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MGA 652

Individual Assignment #1

Instructions

This assignment is an individual assignment.  It is meant to be completed without help from other students or anyone else.  It is due by midnight on Sunday, October 30th.  Please email your assignment to me at [email protected] in either Excel, Word or PDF format (or any combination of the three).

All of the questions can be answered based on information in your book or that we covered in class.  However, you will likely want to make use of Checkpoint to lookup questions you may have

For purposes of these questions the following tax rates should be assumed unless otherwise stated.

  
U.S. Statutory Rates 
  
Corporate Tax Rate21%
Individual Tax Rate35%
Source Withholding Rate30%
  
Treaty Rates 
  
Dividends of a Controlled U.S. Corporation (10% or > owner)5%
Dividends of a Uncontrolled U.S. Corporation (10% or < owner)15%
Interest10%
Royalties0%

Problem 1

Bing Ltd. is a Hong Kong (Non-treaty Country) manufacturer of aftermarket automotive parts and accessories.  All manufacturing is performed in the Hong Kong.  Bing sells goods in the United States through employees that live in the United States.  Bing does not maintain an office in the United States.  The employees spend 100% of their time traveling from customer to customer.   The employees regularly enter into sales contracts with customers on their own authority.  Bing also owns a 40% of the stock of a U.S. corporation which is engage in U.S, business activities unrelated to Bing’s sales activities.

Bing has the following items of income from the United States.

  1. $1,000 of net taxable income from the sale of goods in the United States (title transfers in the United States).
  2. $50 of interest income on bonds issued by U.S. corporations (these are unrelated U.S. corporations).
  3. $75 of interest income on bonds issued by the U.S. corporation which Bing owns 40% of the stock.
  4. $100 of dividend income from U.S. corporations (Bing owns less than 5% of the stock of each of these U.S. corporations).
  5. $200 of royalty income from the license of certain part designs to unrelated third parties (this income is unrelated to the business of selling goods in the United States).
  6. $200 of interest income from deposits located in U.S. banks.

Required

  1. Determine which one of the following best describes Bing’s U.S. federal income tax filing requirement.
  1. No filing requirement
  2. Treaty-based 1120-F and Form 8833 filing requirement
  3. Full 1120-F U.S. corporate filing requirement
  • Discuss the basic U.S. filing requirements as they relate to foreign corporations and explain your choice in #1 above.  Please state specifically which rules you applied to determine Bings U.S. filing requirements.
  • Will Bing be required to provide a W-8 series form to the customers that purchase is products (item #1 above)?  If so specify which one (w-8BEN or W-8ECI).  If not state why not (if there is more than one reason, please state all of the reasons).
  • Will Bing be required to provide a W-8 series the unrelated corporations that pay the $50 of interest (item #2 above)?  If so specify which one (w-8BEN or W-8ECI).  If not state why not (if there is more than one reason, please state all of the reasons).
  • Will Bing be required to provide a W-8 series the 40% owned corporation that pay the $50 of interest (item #2 above)?  If so specify which one (w-8BEN or W-8ECI).  If not state why not (if there is more than one reason, please state all of the reasons).
  • Using the template on below, calculate Bing’s U.S. federal tax liability.

Income Subject to Source Withholding

Income Subject to Graduate Corporate Tax Rates

Problem 2

S&K Corporation is a Dutch (Treaty Country) Corporation that buys leather goods and resells them to customers in the United States.  Title transfers in the United States.  S&K has a sales office located in the United States.  S&K had sales associated with its U.S. office of $10,000,000 in 2019.  The costs related to these sales were $7,000,000.  S&K had net U.S. assets of $4,000,000 at the beginning of 2019.  Of this amount $2,000,000 is attributable to contributed capital and $2,000,000 is attributable to prior earnings. Net U.S. assets of at the end of 2019 was $3,000,000.

Required

  1. Calculated K&S’s U.S. income tax for 2019.
  • Calculate K&S’s Branch Profits Tax for 2019.

Problem 3

S&K Corporation is a Hong-Kong (Non-Treaty Country) Corporation that manufactures leather goods and sells them to customers in the United States.  Title transfers in the United States.  S&K has a sales office located in the United States.  S&K had sales associated with its U.S. office of $10,000,000 in 2019.  The costs related to these sales were $7,000,000.  S&K had net U.S. assets of $4,000,000 at the beginning of 2019.  Of this amount $2,000,000 is attributable to contributed capital and $2,000,000 is attributable to prior earnings. Net U.S. assets of at the end of 2019 was $3,000,000.

