TAX 9869 Lecture Notes - Lecture 62: Tax Haven, Controlled Foreign Corporation, Passive Income

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11 Aug 2020

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Let"s say we have a foreign partnership which owns a us corporation and a foreign corp. I attribute the ownership the foreign pship has in the foreign corporation to us corporation so us corp is viewed as though it owns foreign corporation 100% Us guy owns 10% of the fp and foreign corp owns 90% of the fp. This is still a cfc because more than 50% owned through attribution by this us corp. Now made this foreign corp a cfc b/c owned through attribution by us corp. Guy on top (us corp), is a ussh because owns 10% or more, now ussh indirectly into foreign corp but because of change of law is a cfc, has to pick up 10% of the subpart f income. Pick up 10% of gilti- this guy gets in trouble b/c no one wants to pick up subpart f income.

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Need help revising, and recommendation for a conclusion.

Throughout this paper is my understanding of what I have learned in class chapters 1-4, expressing my understanding and opinions. Economics is the study of how we deal with scarce resources. Microeconomics specially deals with business in the home country exclusively. This type of economics affects small businesses in the home country only. On the other hand, macroeconomics concerns our national welfare concerning trade and international business.

I believe that many things affect our economy on a microeconomics level. Things such as our understanding of our country in reflection to the world are very important. That is why we study ourselves before we study the macroeconomic principle of the world. Understanding ourselves is what microeconomics teaches us. Working from the inside out. The world is a place where there are differences in our wants and what we get. That is what makes items scarce. That is what positive economics is. Positive economics deals with what is and what we have. The other type of economics is called normative statements. This deals with what we should receive instead of what is and deserved to some extent. It's our scarce resources that determine our allocation of resources and how we use our resources and time. This is where opportunity costs come in, giving up something to do something. A successful business or country never ignores opportunity costs. We must ensure that we have a comparative advantage instead of the absolute advantage. Our resources must be used to achieve maximum output. Comparative is met when we have fewer opportunity costs to make some certain products than the other person or entity.

My initial understanding was scarcity was oil potentially running out, but we have so much of it that you can always find more with techniques such as fracking. Now it's obvious to me, one of our most scarce resources is time. You cannot avoid the 8,760 hours in a year. I understand that people have unlimited wants but limited resources. Everything has a cost and we must make a choice as we don't have unlimited farms, factories workers, etc. scarcity forces choices and this ties in with opportunity cost, for every gun made, a theft from the hungry is made. The opportunity cost not being used to feed the poor, but to make guns. And I find it easy to understand no one can have everything choices must be made on benefits. If I'm going to school, imp giving up making cash, as I'm giving up money for an education, I value education more. Scarcity is also related to the invisible hand. As it's an achievement that leads free markets and capitalism through competition for scarce resources.

My understanding of the invisible hand is a person neither intends to promote public interest and does not know how much he is promoting it. Only intending on his own gain. Without being his intention a person can be lead by the invisible hand to do good for society by pursuing one's own self-interest. Going into equity and efficiency the invisible hand does ensure both equity and efficiency. People work in their selfish ways to maximize profit while also contributing to the economy as a whole. It can also be argued that as the invisible hand wants to ensure efficiency, it cannot guarantee efficiency, because it can fail to produce an efficient allocation of resources, which in turn lead to a market failure. It can also be argued that it can't guarantee equity because not everyone gets a fair price. The way I like to remember efficiency is with a real-life example, like a reduction in the number of workers needed to produce a particular good for a particular amount. Equity refers to the ownership interest in an asset, for example, if a person owns a house with a market value of $800,000 and owes $100,000 on the mortgage leaving a $700,000 equity in the home.

It can be predicted that if the price of beef increases - ceteris paribus-the quantity of beef demanded by buys will decrease. In other words, if the price of beef increases, then the quantity of beef increases, then the quantity of beef demanded will decrease because all things have to be equal. In-class lecture thought me all other things remaining the same. Economists use ceteris paribus to determine the effect of a factor when all other factors have been held the same and helps simplify the study and get a more refined data set.

