INTERNATIONAL

TAXATION AND
TECHNOLOGY
Module - 1
History and formation of US
 13 colonies founded in 17th and 18th
centuries which were under the control of
British colonies declared independence on
4th July 1776 and formed United States of
America.
 On February 14, 1912 Arizona was
admitted as 48th State of America.
Alaska and Hawaii were the last 2
states that was formed as a part of
USA in 1959.
 USA currently has 50 states.
 Introduction to US Tax and Legal Systems
BrUS Federal
 of
Branches
Government

Legislative Branch
(Congress) Executive Branch Judicial Branch
(Makes the Law) (Enforces the Law) (Interprets the Law)

President, Vice- President,

House of
Cabinet members and
US Supreme
Representatives
Senate Agency heads Court

Department of the Treasury US Appellate Courts

Internal Revenue Service US Trial Courts

Legislative / statutory
authorities
 Congress – US constitution gives congress
the power to “Lay and collect taxes,
duties and excises.”

 InternalRevenue Code: The IRC is the

domestic authority of federal statutory tax
law in the US, which is published in various
volumes.
Internal Revenue Code is
subdivided as follows:
 US CODE
 TITLE
 SUB TITLE
 CHAPTERS
 SUB CHAPTERS
 PARTS
 SECTIONS
 SUB SECTIONS
 PARAGRAPH
 SUB PARAGRAPH
 CLAUSE
Tax treaties
A bilateral agreement made by 2
countries to resolve double taxation issues
of passive and active income.
TAX LEGISLATION PROCESS IN
UNITED STATES
Types of US Tax Payers

 Individuals
 Business
 Corporations
 Estates
 Trusts

 Taxes may be based on goods, business

activities and others..
Tax Jurisdiction in United States
 Federal
 State
 Local Authority
Tax Jurisdiction in United States
Tax Jurisdiction in United States
Federal Income Tax
 Federal income tax is imposed on all tax
residents (US citizens, Green card Holders and
foreign nationals who meet the residency
test) and non-residents (Foreign nationals who
doesn’t meet the residency test but has US
source income).

 Internal Revenue Service (IRS) is the Federal

agency which enforces those tax laws and
collects the taxes from individuals.
Contd…
 The amount of Federal income tax that a
citizen and resident owes each year is
based on his/her income level and the
filing status.

 TheUnited States uses a progressive tax

system which means higher the income,
the more taxes must be paid.
Tax Jurisdiction in United States
State Income Taxes
 State income taxes are separate from the
Federal tax laws enforced by the IRS.
 State taxes are levied by each individual
State’s government.
 There is no system that encompasses the
separate taxes for all fifty states.
Contd…
State Income Taxes
 State taxes may be administered by a State
department of revenue, department of
taxation, state treasurer, or state comptroller.
 Similar to the federal income tax system, most
states use a progressive tax system.
 Some states, such as Pennsylvania, have a flat
tax ,in other words, the tax payer’s income is
taxed at the same rate regardless of how
much the tax payer earns.
Contd…
State Income Taxes
 There are 7 states that impose no income
tax.
 They are: Wyoming, Washington, Texas,
South Dakota, Nevada, Florida, and
Alaska.
 Along with this, Tennessee and New
Hampshire only impose tax on income
from dividends and interest
Contd…
State Income Taxes
 There are four States which do not charge
any Corporate Income Tax
 They are Nevada, South Dakota,
Washington and Wyoming.
Tax Jurisdiction in United States
Local Taxes
 Local government in the United
States refers to governmental jurisdictions
below the level of the state
 Most states have at least two tiers of local
government: counties and municipalities.
Different Types of Federal
Taxes levied in United States
 Income Tax
 Employment Tax
 Capital Gains Tax
 Estate Tax
 Property Tax
 Gift Tax
Different Types of Federal
Taxes levied in United States
Employment Tax
 In addition to federal income taxes, the U.S.
government also mandates that employers
subtract payroll taxes from their workers’ pay
checks each pay period, and then match the
sums deducted.
 The common type of employment tax is the
FICA tax authorized by the Federal Insurance
Contribution Act.
Different Types of Federal
Taxes levied in United States
Employment Tax
 Total FICA taxes on individual workers are 7.65
per cent of income; 6.2 per cent towards
social security taxes and 1.45 per cent
towards Medicare taxes.
 Self-employed individuals are liable for the
entire 15.3 per cent, although one half of that
amount can be taken as an above-the-line
business deduction on a person’s income tax
return.
Different Types of Federal
Taxes levied in United States
Capital Gains Tax
 Capital gains taxes are those paid on any
profits made from the sale of an asset