Required

  • Calculated K&S’s U.S. income tax for 2019.
  • Calculate K&S’s Branch Profits Tax for 2019.

Problem 4

Redbanks Holdings Inc. is a publically traded UK corporation.  Its only assets are the stock of three subsidiaries Redbanks Canada, Redbanks India, and Redbanks Switzerland.  Redbanks Canada operates a manufacturing facility in Canada and sells to customers throughout Canada and the United States. It had sales in Canada of $80 million and profits in Canada of $10 million.  All expenses of Redbanks Canada are paid to unrelated parties. It had sales of $100 million in the United States and profits of $20 million in the United States.  Redbanks Canada does not have an office or fixed place of business in the United States and does not have dependent agents that habitually conclude contracts located in the United States.

Redbanks India manufactures goods in India.  These goods are sold to either Indian customers or to Redbanks Switzerland. It had sales to Indian customers of $75,000,000 and profits associated with these sales of $10 million.  Redbanks India also sells goods manufactured in India to Redbanks Switzerland.  Sales to Redbanks Switzerland were $50 million and profits associated with these sales were $5 million. All of Redbanks activities are in India.

Redbanks Switzerland’s only activity is to buy goods from Redbanks India and resell them to customers located in the United States.  Sales from these activities amounted to $75 million.  Expenses associated with these sales were $50 million in purchases to Redbanks India and $5 million in salaries and other operating expenses in Switzerland. Redbanks Switzerland does not have an office or fixed place of business in the United States and does not have dependent agents that habitually conclude contracts located in the United States.

Assume that title to all sales of goods occurs at the customer’s place of business.

Required

  1. Calculate Redbanks Canada’s U.S. income tax.
  2. Calculate Redbanks Canada’s U.S. branch tax.
  3. Determine what annual income tax return (if any) that Redbanks Canada will be required to file in the United States.
  4. Calculate Redbanks India’s U.S. income tax.
  5. Calculate Redbanks India’s U.S. branch tax.
  6. Determine what annual income tax return (if any) that Redbanks India will be required to file in the United States.
  7. Calculate Redbanks Switzerland’s U.S. income tax.
  8. Calculate Redbanks Switzerland’s U.S. branch tax.
  9. Determine what annual income tax return (if any) that Redbanks Switzerland will be required to file in the United States.

Problem 5

Case 1 – Rocky Mountain Trading Ltd., is a Canadian (Treaty Country) corporation that operates a subscription based online commodities trading platform.  Subscribers can use the platform to trade commodities futures contracts on a number of different commodities.  In addition to trading futures contracts, the platform provides the subscriber with a large data base of historic trading prices that are not generally available the public.  It also supplies a number of proprietary analytic research tools and access to a large library containing papers and books on trading strategies. Subscribers pay a fixed monthly fee for access to the platform plus a monthly fee based on the dollar value of trades executed.  All assets and employees of the Company are based in Canada.  The Company earns $100,000,000 in revenue from subscribers located in the United States.  Deductible costs associated with these revenues are $70,000,000.

Case 2 – Optic Inc. is a Japanese (Treaty Country) software development company that has developed optical character recognition software.  The Company licenses its software ScanIt Inc., an unrelated U.S. corporation that manufactures and sells optical scanners solely in the United States.  ScanIt Inc. incorporates the Optic Inc. software in each scanner that it sells to its customers.  Optic Inc. earns $30,000,000 in revenue from ScanIt from this arrangement.  Deductible costs associated with this revenue total $10,000,000. All employees, assets and development work performed by Optic Inc. was done in Japan.

Case 3 – Redhawk plc is a UK (Treaty Country) software developer that develops and sells software that is used by its customers to secure and monitor their computer networks.  Customers download the software the purchase from Redhawk and install it on their network servers.  The software license agreement allows customers to use the software, but does not allow them to copy, alter source code, reproduce or sell the software.  All of Redhawk’s assets and employees are located in the UK, but it does lease cloud based computer servers and tools from Amazon Web Services for use in providing software and support to U.S. Customers.  These servers are located in the United States. Revenue from this agreement totaled $15,000,000.  Related deductible costs equaled $10,000,000.

Required

  1. For each case, apply the rules of Treasury Regulation 1.861-18 to determine how much of the Company’s income is U.S. source income. Make sure to indicate which category described in the regulation you believe the item falls under (e.g. transfer of a copy right, transfer of a copy of a computer program, provision of service, provision of know-how) and what sourcing category it falls under (sale of a goods, rental of property, royalties, etc.).
  • If the income is U.S. source income, determine if it would be ECI or FADP income.

