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Lecture 13

ACCT 40610 Lecture 13: Chapter 13
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by Katie Farrell , Fall 2017
4 Pages
42 Views
Fall 2017

Department
Accountancy
Course Code
ACCT40610
Professor
O' Brien
Lecture
13

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Chapter 13
Increasingly, firms and their tax advisors are formulating strategies to reduce
state and local taxes, such as real and personal property taxes,
unemployment taxes, and sales & use taxes.
For a state tax to be constitutional, it must not discriminate against interstate
commerce.
o E.g., an income tax of 3% for resident
corporations and 5% for non resident
corporations would be unconstitutional.
State taxes can only be levied on businesses having nexus - degree of contact
between business and the state. Nexus can be established via:
o Legal domicile: nexus in the state where incorporated.
o Physical presence: employees or real or personal property; however,
sales reps alone do not create nexus.
o Regular commercial activity is argued by some states to create an
economic nexus; the law is still unclear.
Other issues: catalog sales, internet sales.
States may tax only the income attributable to a firm’s in-state business
activity; how is State X’s share of Corporation C’s taxable income
determined?
Under UDITPA (Uniform Division of Income for Tax Purposes Act) model,
apportion based on factor weights:
o Sales.
o Payroll.
o Property (cost).
Over 1/2 of the states double-weight sales; this favors in-state businesses.
Other states only consider sales factor.
Tax treaties govern the jurisdiction to tax as well as exceptions related to tax
rates.
Business activities are taxed only by the country of residence (incorporation)
unless the firm maintains a permanent establishment in another country.
o E.g., a fixed location, such as an office or factory, with regular
commercial operations (but not merely exporting).
If there is no tax treaty, uncertainty may exist as to what level of activity
triggers jurisdiction.
Double taxation may result from two jurisdictions claiming the right to tax
the same income.
The U.S. taxes the worldwide income of its citizens, permanent residents, and
domestic corporations.
If the U.S. corporation has a branch that is doing business as a permanent
establishment, both the foreign country and the U.S. will tax the branch
income.
What relief exists for double taxation?
o Deduction for foreign taxes, or
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Description
Chapter 13 Increasingly, firms and their tax advisors are formulating strategies to reduce state and local taxes, such as real and personal property taxes, unemployment taxes, and sales & use taxes. For a state tax to be constitutional, it must not discriminate against interstate commerce. o E.g., an income tax of 3% for resident corporations and 5% for non resident corporations would be unconstitutional. State taxes can only be levied on businesses having nexus - degree of contact between business and the state. Nexus can be established via: o Legal domicile: nexus in the state where incorporated. o Physical presence: employees or real or personal property; however, sales reps alone do not create nexus. o Regular commercial activity is argued by some states to create an economic nexus; the law is still unclear. Other issues: catalog sales, internet sales. States may tax only the income attributable to a firms in-state business activity; how is State Xs share of Corporation Cs taxable income determined? Under UDITPA (Uniform Division of Income for Tax Purposes Act) model, apportion based on factor weights: o Sales. o Payroll. o Property (cost). Over 1/2 of the states double-weight sales; this favors in-state businesses. Other states only consider sales factor. Tax treaties govern the jurisdiction to tax as well as exceptions related to tax rates. Business activities are taxed only by the country of residence (incorporation) unless the firm maintains a permanent establishment in another country. o E.g., a fixed location, such as an office or factory, with regular commercial operations (but not merely exporting). If there is no tax treaty, uncertainty may exist as to what level of activity triggers jurisdiction. Double taxation may result from two jurisdictions claiming the right to tax the same income. The U.S. taxes the worldwide income of its citizens, permanent residents, and domestic corporations. If the U.S. corporation has a branch that is doing business as a permanent establishment, both the foreign country and the U.S. will tax the branch income. What relief exists for double taxation? o Deduction for foreign taxes, or
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