Category Archives: Cross Border Taxation

Articles in Cross Border Taxation are focus on inheritance of the multi national family
and on small business with a presences in more than one country.

Tax Savings with International Tax Treaty Planning for the Resident Alien

Citizens of Canada, the U.K., Australia, New Zealand, the European Community, have a unique tax advantage while living in the U.S.  Tax treaties with these countries provide a unique and little-known tax savings. 

This video is an audio clip from my tax radio show, Tax Talk. You will learn why resident aliens are paying more in taxes than they should. 

If you have any questions, then please call me, Brian Dooley, CPA, MBT at 949-939-3414 or visit our website – https://www.intltaxcounselors.com.  

International tax planning starts with these essential concepts:
Resident Aliens

resident alien’s income is taxed in the same manner as a U.S. citizen.

They pay tax on their worldwide income including income from interest, dividends, wages, other compensation for services, rental property, and royalties.  The resident alien must report these amounts whether from sources within or outside the United States.  Depositing of income outside the U.S. is taxable.

If you are a citizen of a country with a tax treaty, the treaty decides if you are a resident or non-resident.  Otherwise, if you have a green card or spend too many days in the U.S., you are a resident alien.

Nonresident Aliens  

Nonresident aliens are usually subject to U.S. income tax on U.S. source income.  In some cases, foreign source business income can be subject to U.S. tax.  You will learn more in my book, International Taxation in America for the Entrepreneur.

Dual-Status Aliens  

dual-status alien is an individual that is both a resident alien and a nonresident alien in the same tax year.  This can occur when you obtain your green card.

Income Types

U.S. Investment income is taxed at a flat 30% of the gross income.  If the non-resident alien resides in a treaty country, the tax rate is usually between zero and 15%.

Business income is taxed on a net income basis.  The alien has the same tax rates as an American.  In some cases, an NRA’s foreign business income is taxed by the U.S.  This occurs when the NRA has an office or some other type of business facility or is in the U.S. on a business trip.

Tax Withholding on Foreign Persons

Payments of U.S. income to foreign persons are subject to the  withholding tax rules.  In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income.  This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.

The NRA that comes to the U.S. for business meetings owes U.S. tax on his foreign salary if he or she is paid more than $3,000 by his employer.

Taxpayer Identification Numbers (TIN) for the non-citizen

Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN).  Also, non-citizens who request tax treaty exemptions or other exemptions from withholding must also have a TIN.

Sale of Real Estate 

Non-Resident Aliens are hit with a fifteen percent withholding tax on the sale of U.S. real estate.  In some cases, the withholding tax applies to refinancing.  The withholding tax does not replace the income tax.  Aliens must file an income tax return.  The tax withheld is a credit towards the total tax.  If the total tax exceeds the tax withheld, they get a refund.

Saving Taxes with Tax Treaties 

The U.S. tax liability of non-resident aliens is determined primarily by the provisions of tax treaties.  If the non-citizen is not a national of a treaty country, then the U.S. Internal Revenue Code applies.

Many foreign countries have tax treaties with the U.S. Tax treaties override or modify the provisions of the Internal Revenue Code.  Tax treaties allow you to pay less tax.

Estate Taxes

All though you are a resident alien for income taxes you may be a non-domiciled alien for estate (death) taxes.    Non-domiciled aliens are subject to estate taxes on all of their U.S. property (including stocks, bonds, and property) except bank accounts and life insurance.  They are not entitled to the $5,000,000+ exemption that is allowed for Americans.  Accounts with brokerage firms are frozen upon the alien’s death.   Tax treaties may allow the alien to avoid U.S. gift and estate taxes.

Become an Expert

Become an expert with my book, International Taxation in America for the  Entrepreneur, available on this link and feel free to call me with any questions that you have.

 

 

How the IRS Taxes Australian, Candadian, U.K. and Europeans Companies and Citizens Doing Business In The United States

french tax, french tax planning, job loss.

French businesses are profiting by avoiding the VAT by manufacturing in the U.S.

This blog is for Australian, Canadain, U.K. and Western European companies and citizens planning to have a business in the U.S. or business income from U.S. customers.