Economists deal with many issues that pertain to assuring that both a countries domestic output is efficient and that there is an effective trade balance. This means that there are a balance and limit on the amount of imports. Also, this means home production must be able to meet export demands. There are many factors that affect the production of goods and their effect on shifting the production possibilities frontier. This involves evaluating every detail including knowing the products and any close substitutes and compliments. It also involves knowing how an action or other external force will affect demand. This is called price elasticity; Substitutes are products that can replace any given product or service. An example of this would be Coke and Pepsi. The presence of substitutes affects price elasticity because if there are other options, then any change to the price or quality of the product will cause a shift of the demand curve. O course, price is a huge reason why the demand for a product decreases or increases yet it doesn't shift the curve because of the price only. This price change will cause a domino effect that will end with the shifting of the demand curve because it will cause an increase or decrease in demand of the substitute good if the price change is either lower or higher respectively. This price change serves as a catalyst that will change people's desire to spend more money on a more expensive product and that will instead choose to buy the substitute good for cheaper or buy more of the desired product. The change in the price of actual products will not shift the demand curve yet the change of the price of substitutes will because it serves to change people's purchasing behavior. On the other hand, compliments serve to boost demand when there is a decrease in price. The use of complementary goods is dependent upon another product. An example of this would be hot dogs and buns. If the price of hotdogs decreases then, conversely, the demand for hot dog buns will increase because of this change in price. In this scenario, the decrease in price will cause a positive shift in the demand curve because of people's desire and willingness to buy more buns. This is an example of a demand shifter. There are a few other demand shifters. The shifters of the demand curve are changes in expectations, disposable income, price of substitute goods and complements, tastes and preferences, and population size and composition. Changes in income affect the demand curve because if income is lower then people tend to save any extra income instead of wasting it. Disposable income is minimized and spending is lower. This also causes people to see a perceived value of things and distinguishing between what is necessary and what is a relative luxury. The lower the income, the higher the saving and avoidance to spend. An example of this would be if someone needs to buy some medication and it is relatively expensive, that doesn't mean that someone won't buy the medication just because it is expensive. It is necessary. Other factors that contribute to spending and demand are having a price ceiling and price floor. Having a price ceiling is a limit on the price of the product this is a government-imposed idea that is meant to protect consumers from unfair pricing and other conditions that may be malicious or obscure. This affects demand because if there is a price ceiling there is a limit on profit on a unit-to-unit basis. The other factor is the price floor. This price floor was created to encourage competition and affect consumers' willingness to pay because sometimes this new price may be higher than the original price. This causes a negative impact on a product that has a less than wanted perceived value. Many factors contribute to economic prosperity and certainly do help assure that information is analyzed and implemented into an economic and business plan.

limejellyfish231

Please read the article and answer these THREE questions:

1. Why are conditions currently favorable for firms to issue debt and pay out the proceeds to stockholders?

2. What are dangerous impacts of issuing additional debt mentioned in the article?

3. TransDigm used the proceeds of their debt issue to pay a one-time dividend while Intel used the proceeds to repurchase shares. How does a repurchase differ from a one-time dividend? Why do you think the two firms chose different approaches to distributing cash to shareholders?

___________

"Borrowing for Dividends Raises Worries" at the Wall Street Journal on 10/06/2009

The nascent trend is controversial because corporate borrowers are sinking themselves deeper into debt to pay out special dividends, buy back stock or finance acquisitions. While such moves were all the rage during the credit boom, most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash.

Eric Felder, global head of credit trading at Barclays Capital, says the lure of low rates and companies' stables of cash increases "the risk of non-bondholder friendly events."

Last week's sale of $425 million of bonds by aircraft-parts manufacturer TransDigm Group Inc. is one of the back-to-the-past corporate-bond deals causing concern among some analysts. More than $360 million of the proceeds will be used to pay a special cash dividend to shareholders and management of the Cleveland company.

The added debt increased TransDigm's borrowings to 4.3 times its earnings before interest and taxes, compared with 3.1 times before last week's deal. The expected dividend of $7.50 to $7.70 a share is equal to nearly all of the net income that TransDigm reported since the end of fiscal 2003, according to Moody's Investors Service.

Moody's said the dividend "illustrates the company's aggressive financial policy." Moody's gave the new debt a junk rating of B3, even though the ratings firm said TransDigm's "strong operating performance will enable the company to service the increased debt level."

Sean Maroney, director of investor relations at TransDigm, says the "stability of our business, high profit margins and consistent cash flow" give the company "the ability to support this level of leverage."

Borrowing from bondholders to pay shareholder dividends is "a hallmark of an earlier credit era," Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

With the federal-funds rate at 0% for nine months now and confidence returning to the stock and debt markets, investors have been driven to take on more risk. That is flooding the corporate-bond market with cash. Investors poured $43 billion into investment-grade corporate-bond funds in the second quarter and nearly $40 billion in the third quarter -- almost double previous peak quarters, according to Lipper AMG Data Services.

The wave of buying drove down borrowing costs for the average highly rated corporation to about 5%, according to Merrill, a level not seen since 2005. In the heat of the crisis last October, such rates averaged 9%. Through the end of September, more than 1,000 high-rated companies borrowed a record $860 billion, according to Dealogic.

In July, Intel Corp. INTC 0.33% sold $1.75 billion of convertible bonds, planning to use $1.5 billion of the proceeds to buy back shares. A spokesman for Intel declined to comment.

The computer-chip giant has a strong credit rating of single-A, so it doesn't carry a burdensome debt load. Still, the deal raised eyebrows among some analysts and investors, who say floating debt to buy back stock could become more common as companies regain confidence.

And as merger-and-acquisition activity revs up, the cheaper cost of debt compared with equity is tempting companies to use bond sales as a deal-making war chest.

Analysts are watching Kraft Foods Inc. in anticipation that the company would finance its proposed purchase of U.K. chocolate, candy and chewing gum maker Cadbury PLC by raising tons of debt. Last month's unsolicited bid by Kraft was then valued at about $16.7 billion, but it could be weeks before Kraft submits a formal offer.