Estate Tax
 Estate taxes are imposed on the transfer
of property upon the death of the owner.
Different Types of Federal
Taxes levied in United States
Gift Tax
 Gift tax is imposed on the transfer of
ownership of property where full
consideration is not received in return. The
donor is required to pay the gift tax.
Different Tax Years in United
States
Calendar Year
 A calendar year is 12 consecutive months
beginning on January 1st and ending on
December 31st.
Fiscal Year
 A fiscal year is 12 consecutive months
ending on the last day of any month
except December 31st.
Different Tax Years in United
States
Fiscal Year
 A fiscal year also includes 52- 53 week tax
year.
 A taxpayer can elect to use a 52-53-week
tax year if the books and records are
maintained on that basis. If a taxpayer
makes this election, the 52-53-week tax
year must always end on the same day of
the week.
Different Tax Years in United
States
The 52-53-week tax year must always end
on:
 Whatever date this same day of the week
last occurs in a calendar month, or
 Whatever date this same day of the week
falls that is nearest to the last day of the
calendar month.
Different Tax Years in United
States
Short Tax Year
A short tax year is a tax year of less than 12
months. A short period tax return may be
required when the tax payer (as a taxable
entity):
 Are not in existence for an entire tax year, or
 Change the tax payer’s accounting period.
Tax on a short period tax return is figured
differently for each situation
Different Tax Years in United
States
Example 1: XYZ Corporation was organized on
July 1. It elected the calendar year as its tax
year. The corporation’s first tax return will cover
the short period from July 1 through December
31.
Example 2: A calendar year corporation
dissolved on July 23. The corporation’s final
return will cover the short period from January 1
through July 23.
Tax Years for Different Tax
Payers
Individuals
 Generally, individuals must adopt the
calendar year as their tax year.
 An individual can adopt a fiscal year if
the individual maintains his or her books
and records on the basis of the adopted
fiscal year.
Tax Years for Different Tax
Payers
Partnership
The rules for the required tax year for partnerships
are as follows:
 If one or more partners having the same tax year
own a majority interest (more than 50%) in
partnership profits and capital, the partnership
must use the tax year of those partners.
 If there is no majority interest tax year, the
partnership must use the tax year of all its principal
partners. A principal partner is one who has a 5%
or more interest in the profits or capital of the
partnership.
Tax Years for Different Tax
Payers
Partnership
The rules for the required tax year for
partnerships are as follows:
 If there is no majority interest tax year and
the principal partners do not have the
same tax year, the partnership generally
must use a tax year that results in the least
aggregate deferral of income to the
partners.
Tax Years for Different Tax
Payers
Corporations
A new corporation establishes its tax year
when it files its first tax return. It can either be
a Calendar Year or Fiscal Year
Process To Change a Tax Year
 Generally, the taxpayer must file Form 1128 to
request IRS approval to change the tax year.
 If the taxpayer qualifies for an automatic
approval request, a user fee is not required.
 Generally, a corporation that wants to
change its tax year must obtain approval
from the IRS under either the:
(a) Automatic approval procedures; or
(b) ruling request procedures.
 Residential Status
Or
Residency Determination
For Residency determination in the US, the
taxpayers can be grouped into US citizen
and Foreign nationals.

US Citizen – US Citizen is always a Resident.