The United States is courting U.K., Western European, Canadian and Australian citizens to move their businesses.  The U.S. doesn’t  have a VAT (value-added tax).  The absence of this tax gives a 25% increase in a company’s purchasing power (assuming a VAT of 20%) of inventory, machinery and employees.  Business makes more money due to the additional working capital.   

Labor unions are weak in the U.S. Employee rights are limited compared to the U.K., the EU, and Australia.

This blog explains how citizens (and their companies) from a tax treaty country are taxed in the U.S.

I am using the U.S. Model Income Tax Convention (the “U.S. Model Treaty”) for this blog.  I will highlight the articles that apply to business.  I will make the treaty easy to understand by removing the tax jargon. 

If you would like to discuss a U.S.’s tax treaty, then please call me, Brian Dooley, CPA, MBT at (U.S.) 949-939-3414.

 Next, I will explain the U.S. tax law on doing business in USA.  

Lastly, I will have some questions that I am frequently asked and the answer.

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Foreign Investors Learn Why a Corporation and Family Limited Partnership is U.S. Death Tax Trap

The problem for the non-resident alien is that their estate tax exemption is $60,000 and not $5.3 million (as it is for Americans).   And there is one more problem… the U.S. estate tax planner.  While the U.S. has a tax on the estate, other countries tax the recipient.  This tax is called an “inheritance tax.”

Thus the  American tax planner also must know “international inheritance tax planning” for the foreign country of the investor.

They advise the nonresident alien (the term for estate and gift taxes is “nondomiciled“) to own their U.S. investments and U.S. real estate through a foreign corporation (such as a Panamanian company or a British Virgin Island company).  

Since the 1950’s, this tax plan has failed.  The U.S. courts have ruled for the IRS (more on these cases on this link).  These court cases focused on the power to revoke (section 2038) and the right to the corporate dividends (section 2036).  These tax laws  required the assets owned by the foreign entity to be included in the deceased’s U.S. taxable estate

The best estate tax planning method for the foreign investor involves a trust.   Here is a link on the basics.  In Europe and the United Kingdom are subject to an inheritance tax.  Estate taxes and inheritance differ.  This difference challenges international inheritance tax planners. 
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How to Prepare Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests

Form 8288, form 8288-b

Preparing Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests

The non-resident alien, foriegn LLC and foreign corporations all have one common international tax problem- the U.S. 15% real estate sale price withholding tax.  But there are often another tax which is the state withholding tax.

For example, Hawaii is a five percent withholding tax of the sales price.  As a result, a whooping 20% of the sales price is withheld.

The seller is personally responsible for this tax and so is the escrow company or law firm handling the sale.   It is what we call, in America, as a “hot potato”.   Every person connected with the sale proceeds is personally responsible.

I am sorry.  I have more bad news about Form 8288-B FIRPTA Certificate.  Congress slashed funding for the IRS.  The other day, an IRS International Tax Attorney told me that the IRS has “limited resources”.   This means a longer, much longer, wait for your FIRPTA Certificate.

The instructions state up to 90 days; but this is only if your submission is perfect.   Here is why.  Imagine an IRS office handling million of Form 8288-B and invision paper everywhere in the office.  The fastest way for an employee to clear his workload is to reject the Form.  He merely pushes a few buttons on the computer and the computer sends you a rejection letter.

Because of this you must have each and every required document attached.

Here are the four most common mistakes made by the “do it yourself”  applicant of the FIRPTA Withholding Certificate and some CPAs .

  1.  An unprofessional explanation of the transaction and “tax basis”.  I always provide a tax law citation such as IRC section 897 or the most important section 1445.  Each of these section have regulations.  For example you want to discuss the IRS rules in regulation section 1.1445-4.
  2.  No canceled checks proving the tax basis.  This mistake will quickly get your application rejection and this is why.  For the IRS to verify your gain (and thus taxes due), the IRS must have proof of your cost.   Just providing the IRS a copy of your purchase agreement means nothing because it may be phony.  The IRS is auditing you in advance of your sale.  You must give them proof of your cost.   Proof is your canceled checks.
  3. Incorrect calculation of “recapture depreciation”.    Recapture depreciation is taxed as ordinary income and not capital gain.    Proper calculation needs a computer program since depreciation is done on a “declining balance'”.
  4. Rushing in preparing the Form 8288-b.   The instructions to the form estimate four hours but in reality the longer you have owned the property the longer the preparation time.   As time goes on, you have more depreciation on the different components of property, more improvements for which you need proof (the invoices and canceled checks) and more photo copying of each of these item.

