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    U.S. Taxation of International Transactions

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    Can you help me with the following scenarios below concerning U.S. taxation on international transactions?

    Scenario 1: USAco, a domestic corporation, forms a Canadian subsidiary, CANco, to distribute USAco's widgets in Canada. USAco sells widgets to CANco for resale in Canada, providing CANco with USAco's unique distribution software. This provides the use of USAco's collections staff to collect receivables from delinquent accounts.

    What are the intercompany transactions that USAco must price at arm's length?
    What compliance techniques may USAco employ to minimize the risk of a transfer pricing penalty?

    Scenario 2: Erica is a citizen of a foreign country, and is employed by a foreign-based computer manufacturer. Erica's job is to provide technical assistance to customers who purchase the company's mainframe computers. Many of Erica's customers are located in the United States. As a consequence, Erica consistently spends about 100 working days per year in the United States. In addition, Erica spends about 20 vacation days per year in Las Vegas, since she loves to gamble and also enjoys the desert climate. Erica does not possess a green card. Assume that the United States has entered into an income tax treaty with Erica's home country that is identical to the United States Model Income Tax Convention of November 15, 2006.

    How does the United States tax Erica's activities?
    How would your answer change if Erica were a self-employed technician rather than an employee?

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    Solution Preview

    Please see the attached for both scenarios, as well as the following explanations and links below.

    Scenario 1:
    USAco must price all intercompany transactions at arm's length including the sales of tangibles like widgets, intangibles like software and collection staff, plus all categories that can be found on the pdf included or on this reference (Section 2).

    Check out this reference: http://www.pwc.com/en_GX/gx/international-transfer-pricing/assets/itp-2011.pdf

    To avoid the risk of ...

    Solution Summary

    The expert examines United States taxation of international transactions. The inter-company transactions that USAco must price at arm's length are determined.