Now you can address the questions about VoiceCo's Activities that were posed at the beginning of the chapter. Simply selling into a foreign jurisdiction may not trigger any overseas income tax consequences, but such income is taxed currently to VoiceCo in the United States. When VoiceCo sets up an Irish corporation, it benefits from deferral because as a manufacturer, it can avoid deemed dividends under subpart F. However, passive-basket income may be earned by the irish subsidiary. If VoiceCo must file Form 5471 to report the activities of its foreign subsidiary. If VoiceCo receives dividends from its foreign subsidiary, it can claim indirect foreign tax credits. What are the foreign tax implications if VoiceCo "checks the box" on its foreign subsidiary? The U.S. tax Implication?
What If?
Suppose that although VoiceCo's European sales become a substantial part of its total revenues, it decides not to create a foreign subsidiary. Instead, because shipping cost are high and customers demand quick turnaround on product orders, VoiceCo decides to license its design and manufacturing process to a local European musical instruments company for sales in Europe. The European company pays VoiceCo a royalty equal to 25 percent of the sales price on all of its sales of microphones based on VoiceCo's design. The royalty income is foreign-source income (as the underlying intangible property is exploited outside the United States).
The European country imposes a 5 percent withholding tax on all royalty payments to VoiceCo. The royalties are part of its worldwide income and so are currently taxed to VoiceCo in the United States. Will VoiceCo receive a foreign tax credit for the withholding tax?
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