Questions -
Q1. USAco, a domestic corporation, is a wholly-owned subsidiary of FORco, a foreign corporation. USAco's only assets are cash of $200,000, accounts receivable of $200,000 and its U.S. manufacturing plant worth $500,000. USAco has no liabilities. FORco sells USAco to an independent U.S. buyer.
Is FORco's sale of USAco subject to withholding under FIRPTA? Explain. Would your answer change if USAco had a liability of $300,000 in the form of a mortgage on the U.S. manufacturing plant?
Q2. Cholati is a foreign corporation that produces fine chocolates for sale worldwide. Cholati markets it chocolates in the United States through a branch sales office located in New York City. During the current year, Cholati's effectively connected earnings and profits are $3 million, and its U.S. net equity is $6 million at the beginning of the year, and $4 million at the end of the year. In addition, a review of Cholati's interest expense account indicates that it paid $440,000 of portfolio interest to an unrelated foreign corporation, $200,000 of interest to a foreign corporation which owns 15% of the combined voting power of Cholati's stock, and $160,000 of interest to a domestic corporation.
Compute Cholati's branch profits tax, and determine its branch interest withholding tax obligations. Assume that Cholati does not reside in a treaty country.
Q3. Wheelco, a foreign corporation, manufactures motorcycles for sale worldwide. Wheelco markets its motorcycles in the United States through Wheely, a wholly-owned U.S. marketing subsidiary that derives all of its income from U.S. business operations. Wheelco also has a creditor interest in Wheely, such that Wheely's debt to equity ratio is 3 to 1, and Wheely makes annual interest payments of $60 million to Wheelco. The results from Wheely's first year of operations are as follows:
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Sales
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$180 million
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Interest income
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$6 million
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Interest expense (paid to Wheelco)
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$60 million
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Depreciation expense
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($30 million)
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Other operating expenses
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($81 million)
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Pre-tax income
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$15 million
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Assume the U.S. corporate tax rate is 35%, and that the applicable tax treaty exempts Wheelco's interest income from U.S. withholding tax. Compute Wheely's interest expense deduction.
4. USAco, a domestic corporation, is the wholly-owned U.S. subsidiary of FORco, a foreign corporation. The U.S.-Country F tax treaty exempts interest payments from withholding taxes. USAco's financial statements appear as follows:
BALANCE SHEET
Assets Liabilities & Owners' Equity
Cash $100
Receivables $500
Notes Payable $400
Owner's Equity $200
INCOME STATEMENT
Gross Income $500
Administrative Expenses $350
Interest Expense $100
The interest expense of $100 arises from a notes payable from USAco to FORco.
What is the maximum amount of interest USAco may deduct on its U.S. return?