Table of Contents for Form 1120-F U.S. Income Tax Return of a Foreign Corporation Tax Planning
1. This blog tells you how to protect yourself from the U.S. courts and the IRS.
2. his blog is primarily about U.S. international income taxation and the branch profits tax.
3. Two important international tax laws to watch.
4. Tax Planning for your Balance Sheet and the Branch Profits Tax.
5. Liability Of Corporate Agent in the USA.
6. You Must Timely File Form 1120F to Claim Deductions or Credits.
7, Protective Filing of Form 1120F: Smart International Tax Accounting.
8. What if only part of your U.S. income is U.S. business income?
This just might be the most important blog on international tax that you will ever read. Here is the problem for U.K., EU, Australian, New Zealand, and Canadian corporations with U.S. income.
The internet is full of stories of how the tax treaty permanent establishment article prevents the USA from taxing you. What the stories don’t tell is that the U.S. Tax Court does not care about your tax treaty.
The U.S. Tax Court is part of the Government. The Government wants your money. It is that simple. Okay, it’s not fair. But they really do not care. This link discusses a few of these anti-tax treaty court cases.
This blog tells you how to protect yourself from the U.S. courts and the IRS.
Form 1120-F U.S. Income Tax Return of a Foreign Corporation covers three different taxes.
Foreign corporations have income from U.S. sources are always required to file U.S. tax returns.
Three different taxes are on the form as follows:
- Foreign corporations must pay a 30 percent tax on income from U.S. sources not connected with a U.S. trade or business.
- Foreign corporations engaged in trade or business within the United States is subject to income tax, alternative minimum tax, and other taxes applicable to corporations on their taxable income.
- Foreign corps engaged in business within the U.S. must pay the branch profits tax.
This blog is primarily about U.S. international income taxation and the branch profits tax.
A foreign corporation with a business in the United States at any time during the tax year or that has income from United States sources must file a return on Form 1120-F. A foreign corporation with U.S. business income must file (I will explain why later in this blog) even though:
(1) It has no business income (that is income effectively connected with the conduct of a trade or business) in the United States,
(2) It has no income from U.S. sources or
(3) Its revenues are exempt from income tax under a tax convention or any provision of the tax law.
Two important international tax laws to watch.
- If the foreign corporation has no gross income for the year, it is not required to complete the return. However, it must file a Form 1120F and attach a statement (I will explain why later in this blog) to the return indicating the nature of any tax treaty exclusions claimed and the amount of such exclusions to the extent these amounts are readily determinable. For example, if you believe that you have avoided having a permanent establishment, you need to explain why. Here is more on court cases on permanent establishment).
- To claim tax deductions and credits, the corporation must file an accurate tax return on time. If the return is not timely file, all of the expenses and costs of goods sold can never be deducted. If the U.S. income of a foreign corporation includes income that is subject to a lower rate of tax under a treaty, it must attach a statement to its return explaining this and showing:
(a) The income and amounts of tax withheld,
(b) The names and post office addresses of withholding agents, and
(3) any other information required by the return form or its instructions.
Tax Planning for your Balance Sheet and the Branch Profits Tax.
The foreign corporation may elect to limit the balance sheets and reconciliation of income to the U.S. business use assets, liability and equity and its other income from U.S. sources. The branch profits tax traces the U.S. business equity and debts. Thus, the balance sheet is the IRS’s primary audit tool. Reporting your worldwide assets is providing the IRS information that has little or no value.
TAX TIP: A foreign corporation that is not engaged in a trade or business in the United States it is not required to file a return when the U.S. withholding of tax at the source of its payments covers the taxes owed. A matter of fact, the goal of U.S. withholding tax is eliminated U.S. tax compliance for the foreign person.
Liability Of Corporate Agent in the USA
A representative or agent of a foreign corporation must file a return for and pay the tax on the income coming within his control as representative. The agent can include a related corporation or an individual.
You Must Timely File Form 1120F to Claim Deductions or Credits
I can not say this too often. A foreign corporation must its return on time to take deductions and credits against its U.S. business income.
However, the following deductions and credits are allowed even if such a return is not filed:
(1) the charitable deduction;
(2) the foreign tax credit passed through from mutual funds;
(3) the fuels tax credit; and
(4) The credit for income tax withheld.
Timely filed means the Form 1120-F is filed no later than 18 months after the due date of the current year’s return.
But it is more complicated, and you must read this: I know this next section is tricky. So, please be patient. However, if you need help, then contact me, Brian Dooley, CPA, MBT at [email protected]
When the return for the prior year was not filed, the return for the current year must have been filed no later than the earlier:
- of the date which is 18 months after the deadline for filing the current year’s return, or
- the date, the IRS mails a letter to the foreign corporation advising it that the current year return has not been filed and no deductions may be claimed it.
The IRS may waive these deadlines when the foreign corporation proves that:
- It acted “reasonably and in good faith” in failing to file a U.S. income tax return (including a protective return), and
- cooperates in determining its income tax liability for the year for that the return was not filed.
Protective Filing of Form 1120F: Smart International Tax Accounting
This is the smartest thing you can do as a foreign corporation. The chances of an audit are low and the tax protection is high. I have the rules below.
A foreign corporation with limited activities in the United States that it believes does not give rise to U.S. gross business income should file a protective return.
A timely filed protective return preserves the right to receive the tax savings of the deductions and credits if it is later determined that the foreign corporation did have a U.S. business.
Here is the very good news: On that timely filed protective return, the foreign corporation is not required to report any gross income taxable income and thus pays no net income tax or branch profits tax.
However, do not forget to attached a statement indicating that the return is being filed as a protective return and to check the box on the Form 1120F. Also, you must include your tax treaty disclosure IRS form. Be sure to attach the IRS tax treaty disclosure Form 8823, on this link.
What if only part of your U.S. income is U.S. business income?
If the foreign corporation determines that part of the activities is U.S. business gross income that U.S. business income and part are not, then the foreign corporation must timely file a return reporting the U.S. business gross income and deducting the related costs and expenses.
Important: Also, the foreign corporation must attach a statement that the return is a protective return about the other activities. The protective election ensures that it can deduct the related expenses if the IRS should disagree.
The same procedure is available if the foreign corporation when if they initially believe that it has no U.S. tax liability due to a tax treaty. Be sure to attach the IRS tax treaty disclosure Form 8823, on this link.
As discussed above, many foreign corporations believe that their home country tax treaty “permanent establishment” provisions protect them since they do not have an office in the U.S. However, the U.S. courts treat almost any office (even an office owned by an agent or a related person) as a permanent establishment.
Lastly, U.S. Department of the Treasury will guide you and provide you with a tax guarantee. This is known as a private letter ruling. Here is more information.
- Section 1.6012-2(g)(1)(i).
If the foreign corporation with a place of business in the United States, the return must be filed by the 15th day of the third month after the end of the tax year.
 Reg. Section 1.6012-2(g)(1)(ii).
 Reg. Section 1.6012-2(g)(1)(iii).
 Code Section 882(c)(2).
 Reg. Section 1.882-4(a).
 Reg. Section 1.882-4(a)(2).
 Reg. Section 1.882- 4(a)(3).
 . Reg. Section 1.882-4(a)(3)(iv).