The days of presence in the US is not
relevant for a US citizen.
Residency Determination of
the Individual Taxpayer
 ForeignNationals – A foreign national is a
non-US citizen who is in the US to live
and/or work. These individuals may
decide to stay in the US and become US
nationals but until such a point they will be
considered as a ‘foreign national’ and a
different set of rules apply to them.
Income is taxable according to the
residency status at the time the income is
received.

Residents are taxed on worldwide income.

Non residents are only taxable on the US
income that they receive as a non-resident.
Residency Determination of
the Individual Taxpayer
 Foreign National - A foreign national
either files a resident or nonresident return.

 Residents are taxable on the worldwide

income that they receive as a resident.
Nonresidents are only taxable on the US
source income that they receive as a
nonresident.
Residency tests for foreign
nationals
An individual is considered a ‘resident’ in
the US in a given year if one of the following
two tests is passed:
 Green Card Test
 Substantial Presence Test
Green Card Test
A taxpayer is considered as a resident, for
tax purposes, if he/she is a lawful
permanent resident of the US at any time
during the calendar year.
 The individual must possess a ‘green card’
issued by the Department of Homeland
Security
Substantial Presence Test

 Thisis an objective test based on the

number of days the taxpayer is present in
the US during each year.
 Should have at least 31 days in the current year
and
 Total US day count should be 183 days or more
(part-days are US days).
Substantial Presence Test
The US day count is a sum of:
 100% of current year days
 1/3 of first preceding year days
 1/6 of second preceding year days
Substantial Presence Test

Days which are not counted for SPT test

 If a taxpayer is commuting regularly from
his or her home in Mexico or Canada to a
work place in the US
 If he or she is physically present in the US
for less than 24 hours (while in transit
between two countries)
 Days you are in the U.S. as a crew
member of a foreign vessel
Substantial Presence Test

Days which are not counted for SPT test

 If he or she is unable to leave the US
due to a medical condition
 Exempt individuals:
A teacher or trainee with ‘J’ or a ‘Q’ visa
 A student temporarily present with F, J, M, Q
visa
 A professional athlete

 Form 8843
SPT: Example 1

Joe is a UK citizen and is physically present

in the US for the following days. Please
calculate whether he satisfies SPT in 2018:

 2018 - 150 days (this is at least 31)

 2017 - 62 days
 2016 - 91 days
SPT: Example 1

2018: 150 x 1 150

2017: 62 x 1/3 20.67

2016: 91 x 1/6 15.17

Total 185.84
SPT: Example 2

 John,who is a citizen of France, came to

the US on 1 January 2016, and went back
on 1 December 2016. In 2017, he came
back to the US on 1 February went back
to France on 30 January 2018. Calculate if
John will satisfy SPT for the 2018 tax year.
SPT: Example 2