"Kraft is committed to maintaining an investment-grade rating," a Kraft spokesman said, declining to comment further.

So far in 2009, returns to high-grade bond investors are 19%, according to Merrill. "We've seen a feeding frenzy" because of low interest rates, says Kathleen Gaffney, portfolio manager at Loomis, Sayles & Co. She sold some bonds recently to take profits from the rally. Loomis Sayles wants to have cash on the sidelines in case the Fed raises rates soon or Treasury bonds sell off.

maroonclam133

Please read the article and answer these THREE questions:

1. Why are conditions currently favorable for firms to issue debt and pay out the proceeds to stockholders?

2. What are dangerous impacts of issuing additional debt mentioned in the article?

___________ "Borrowing for Dividends Raises Worries" at the Wall Street Journal on 10/06/2009

Rock-bottom interest rates and thawed credit markets are emboldening some companies to use bond-sale proceeds to go on the offensive, even if that means rewarding shareholders at the expense of bondholders. The nascent trend is controversial because corporate borrowers are sinking themselves deeper into debt to pay out special dividends, buy back stock or finance acquisitions. While such moves were all the rage during the credit boom, most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash.

Eric Felder, global head of credit trading at Barclays Capital, says the lure of low rates and companies' stables of cash increases "the risk of non-bondholder friendly events." Last week's sale of $425 million of bonds by aircraft-parts manufacturer TransDigm Group Inc. is one of the back-to-the-past corporate-bond deals causing concern among some analysts. More than $360 million of the proceeds will be used to pay a special cash dividend to shareholders and management of the Cleveland company. The added debt increased TransDigm's borrowings to 4.3 times its earnings before interest and taxes, compared with 3.1 times before last week's deal. The expected dividend of $7.50 to $7.70 a share is equal to nearly all of the net income that TransDigm reported since the end of fiscal 2003, according to Moody's Investors Service. Moody's said the dividend "illustrates the company's aggressive financial policy." Moody's gave the new debt a junk rating of B3, even though the ratings firm said TransDigm's "strong operating performance will enable the company to service the increased debt level." Sean Maroney, director of investor relations at TransDigm, says the "stability of our business, high profit margins and consistent cash flow" give the company "the ability to support this level of leverage." Borrowing from bondholders to pay shareholder dividends is "a hallmark of an earlier credit era," Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

Companies like Dex Media Inc. DEX -0.18% took on debt to pay dividends to its private-equity owners, including Carlyle Group and Welsh, Carson, Anderson & Stowe, before taking the companies public. Dex Media filed for bankruptcy earlier this year under a mountain of debt. With the federal-funds rate at 0% for nine months now and confidence returning to the stock and debt markets, investors have been driven to take on more risk. That is flooding the corporate-bond market with cash. Investors poured $43 billion into investment-grade corporate-bond funds in the second quarter and nearly $40 billion in the third quarter -- almost double previous peak quarters, according to Lipper AMG Data Services. The wave of buying drove down borrowing costs for the average highly rated corporation to about 5%, according to Merrill, a level not seen since 2005. In the heat of the crisis last October, such rates averaged 9%. Through the end of September, more than 1,000 high-rated companies borrowed a record $860 billion, according to Dealogic. In July, Intel Corp. INTC 0.33% sold $1.75 billion of convertible bonds, planning to use $1.5 billion of the proceeds to buy back shares. A spokesman for Intel declined to comment. The computer-chip giant has a strong credit rating of single-A, so it doesn't carry a burdensome debt load. Still, the deal raised eyebrows among some analysts and investors, who say floating debt to buy back stock could become more common as companies regain confidence. And as merger-and-acquisition activity revs up, the cheaper cost of debt compared with equity is tempting companies to use bond sales as a deal-making war chest. Analysts are watching Kraft Foods Inc. in anticipation that the company would finance its proposed purchase of U.K. chocolate, candy and chewing gum maker Cadbury PLC by raising tons of debt. Last month's unsolicited bid by Kraft was then valued at about $16.7 billion, but it could be weeks before Kraft submits a formal offer.

Three major credit-ratings agencies have warned Kraft that they could slash the company's debt ratings if the company reaches a deal agreement with Cadbury. At the current offering price, Kraft would need to shell out at least $6 billion in cash, much of it likely from the debt markets, according to corporate-bond research firm Gimme Credit. "Kraft is committed to maintaining an investment-grade rating," a Kraft spokesman said, declining to comment further. So far in 2009, returns to high-grade bond investors are 19%, according to Merrill. "We've seen a feeding frenzy" because of low interest rates, says Kathleen Gaffney, portfolio manager at Loomis, Sayles & Co. She sold some bonds recently to take profits from the rally. Loomis Sayles wants to have cash on the sidelines in case the Fed raises rates soon or Treasury bonds sell off.

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TAX 9869 Lecture Notes - Lecture 62: Tax Haven, Controlled Foreign Corporation, Passive Income

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