You have just started a new job at Wealth Advisors International LLP, a tax, accounting and financial advisory firm to high net worth individuals and businesses based in the U.S. or Europe. These clients conductvarious commercial and/orpersonal activities in the U.S. and/or in European countries. On your first day you are given the following questions to answer.
Question 1. Elizabeth Jones, a wealthy retired heiress who was born, grew up and is a citizen of Scotland, started to spend a fair amount of time in the U.S. over the past several years. She does not plan to immigrate to the U.S. and does not have a "green card." She purchased a 5,000 square foot townhouse in the Back Bay section of Boston, MA, USA where she lives when in the U.S. When not in the U.S. she lives, at different times throughout the year, in luxury hotels in Scotland, Portugal and Monaco. Elizabeth had heard some years ago that to avoid becoming subject to U.S. tax on her personal income she had to avoid spending more than 183 days in the U.S. in the course of a calendar year. Elizabeth apprises you that she spent 130 days in the U.S. in 2015, 130 days in the U.S. in 2016 and will spend 130 days in the U.S. in 2017 as well. In light of this information does it appear that Elizabeth has an obligation to file a U.S. personal income tax return for 2015, 2016 and/or 2017?
Question 2. USCorp. is a company organized in Delaware, U.S. USCorp. has been doing business in the U.S. for a number of years, but started doing business outside the U.S., in Italy, for the first time in 2017. In 2017 USCorp reported the following income amounts:
Italy Income $1,000,000
US Income 5,000,000
Assume the U.S. imposes its corporate income tax at a flat 35% rate and Italy imposes its corporate income tax at a flat 25% rate. What would expect USCorp's aggregate income tax (i.e., total income tax paid to Italy and the U.S.) to be for 2017?
a. What would USCorp's aggregate income tax expense be for 2018 if the facts are the same as in 2018, except that Italy raised its income tax rate in 2018 to a flat 45%?
b. Assume the facts are the same for 2019 as in 2018, except that additionally on the first day of 2019 USCorp also acquired all the stock of a subsidiary in the UK which subsidiary conducted an active trade or business (i.e., subpart F of the IRC does not come into play). The subsidiary: paid a $500,000 dividend to USCorp in 2019; reported earnings and profits of $1,000,000 for 2019; and paid $200,000 of income tax to the UK in 2019.
Question 3. Focusing on USCorp's UK subsidiary - -
a. Assuming that the subsidiary is conducting an active trade or business, what are the US tax implications, if any, to USCorp for a year in which the subsidiary does not pay any dividends?
b. Related to a. immediately above, what does USCorp report in its U.S. GAAP financial statements, if anything, for U.S. income tax expense on the earnings of its UK subsidiary if USCorp makes the Accounting Principle Board ("APB") 23 representation that the earnings of its subsidiary will be permanently reinvested outside of the U.S.?
c. What are the U.S. income tax consequences, if any, to USCorp if, as set out in a. and b. above, the UK subsidiary does not distribute any dividends, but in contrast to a. and b. above, instead of conducting (and realizing income from) an active trade or business the subsidiary only holds investments which generate personal holding company income?
Question 4. GermanCo is the next client you are looking at. GermanCo, a manufacturer of testing equipment, is looking to expand into the U.S. It is considering the following three steps:
a. Making an investment (i.e., buying stock) in a U.S. company that manufactures similar equipment in the U.S. This year the U.S. company that GermanCo has invested in will pay dividends of $100,000 of the stock held by GermanCo.
b. Setting up a representative office in Chicago where two employees will engage in purely promotional activities such as advertising, or gathering/dispensing information. The employees will not solicit, or accept sales orders.
c. Establishing a manufacturing branch operation in the U.S. which plant will manufacture product and sell such product to unrelated distributors in the U.S. It's anticipated that this year this operation would make $10M USD.
Looking at each sub-paragraph separately, what are the U.S. tax implications to GermanCo of doing a, b and c?
Question 5. GermanCo has come back with a follow-up question. GermanCo has heard that if it pursues step c above (setting up a manufacturing branch operation in the U.S.) it would have to comply with U.S. IRC §482 on purchases and/or sales that might occur between the branch operation and GermanCo (as well as any other related parties with whom the U.S. operation purchases goods or services from, or sells goods or services to). GermanCo has asked that you briefly explain the purpose and application of IRC §482.