g): Covered Expatriate Under Section ($49)
6. Section 954(d): Foreign Base Company Sales Income (Subpart F Income) ($169)
7. Section 956: Investments in U.S. Property ($49)
8. Section 2501: U.S. Gift Taxes on “Cross-Border” Gifts ($49)
9. Foreign Trust & Gift Reporting Under Sections 6048 & 6039F ($49)
10. Section 7701(b): U.S. Individual Income Tax Residency ($49)
11. Permanent Establishment: Article 5 of the OECD Model Income Tax Treaty ($49)

Free Code § 302 Redemption Flowchart

On our sister website, Tax-Charts.com, we have published a flowchart of distributions in redemption of stock under Code § 302.  Redemptions of stock can be treated either as sales/exchanges or as Code § 301 distributions.  The flowchart leads the user, step-by-step, through the process of determining whether the redemption should be treated as a sale/exchange or as a Code § 301 distribution.

The flowchart covers the substantially disproportionate rules of Code § 302(b)(2) as well as the family attribution rules of Code §§ 302(b)(3) and 302(c), and more.

The flowchart is available for free.  Students taking corporate tax classes may be particularly interested in studying the flowchart.

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

Tax-Charts.com & Section 367 Flowchart

This week we launched a new sister website.  The website is Tax-Charts.com.  This website contains flowcharts of certain U.S. tax rules.  The site currently includes three flowcharts: cross-border transfers under section 367, U.S. Individual Income Tax Residency Flowchart, and Cross-Border Gifts Flowchart.

  

By far, the most important of these three flowcharts is the section 367 flowchart.  This flowchart has taken three years to complete and is three and a half feet tall and nearly six feet wide.  The flowchart has over 325 color-coded boxes with questions and answers dealing with recognition of gain or loss on transfers to and from foreign corporations.

 

Each of the flowcharts leads the user through a logical procession of questions to arrive at the U.S. tax results for the transaction.  Each box contains a citation to authority and an abbreviated title.  The abbreviated titles help expedite the thinking process for seasoned users of the flowchart.

Section 367 - Exceptions Upon Exceptions

The U.S. tax rules dealing with cross-border corporate nonrecognition transactions are some of the most complicated tax rules in existence.  It is remarkable how many exceptions can exist.  The following example of an outbound asset reorganization demonstrates six levels of rules and exceptions to those rules.

Outbound Asset Reorganization

GAIN:  In general, gain is recognized upon an exchange of one asset for another asset.  Code § 1001.

NO GAIN:  An exception to gain recognition exists where corporations transfer their assets to another corporation in exchange for stock in the other corporation under Code § 361(a) in certain Code § 368 corporate reorganizations.

GAIN:  If the transferor corporation is a domestic corporation and the transferee corporation is a foreign corporation, then Code § 367(a)(1) provides an exception - gain is recognized on the transfer.

NO GAIN:  However, if the asset being transferred from the domestic corporation to the foreign corporation is stock in a foreign corporation, then it may be possible (under certain circumstances) for the domestic transferor corporation not to recognize gain.  Code § 367(a)(2) and Treas. Reg. § 1.367(a)-3(b).

GAIN:  In this example, the exchange was non-taxable under Code §§ 361(a) and 367(a)(2).  The first sentence of Code § 367(a)(5) provides that the exception under Code § 367(a)(2) does not apply to Code § 361(a) exchanges.  Thus, gain would be recognized.

NO GAIN:  The second sentence of Code § 367(a)(5), however, provides that the first sentence in Code § 367(a)(5) does not apply if the transferor corporation is controlled by 5 or fewer domestic corporations and certain other requirements are met.  Thus, it may be possible not to recognize gain.

In a simple asset reorganization under Code § 368(a), the target corporation will exchange its assets for stock in the acquiring corporation, and then the target corporation will distribute to its shareholders the acquiring corporation stock it received.  The above analysis only discusses the first of these two steps (exchange of assets for stock).  The second step in a simple asset reorganization (the distribution of the acquiring corporation stock) requires an entirely separate analysis to determine whether the distribution is taxable.  Further, when dealing with cross-border reorganizations, certain transfers can be deemed to occur.

We will soon be publishing a massive flowchart of Code § 367 and the regulations thereunder.  [UPDATE: See Section 367 flowchart]  The flowchart is more than 3 feet tall and more than 5 feet wide, and it has over 300 color-coded boxes with questions and answers.  The flowchart leads one through a logical procession to arrive at the U.S. tax results for cross-border transfers.  The flowchart will not only deal with Code § 367, but also with various other cross-border rules.

The flowchart will be available for sale on a soon-to-be-announced sister website.

Canadian Outbound Taxation

I recently read an article dealing with Canadian taxation of cross-border transactions.  Part of the article discussed the Canadian approach to outbound taxation.  In many ways, the Canadian rules for taxing outbound investments are very similar to the U.S. rules. 

The U.S. generally allows for deferral -- Canada generally allows for deferral.

The U.S. has certain anti-deferral regimes (subpart F income and passive foreign investment companies) -- Canada has certain anti-deferral regimes (foreign accrual property income, or "FAPI," and foreign investment entities).

The U.S. allows foreign tax credits to offset U.S. tax when foreign profits are repatriated -- Canda allows foreign tax credits to offset Canadian tax when foreign profits are repatriated.

One major difference, however, is that the U.S. generally does not allow foreign profits to be exempt from U.S. taxation when the profits are repatriated.  In contrast, Canada exempts from Canadian corporate income tax certain foreign profits of active businesses in countries that have income tax treaties or tax information exchange agreements ("TIEAs") with Canada.

Based solely on information provided in the article, we have created a rudimentary flowchart showing the Canadian taxation of outbound transactions.  The flowchart is shown below: (for a larger version of this chart, click here)