Author Archives: Brian Dooley

About Brian Dooley

Brian Dooley, CPA, MBT is an international tax researcher and planner. He has written many books, testifies at Congressional and Department of Treasury hearings on matters regarding taxation.

When International Cross Border Management Consulting Fees Can Send You to Prision

The IRS is hunting for non-U.S. citizens paying management fees or consulting fees to their foreign business.   The United States is the only country that puts you in jail for ignoring the economic substance of a transaction.

Mr. Albert S.N. Hee was sentenced to 46 months in prison.  He was a successful businessman in Hawaii.    To get money out of his U.S. corporation, he paid his wife and children about $750,000.  He deducted the expense on his corporate tax return claiming that they were providing services to his business.

When the IRS found out the truth, he was arrested on various criminal charges.  The easiest one for the IRS to prove was filing a false tax return.  All the IRS has to prove is the Mr. Hee placed an item on his return (the expense) that was not true.

Take Mike, he has invested in a U.S. business.  He has provided the startup money to an e-commerce business and owns 25% of the business (operating as a limited liability company).  Mike does not want the complexity (and therefore accounting fees) of filing a U.S and state tax return.

Mike is taking his share of the profits as a management fee. He spends time getting an update report from the other owners but he is not managing the business. 

He is paying Canadian taxes on the income but no American taxes.   The criminals are the LLC, its managing members, and Mike.   Often the IRS will add the criminal charge of “conspiracy to defraud” and mail fraud. 

What should have Mike have done?

For a Canadian, an American LLC is not the best choice.  Since Mike is not involved with management, a limited partnership is a good option.  Under the Canadian-United States Tax Treaty, Canada will offset his Canadian income taxes by the U.S. income tax.

The limited partnership will make the estimated tax payments for Mike.  Mike will get one or two-page report (call a Form K-1) from the partnership telling Mike the amount of his taxable income and the amount of estimated taxes.  Mike will file a U.S. and state income tax returns.

Yes, it is a hassle.  But other international businesses see this a part of the cost of being an international business.  Usually the CPA fees for the returns are less than $5,000.  By the way, the fees are a tax deduction. 

Judges are harsh on non-U.S. citizens saying to the defendant that they came to America to make money.  Unlike citizens who have no choice but to pay taxes, the nonresident alien came here by their own choosing.

How the Rich Pay Lower Taxes and How Can You Do the Same?

Smart business owners are not too busy to save taxes.

Smart business owners are not too busy to save taxes.

The Wealthy are not like us.  They are willing to spend money to make money.  They are willing to pay their tax team a $1 to save $10 in taxes.

This Wealthy (called the “one percent”) create most of the jobs in the U.S. They pay half of all income taxes.  But, at the same time, they usually in a lower tax rate than the rest of us.   For example, Democratic Senator Bernie Sanders is in 15% tax bracket on all his income, including his senator salary.    The topic of this blog, is what’s wrong with your tax planning?

The Wealthy use long-term tax strategies.  These strategies tweak their business structure.     Different parts of a business have different tax laws.  For example, if you have a sales force, they should be in a different corporation than your business. Continue reading

Amazon Fulfillment International Tax Strategies with a Tax Treaty Corporation

Wow, the speed of change in business is leaving worldwide governments in the dust. From Netflix streaming to Google AdWords, the 21st Century business has many legitimate tax avoidance strategies.

This blog explains U.S. taxation (I should say lack of U.S. taxation) for the foreign corporation doing business via the Amazon fulfillment center (referred to as FBA). At the end of this blog is Amazon’s short video explaining their FBA.

Let me tell you about Sam. He is an entrepreneur. He also is wise. He has a tax team of a CPA and a business attorney.  He does not read a blog like this and then goes out and does his tax planning by himself. This blog gives the concept. But the tax savings are in the legal details that only your attorney and CPA can do for you.

Sam has decided to sell beauty products that he has manufactured in Switzerland to U.S. consumers. He will create a fantastic e-commerce and branding website. He will use Google Adwords as part of his marketing. Sam plans to have no employees.

Sam met with his CPA and attorney. After careful research, they have decided on an Irish company. His tax team explained that his Irish company must create the website, contract with the Swiss manufacturer of the products, pay for the marketing including Google Adwords and be the party to the contract with Amazon FBA.

