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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.

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U.S. Taxation of International Transactions when Liquidating or Selling

Finco is a wholly owned Finnish manufacturing subsidiary of Winco, a domestic corporation that manufactures and markets residential window products throughout the world. Winco has been Finco's sole shareholder since Finco was organized in 1990. At the end of the current year, Winco sells all of Finco's stock to an unrelated foreign buyer for $25 million. At that time, Finco had $6 million of post-1986 undistributed earnings, and $2 million of post-1986 foreign income taxes that have not yet been deemed paid by Winco. Winco's basis in Finco's stock was $5 million immediately prior to the sale.

Assume Winco's capital gain on the sale of Finco's stock is not subject to any foreign taxes, and that the U.S. corporate tax rate is 35%. What are the U.S. tax consequences of this sale for Winco?

Now assume that instead of selling the stock of Finco, Winco completely liquidates Finco, and receives property with a market value of $25 million in the transaction. As in the previous scenario, at the time of the liquidation, Finco had $6 million of accumulated earnings and profits, and $2 million of foreign income taxes that have not yet been deemed paid by Winco. Assume that Winco's basis in Finco's stock was $5 million immediately prior to the liquidation, and that the U.S. corporate tax rate is 35%. What are the U.S. tax consequences of this liquidation for Winco?

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