New- 2018 International Tax Code for Small Business Importing, Exporting & Ecommerce

The International Tax Code for Small Business Importing, Exporting & Ecommerce just got much much better.  The new GOP Tax Act  allow small business to avoid U.S. income taxes on their foreign source income. 

So now, the new challenge (and maybe the only challenge) is designing the business activity to have foreign income.

For some businesses it is not difficult. For other business it will be almost impossible.  This blog post has the basic concepts.   Please use these concepts, below, as a discussion point with your CPA and/or attorney.  Also, you can learn about some easy foreign corporation tax planning on this link.

Small business international tax plan will include a foreign corporation.  E-commerce businesses will want a tax haven corporation.  My two favorites are the Isle of Man and the British Virgin Islands.    The two countries have different economic systems that will affect your choice.

The international tax code has little effect on your choice.    The new  international tax code allow small business to avoid U.S. income taxes on their foreign source income.   The  international tax code does not care where the foreign corporation is formed.

If Europe is your market, then the Isle of Man is best.  The BVI is the best for markets other than Europe.  The reason is the VAT (value added tax).  This tax is in all of Europe, the U.K. and Canada. Compliance is easier in the Isle of Man.  Also, the Isle of Man has solid electrical grid.

The BVI has good corporate laws.  However,  you do not want to place your computer server in the BVI.  Their electric grid is not dependable.

The new  international tax code is dependent upon foreign source income. I have the general rules below (each rule has exceptions so consult your CPA or contact me at [email protected]).

Summary of the General Source Rules for Income of  Foreign Corporations and Nonresident Aliens.

 Item of income

   Factor determining source

Salaries, wages, other compensationWhere services performed
Business income: 
 Personal servicesWhere services performed.  This includes some E-commerce websites providing information or a service.
 Sale of inventory—purchasedWhere sold.  One of the key points is where the change of title to the inventory occurs. Contact your CPA.
 Sale of inventory—producedAllocation – this law is more complex.  Contact your CPA or me. 
InterestResidence of payer
DividendsWhether a U.S. or foreign corporation*
RentsLocation of property
Royalties: 
 Natural resourcesLocation of property
 Patents, copyrights, etc.Where property is used
Sale of real propertyLocation of property
Sale of personal propertySeller’s tax home (but see this special IRS report on  Personal Property, for exceptions)
Pension distributions attributable to contributionsWhere services were performed that earned the pension. See the new IRS tax planning on this link.
Investment earnings on pension contributionsLocation of pension trust.  The IRS just issued a new tax savings ruling on this topic on this link.
Sale of natural resourcesAllocation based on fair market value of product at export terminal. For more information, see section 1.863-1(b) of the regulations.
*Exceptions include: a) Dividends paid by a U.S. corporation are foreign source if the corporation elects the American Samoa economic development credit. b) Part of a dividend paid by a foreign corporation is U.S. source if at least 25% of the corporation’s gross income is effectively connected with a U.S. trade or business for the 3 tax years before the year in which the dividends are declared.

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