His tax team informed Sam that he must request an IRS private letter ruling before he starts an international business.  Sam is a smart business person. He knows that working with the IRS is the best way to create wealth.

The Irish company needs a U.S. bank account and credit card processing. Sam’s bank required the Irish company to qualify to do business in the state where the bank is located. Sam and his bank are in Florida. The Irish company registers with the State of Florida.

Okay…now it is time to build the business. The Irish company hires an Irish web design firm to create and host the website. In Ireland, many chartered accountants and law firms provide the registered office. As part of this process, the firm provide directors and their staff to help with the management. The Irish company signs the contracts with Amazon and the Swiss manufacturer.

The beauty products are shipped to the Amazon fulfillment centers, and Amazon does the rest.

Back in Florida, Sam checks up on the operations. He gets fantastic reports from Amazon. He talks to the Irish web consultant about the SEO for his website.  He looks at the Google Adwords dashboard. From time to time, Sam travels to Europe to meet with the Swiss manufacturer of new products and to meet with his team in Ireland.

The Irish company files many tax returns. First, an Irish income tax return (the tax rate is about 12%). Here in the U.S., the IRS gets two returns, a Form 1120F (a foreign corporation income tax return) and a Form 5471 (an information return for controlled foreign corporations).  Sam’s CPA explains the tax treaty to the IRS using Form 8833.

The U.S. Irish tax treaty provides that If an Irish company has what is known as a “permanent establishment” in the U.S., it owes tax on its U.S. source income (the sales to its U.S. customers). The definitions of a “permanent establishment” are from the 1960’s, and they do not include the concept of a fulfillment center’s contract with the vendor(fn1).    While the Irish Tax Treaty has been updated many times, the updates have been for the exchange of information and the American concept of pass-through entities (such as an S-corporation or a trust).

Your tax team must carefully review the fulfillment center’s contract and compare it to the definition of a permanent establishment in the Tax Treaty.

Get a tax study for your business from us.  We will look at your business and provide you with a tax study for only  (USD) $1,000.  We accept credit cards and wire transfers.  Email me, Brian Dooley, CPA. MBT [email protected] to get started. 

Footnote (1)  Treaty Article Five, Paragraph 6 states:  ” An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business as independent agents.”

If Sam was using a non-treaty corporation (such as the Isle of Man company) then  pursuant to tax code section 864(c)(5)(A), the office or other fixed place of business of an independent agent will not be attributed to a foreign corporation even if the agent has the authority to negotiate and conclude contracts on behalf of the foreign corporation or maintains as stock of goods from which to fill orders on the foreign corporation’s behalf.    

This is where the tax law is tricky.  The agreement with the fulfillment center must be carefully examined to determine if section 864(c)(5)(A) applies. 

Learn more about permanent establishment vs. fixed place of business, section 864(c)(5)(A)  on this link.  As in all international tax strategies, the company should apply for an IRS ruling before proceeding.  Learn about IRS rulings on this link.

 

Provocative International Tax News

offshore tax planning, offshore tax strategies, controlled foreign corporation,

Tax Planning Small Business Are Taxed at 14%

Government Report Shames Businesses Paying More than 14% in Taxes.    Hard to believe that Senator Bernie Sanders  (who paid tax at 13%) released the report.  It states that a business that plans its taxes are taxed at 14%. Here’s what’s going on.    

saving taxes, how to save taxes, tax planning,

Saving taxes with an IRS approved tax plan is called a private letter ruling.

International Gift Tax Plans with this IRS internal letter on this link. Fantastic legal tax avoidance for the foreign person with family in the U.S. is explained in this letter.

  • Avoiding state income taxes this new IRS  designer  Nevada trust.  IRS tells how to use your Nevada corporation as your trustee to legally stop paying state taxes on your investment income. Here’s what’s happeningon this link.

New- Department of the Treasury letter to the U.K. tax authorities on U.S.  tax planning for UK and EU companies. Here is the  this letter from the U.S. 

Tax planning, with the Supreme Court common tax laws

Tax planning with Supreme Court common tax laws

18th Century Supreme Court case destroys IRS tax penalty law. Using this case, the Tax Court gave the IRS a significant defeat.  Here is what happen.   The Supreme Court is the “Law of the Land.”  It rules over the IRS and Congress.   

It works both ways.  The blog on this link explains the most missed Supreme Court Doctrine use by the IRS to blow up this offshore plan.

international tax planning, international, tax, planning,

International tax planning and international tax savings with this Treasury Department report. 