2018: 30 x 1 30
2017: 335 x 1/3 111.66
2016: 335 x 1/6 55.8
Total 197.46
SPT: Example 2
Although the taxpayer meets the 183 days,
which are part of the test, he fails the 31-
day test and so does not satisfy SPT for 2017.
When is a person
considered as non-resident
in US?
A person is a non-resident in the US if he or
she has not passed the green card test or
the SPT test.
Residency tests for foreign
nationals
A Resident is always taxed on his/ her
Worldwide- Form 1040.
 Non- Resident is taxed only on the US
Source Income such as wages for the US
Work Days, US Rental Income, and
Dividend from US Corporations etc.- Form
1040 NR
Filing Status of an Individual
Tax Payer
Following are the different filing statuses
which can be chosen by an Individual Tax
payer while filing his/ her Federal Income
Tax Returns:
 Single.
 Married filing jointly.
 Married filing separately.
 Head of household.
 Qualifying widow(er).
Single
A tax payer can file his/ her returns by
choosing the Single status if any of the
following were true as on December 31st of
the tax year.
 The tax payer was never married.
 The tax payer was legally separated
according to the respective state law
under a decree of divorce or separate
maintenance.
Married Filing Jointly
A tax payer can file his/ her returns by
choosing the Married Filing Joint status if
any of the following were true as on
December 31st of the tax year. Same Sex
Couples can also file their returns using this
status.
 The taxpayer was married at the end of
the tax year, even if the tax payer didn't
live with his/ her spouse at the end of the
tax year.
Married Filing Jointly
 The tax payer’s spouse died during the tax
year and the tax payer didn't remarry
during the tax year.
 The tax payer was married at the end of
2018, and the tax payer’s spouse died in
2019 before filing a 2018 return.
Married Filing Jointly
 A married couple filing jointly report their
combined income and deduct their
combined allowable expenses on one return.
 They can file a joint return even if only one
had income or if they didn't live together all
year.
 Generally, a married couple can't file a joint
return if either spouse is a non-resident alien at
any time during the year.
Married Filing Separately
 This filing status may benefit if the
taxpayer wants to be responsible only for
their own tax or if it results in less tax than
filing a joint return.
 If the tax payer is married and file a
separate return, then the tax payer
generally report only his/ her own income,
exemptions, deductions, and credits.
Married Filing Separately
 Also,if the tax payer choses to file a
separate return, then he/she can't take
the student loan interest deduction, the
tuition and fees deduction, the education
credits, or the earned income credit.
Head of Household
Taxpayer may be able to file as head of household if
they meet all the following requirements:
 Taxpayer is unmarried or “considered unmarried”
on the last day of the year.
 Taxpayer paid more than half of the cost of
keeping up a home for the year.
 A qualifying person lived with the taxpayer in
his/her home for more than half the year (except
for temporary absences, such as school).
However, if the qualifying person is taxpayer’s
dependent parent, he or she doesn't have to live
with him/her.
Considered Unmarried:

The tax payer is considered unmarried on

the last day of the tax year if he/she meet
all the following tests.
 The tax payer was legally separated
according to the state law under a
decree of divorce or separate
maintenance.
 The tax payer was married to a non-
resident alien at any time during the year.
Qualifying Widow(er)
 The tax payer can file the return as
qualifying widow, if the following
conditions are satisfied:
 Tax payer spouse died in 2016 or 2017 and
tax payer didn’t remarry before the end
of 2018.
Personal exemption
 Thetax payer generally can take one
exemption for himself/herself and if
he/she is married, one for spouse.

 SSN
or ITIN must be listed for any
dependents for whom taxpayer claims an
exemption
Dependents for the Purpose of Claiming
Exemptions
The taxpayer is allowed one exemption for
each person to be claimed as a dependen
t. The term “dependent” means:
 1. A qualifying child
 2. A qualifying relative
Dependents for the Purpose of
Claiming Exemptions
 Dependent taxpayer test: You cannot clai
m any dependents if you (or your spouse,
if filing jointly) could be claimed as a dep
endent by another taxpayer.
 Joint return test: You cannot claim a marri
ed person who files a joint return as a dep
endent.
 Citizen or resident test: You cannot claim
a person as a dependent unless that pers
on is a US citizen, US resident alien, US nati
onal, or a resident of Canada or Mexico.
Tests to be a qualifying child
 Relationship test: The child must be your son, da
ughter, stepchild, foster child, brother, sister, half‐
brother, half‐ sister, stepbrother, stepsister, or a de
scendant of any of them.
 Age test: The child must be any of the following
1. Under age 19 at the end of the year and younge
r than you (or your spouse, if filing jointly)
2. Under age 24 at the end of the year, a student, an
d younger than you (or your spouse, if filing join
tly)
3. Or any age if permanently and totally disabled.
Tests to be a qualifying child
 Residency test: The child must have lived with
you for more than half of the year.
 Support test: The child must not have provided
for more than half of his or her own support for the
year.
 Joint return test: The child must not be filing a
joint return for the year (unless that return is filed on
ly to get a refund of income tax withheld or estimate
d tax paid.
Tests to be a qualifying relative
 “Not a qualifying child” test: The person
cannot be your qualifying child or the
qualifying child of any other taxpayer.
 Member of household or relationship test:
The person is either Related to you in one of
the ways listed under Relatives who do not
have to live with you, or Living with you all
year as a member of your household.
Tests to be a qualifying relative
 Gross income test: The person's gross
income for the year must be less than
US$4,050.
 Support test: You must provide more than
half of the person's total support for the
year.
Filing Requirements