If you need help obtaining your Certificate, then call me, Brian Dooley, CPA, MBT at 949-939-3414.  Ask about our  expedited service where we prepare and Federal Express your Application to the IRS in 24 hours. 

Saving Taxes as the U.S. Goes to the Trump International Tax Plan

Will it be protectionism or something more dramatic?  International Tax Planners are shifting their client’s tax strategy now getting ready for this Fall.

Small Business Tax Planning. Try very hard to pay the least in taxes

Small Business Tax Planning. President Trump states “I fight very hard to pay as little tax as possible.”

Here is what’s happening.   First,  President Trump is proposing a 15%  U.S. business income tax rate.   The goal is to keep American businesses from going offshore.    The downside is this lower tax rate will apply only to corporations (excluding S-corporations).   When a corporate distributes its profits, it is called a dividend.   The shareholder pays tax on the dividend income.

Second, the wall.  I am not writing about the Mexican wall.  I am writing about the approximately 20% import duty.  The proposal is to apply this import tax to all countries that have a value-added tax (VAT).  All of Europe, the U.K., Canada, Australia, China, most of Asia and most of Latin America have the VAT.    So, just assume the whole world.

The result is a tax on imports and a lower tax on domestic production.   Domestic corporations will have more after-tax dollars for growth and improve efficiency.   This should allow for lower price goods.  Meanwhile, exports will cost 20% more due to the import tax.

International businesses are splitting and eliminating cross-border joint production and cost sharing programs.

Currently, corporations have a preferred tax savings with the foreign tax credit law.  The IRS  reimburses a domestic corporation the taxes paid by it or a subsidiary to a foreign government.    With the current high-income tax rate, the full amount of the foreign taxes were reimbursed.

But, with President Trump’s tax plan, the reimbursement will be reduced because the income tax rate is reduced to fifteen percent.   For example, if a foreign government tax rate is 30% and the U.S. business has a $1,000 of foreign income, the foreign tax is $300.   If the U.S. tax rate is 35% then the U.S. tax of $350 is reduced by the foreign tax of $300.   The net amount is paid to the IRS.

With President Trump’s tax law, the U.S. tax will be $150 (15% of $1,000).   The foreign tax will reduce only $150 of U.S.  taxes.    As a result, tax planners will want to avoid having plants, employees and “permanent establishments) in foreign countries unless their tax rate is less than 15%.

Currently, only Ireland fits a tax rate less than 15% and has the capacity to manufacture.

What about tax havens like the Cayman Islands?  They are too small for manufacturing or productions.

Tax havens are ideal for the internet business and for firms that stream content.   But, where good electricity for big equipment is required, they are not the best choice.

Summarizing this year’s foreign tax planning

Cross-border multi-national businesses are gearing up for all in one production within the U.S. for their American customers.   Likewise, these firms are going to be all in one within the EU  or the British colonies.  As a result, three separate free trade zones will develop (the U.S., the EU, and the British Colonies).

International tax strategies are now being developed for each of the three free trade zones.

Latin America countries, China and the rest of Asia will find their markets are changing.   They will be caught fall out from  President’s Trump isolation protective tax laws.  American international firms will find the overall tax costs too high in these countries and their market to weak.

Summarizing International Tax Planning for 2018 to 2020

Tax planning is not so much about today’s tax laws.  Tax planners closely look at the economic and political trends.  These trends shape future tax bills and tax planning is only for the future, not the present or the past.

The Wall Street Journal “Think Tank” blog’s headline today is Donald Trump’s Foreign Policy Is ‘America Only,’ Not ‘America First’.     The import duty to keep out foreign products and the lower corporate tax rate to keep American businesses in the Country is an “American Only” tax program.

Cross-border tax planners have noted this and are shifting their tax planning into three economic segments- the United States,  the European Union and the British Commonwealth.

If you need help with your international tax planning, then please call me, Brian Dooley, CPA, MBT, at 949-939-3414. We will help you “fight very hard to pay as little tax as possible.”