The secret report on tax savings international tax plans that the IRS cannot stop was issued by the U.S. Department of the Treasury (a branch of the White House).

They reported the successful foreign tax plans of international businesses. We have obtained a copy.  It is on this link.   Here you will learn the legitimate foreign tax plans that Congress likes. 

offshore trust, foreign trust, nevada trust, estate planning trust, esbt,    Since the Middle Ages, the wealthy have capitalized on trusts to avoid paying taxes. During the Great Crusades, upon the death of a knight, his entire estate went to the king.    Nine hundred years later, things have not changed much except the ‘King” takes only half.

Trust are the most efficient tax tool. International tax planning should start with a Nevada trust to own the foreign company.  Learn trust tax planning and asset protection in this easy to read blog post.    It has the blueprint for successful trust tax planning.   IRS memo on asset protection and tax planning with an offshore trust.  Get it now on this blog post.

internet tax planning, saving taxes, cloud tax planning

Saving taxes with the cloud-based

Cloud tax planning. Learn how businesses are using the cloud to avoid taxes on this link.  E-commerce companies are avoiding state income taxes and in some cases deferring U.S. taxes.

Be an IRS tax wizard with our new custom Google search, on this link.  This custom Google app to read 300,000 pages deep inside the IRS’s website and the tax court’s website.

Is the U.S. a tax haven for citizens of the UK, Sweden, Belgium, Canada, Luxembourg, and Austria?  Yes, says the IRS in its Publication.  Learn the magic Tax Treaty words for these lucky citizens of The UK, Sweden, Belgium, Canada, Luxembourg, Austria on this link.

IRS Wins a Big One with a New Make Believed Tax Treaty Shopping Theory “Cramping”

Maybe the taxpayer just used the wrong court?   The taxpayer, Starr International Co. appeared to have had smart tax planning.   It moved its operation to Switzerland.  In part because the Swiss are very pro-business and in part because the Swiss have a good tax treaty with the U.S. 

But U.S. District Court Judge Christopher R. Cooper would just didn’t like it.  So, Judge Cooper made up a new tax term and theory, “Cramped Conception“.

Not knowing that U.S. law allows one to arrange their affairs to pay the lowest tax (except in the case of a sham transaction without economic substance), Judge Cooper ruled for the IRS.

In tax planning, this is known as the “hazards of litigation”.  I have a portion of the Judge opinion below with my author notes in bold print. 

5. Starr’s Test Would Result In a Cramped Conception of Treaty Shopping

Starr’s proposed test is not only at odds with Article 22 and the Technical Explanation, but it also depends on an unduly narrow definition of treaty shopping. Starr insists that “treaty shopping is a well-defined legal standard,” which categorically excludes situations that do not involve on-paper third-country residents. Pl.’s Cross-MSJ 2.

But, tellingly, the term is nowhere to be found in the U.S-Swiss Tax Treaty (or any bilateral tax treaty, for that matter).  (Author note: The Judge admits that the law is not defined but then, below talks about the 1,000s of articles and other commentaries.  I doubt if the Judge read all of the articles).

Rather, as indicated by the commentaries, legislative testimony, and agency guidance cited by the parties, there is a fair amount of imprecision surrounding the phrase.  (Again the Judge admits the term treaty shopping  is not defined…so he just makes up his own theory of “cramped”).

As used by these authorities, treaty shopping does frequently involve the participation of a third-country resident, but it need not. Rather, its essential characteristic is treaty abuse — manipulating on-paper residency for the purpose of obtaining treaty benefits.

Starr insists that “treaty shopping is a well-defined legal standard,” which categorically excludes situations that do not involve on-paper third-country residents. Pl.’s Cross-MSJ 2.

But, tellingly, the term is nowhere to be found in the U.S-Swiss Tax Treaty (or any bilateral tax treaty, for that matter).  (Author note: the Judge admits that no tax law exists).

Rather, as indicated by the commentaries, legislative testimony, and agency guidance cited by the parties, there is a fair amount of imprecision surrounding the phrase. As used by these authorities, treaty shopping does frequently involve the participation of a third-country resident, but it need not.  (In this case, a third-country resident did not exist).

Rather, its essential characteristic is treaty abuse — manipulating on-paper residency for the purpose of obtaining treaty benefits.