Generally, the tax payer must file a return

for 2018 if his/her gross income from
worldwide sources is at least the amount
shown for his/her filing status in the following
table.
Filing Requirements
Estimated Taxes
 Taxes must be paid as the tax payer earns
or receives income during the year, either
through withholding or estimated tax
payments.
 If the amount of income tax withheld from
the tax player’s salary or pension is not
enough, or if tax payer receives income
such as interest, dividends, alimony, self-
employment income, capital gains, prizes
and awards, the tax payer may have to
make estimated tax payments
Estimated Taxes
 If the tax payer is in business on his/her
own, the tax payer generally needs to
make estimated tax payments.
 If the tax payer does not don’t pay
enough tax through withholding and
estimated tax payments, the tax payer
may be charged a penalty.
Estimated Taxes
The payment period and due dates for
payment of Estimated Taxes for Individuals is
as follows:
Payment Period Due Date

January 1st to March 31st April 15th

April 1st to May 31st June 15th

June 1st to August 31st September 15th

September 1st to December January 15th of the following

31st year
Taxpayer Identification Numbers

A Taxpayer Identification Number (TIN) is

an identification number used by the
Internal Revenue Service (IRS) in the
administration of tax laws.
 It is issued either by the Social Security
Administration (SSA) or by the IRS. A Social
Security number (SSN) is issued by the SSA
whereas all other TINs are issued by the
IRS.
Taxpayer Identification Numbers

 Social Security Number "SSN"

 Employer Identification Number "EIN"
 Individual Taxpayer Identification Number
"ITIN"
Social Security Number "SSN"

 Inthe United States, a Social Security

number (SSN) is a nine-digit number issued
to U.S. citizens, permanent residents, and
temporary (working) residents.

 Primary purpose is to track individuals for

Social Security Purposes.
ITIN- Individual Taxpayer
Identification Number
An ITIN, or Individual Taxpayer Identification
Number, is a tax processing number only
available for certain non-resident and
resident aliens, their spouses, and
dependents who cannot get a Social
Security Number (SSN).
It is a 9-digit number, beginning with the
number "9", formatted like an SSN (NNN-NN-
NNNN).
EIN- Employer Identification Number

 An Employer Identification Number (EIN) is

also known as a federal tax identification
number, and is used to identify a business
entity
Concept of Rounding Off

 Rounding Off to Whole Dollars, the tax

payer can round off cents to whole
dollars on his/her return and schedules. If
the tax payer round to whole dollars,
he/she must round all amounts.
 To round, drop amounts under 50 cents
and increase amounts from 50 to 99 cents
to the next dollar. For example, $1.39
becomes $1 and $2.50 becomes $3.
Filing Deadlines

 If the tax payer files return on a calendar

year basis, the due date for filing tax
payer’s return is April 15 of the following
year.
 If the tax payer files return on a fiscal year
basis (a year ending on the last day of
any month except December), the due
date is 3 months and 15 days after the
close of his/her fiscal year.
Extensions

 The tax payer can get an extension of

time to file his/her return. An automatic
extension until October 15 can be
obtained by filing Form 4868.
 However, if the tax payer pays the tax
due after the regular due date, interest
will be charged from the regular due date
until the date the tax is paid.
2018 Income Tax Brackets
 The Federal income tax has 7 brackets:
10%, 12%, 22%, 24%, 32%, 35%, and 37%.
The amount of tax you owe depends on
your income level and filing status.
 It’s important to understand that moving
into a higher tax bracket does not mean
that all of your income will be taxed at a
higher rate. Instead, only the money that
you earn within a particular bracket is
subject to that particular tax rate.