Note: There may be no right or wrong answer, so grading depends on how well you logically support your position.

Problem 6

Indicate the default classification for each entity listed below and indicate if there is an alternative election that can be made.

  1. Canadian Corporation with 25 owners (all owners have limited liability and it can be used for both public and private companies)
  • Alberta Unlimited Liability Company with one owner (all owners have unlimited liability and it can be used for private companies)
  • Mexican Sociedad de Responsabilidad Limitada with two owners (all owners have limited liability and it can be used only for private companies)
  • UK public limited company with two thousand owners (all owners have limited liability and it can be used for public companies)
  • Delaware General Partnership with 10 members
  • New York Limited Liability Company with two owners

Problem 7

Randle Inc. Is a U.S. corporation that manufactures industrial equipment?  Its headquarters and sole operating facility is located in the New York State.  Randle makes payments for goods and/or services received from four corporations as described below.

Vendor 1 – Vendor 1 is a UK (Treat Country) corporation that provides engineering services to Randle.  Fifty percent of these services are performed in the UK and fifty percent are performed in the U.S. Vendor 1 does not have a permanent establishment in the United States.  Randle made payments totaling $150,000.

Vendor 2 – Vendor 2 is an Argentinian (Non-treaty) distributor (buys and resells) of parts that are used in the production of Randle’s manufactured products.  Randle paid $1,200,000 to Vendor 2 for parts purchased.  Title to the goods transfers in the United States. Vendor 2 does not have a permanent establishment in the United States.

Vendor 3 – Vendor 3 is a law firm located Canada (Treaty Country).  Vendor 3 advisors Randle regarding international legal matters related to Randle’s sales to customers.  All the legal services are performed in Canada. Randle made payments totaling $50,000.

Vendor 4 – Vendor 4 is a Canadian manufacture of goods located in Canada (Treaty Country).  Vendor 4 supplies parts and equipment that are used in Randle’s production process.  Vendor 4 has an office located in the United States from which the sales to Randle are mode.  Randle made payments of $2,500,000 to Vendor 4.

Required

  1. Determine how much Randle would be required to withhold from payments made to each of the four vendors assuming none of the vendors provided Randle with a W-8 series form.
  • For each of the four vendors, determine what W-8 form (e.g. W-8BEN, W-8ECI) would be each be required to provide to Randle in order to avoid withholding.
  • Determine what federal income tax return (e.g. Treaty-based 1120-F, Full 1120-F), if any, each of the four vendors must file.


Problem 8

Gadget Inc. is a UK corporation that manufactures various consumer electronic products.  Gadget has decided to open a U.S. subsidiary to operate a manufacturing facility in the United States.  Goods produced in the United States will primarily be sold to customers located in the United States.  Gadget expect that the U.S. operations will have a net loss of approximately $1,000,000 in the first year of operations and to have net profits of approximately $7,000,000 each year thereafter.  Depreciation and amortization is expected to be $2,000,000 per year.  The Company intends to invest $100,000,000 in the U.S. operations in the first year. Interest rates on loans in the industry are typically around 5% and debt to equity rates are typically about 2 to 1.  The tax rate in the UK is 15% and the treaty rate for dividend withholding is zero.

The management of Gadget would like to know if they should make their investment in the U.S. subsidiary in the form of debt or equity.

Required

  1. Describe the factors that are important to determining whether Gadget should use debt or equity.
  • Make a recommendation of how much of the $100,000,000 investment should be made in the form of debt and how much should be made in the form of equity.  Clearly explain how you arrived at your conclusions.

Problem 9

Wild Rover Corporation is an Irish corporation.  Pat Murphy (an Irish citizen and resident) owns 60% of the stock of Wild Rover.  John Brown (a UK citizen and resident) owns 40% of the stock of wild Rover.  Wild Rover sole operating facility is a manufacturing, distribution and sales facility located in Nigeria (a non-treaty country).  Wild Rover sells clothing manufactured in it facilities in Nigeria to customers in the United States.  The company markets its goods by placing advertisements on American television and on various websites.  All orders from American customers are taken on the Company’s website.  The Company does not have significant markets outside the United States.  The Company does not have an office or fixed place of business in the United States, does not have any assets located in the United States and does not have employees or other dependent agents present in the United States.

During 2019, the Company has $20,000,000 of sales to customers in the United States.  Deductible costs associated with these sales were $15,000,000. Title and risk of loss for all sales transfers in the United States.

Required

  1. Calculate Wild Rover’s U.S. federal income tax liability for 2019 (if any).
  • Calculate Wild Rover U.S. branch profits tax liability for 2019 (if any).

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