Rather, its essential characteristic is treaty abuse — manipulating on-paper residency for the purpose of obtaining treaty benefits.(Author note: this is not the facts… the Judge is merely “papering” his opinion with “fake news”.)

For example, the Government cites commentary from the Organisation for Economic Co-operation and Development (“OECD”) on its model tax treaty, which expresses concern regarding “the creation of usually artificial legal constructions, to benefit both from the tax advantages available under certain domestic laws and the reliefs from tax provided for in double taxation conventions.” OECD Committee on Fiscal Affairs, Model Double Taxation Convention on Income and on Capital 47 (1977).11    

The commentary explains that such abuse (this Judge loves the word “abuse”; it sounds so righteous) would occur, “for example, if a person (whether or not a resident of a Contracting State), acted through a legal entity created in a State essentially to obtain treaty benefits which would not be available directly to such person.” Id. (emphasis added).

(According to the Europeans and not the Americans) Treaty abuse would also occur, according to the commentary, if an individual “transferred his permanent home [from one Contracting State] to the other Contracting State, where [capital] gains were subject to little or no tax.” Id. (California will love this judge… if I move from California to Washington state, this Judge will rule that I still owe tax in California since Washington has not income tax).

Clearly, these examples do not turn on a third-country participant, and yet the OECD’s more current commentary describes this treaty abuse as “the problem commonly referred to as ‘treaty shopping.’” OECD Committee on Fiscal Affairs, Model Tax Convention on Income and on Capital C(1)-26 (2014).

Similarly, the parties have cited and discussed testimony regarding the U.S.-Swiss Treaty, presented before the Senate Committee on Foreign Relations, from former Deputy Assistant Treasury Secretary Joseph H. Guttentag. See Bilateral Tax Treaties and Protocol: Hearing Before the S. Comm. on Foreign Relations, 105th Cong. 354, at 11 (1997). Mr. Guttentag explains that one   major objective of U.S. tax treaty policy is to . . . prevent abuse of the treaty by persons who are not bona fide residents of the treaty partner. This abuse, which is known as “treaty shopping,” can take a number of forms, but its general characteristic is that a resident of a third state that has either no treaty with the United States or a relatively unfavorable one establishes an entity in a treaty partner that has a relatively favorable treaty with the United States. 

Id. Guttentag elaborates that, while treaty shopping “general[ly]” involves a third-country resident, it “can take a number of forms,” and it is primarily concerned with treaty abuse “by persons who are not bona fide residents of the treaty partner.” Id.  (Author note: Starr was a bonafide resident in Switzerland)

Starr’s definition of treaty shopping, by contrast, would narrow the concept to such an extent that even some persons who are not bona fide residents of a treaty nation — persons who lack a “sufficient nexus” to either contracting state — would be entitled to benefits. Of course, that is likely Starr’s reason for proposing such a standard, since it largely concedes that it was not a bona fide resident of Switzerland or the United States at the relevant time.12

Before proceeding to Starr’s remaining arguments, some qualifications are in order.

First, the Court does not mean to suggest that an entity’s on-paper residency (and that of the individuals it associates with) is irrelevant to its bona fide residency.

Surely, in exercising its discretionary judgment under Article 22(6), it would be reasonable for the Competent Authority to consider Starr’s lack of affiliations with on-paper third-country residents in evaluating the company’s bona fide connections to treaty states.

There is simply no per se Article 22 rule, however, requiring the Competent Authority to reach such a determination.

Second, clearly any bilateral tax treaty is intended to benefit the legitimate residents of the two signatory nations. Accordingly, it would also have been permissible as a matter of policy, but was not required as a matter of law, for the Competent Authority to consider an argument that Starr’s majority-control by U.S. citizens should counsel in favor of awarding it benefits under Article 22(6).13

In any event, the point remains that it is difficult to square Starr’s version of the Article 22(6) standard with Article 22’s text, structure, and accompanying Technical Explanation.

The Court therefore reaffirms that the proper standard for determining benefits under Article 22(6) is “whether the establishment, acquisition, or maintenance of the person seeking [treaty] benefits under the Convention, or the conduct of such person’s operations, has or had as one of its principal purposes the obtaining of [treaty] benefits.” Technical Explanation 72. The Competent Authority clearly applied this standard. A.R. 274.  (Can you  imagine this Judge ruling against a Subchapter S election because the election was with the “principal purpose of obtaining the [tax} benefits?)