Tag Archives: cross border TAX

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.

International Tax Accountants Are Watching for the New Form 1120F and Form 5471

A great debate over the United States corporate tax reform is underway.   Foreign tax accountants are waiting to see how this will change the Form 1120F (reporting for an international company with U.S. income)  and the Form 5471 (reporting for a controlled foreign corporation).

The Form 1120F includes the Branch Profits Tax.  A tax on U.S. equity and foreign interest expense.

Form 1120F’s Branch Profits Tax is a surprise attack tax.   Small international businesses rarely spend the time needed to avoid this tax.  Quarterly proforma tax returns are required to manage this tax.   Corporate minutes are needed to justify the retention of liquid assets on the U.S. branch.

The word “branch” is misleading.  A foreign corporation does not need a branch (such as an office or a factory) for this tax to apply.  The tax is on U.S. equity that is not necessary for an active U.S. business.

The second part of the branch profits tax is in the method of the corporation’s debt financing.

Foreign tax accountants are expecting the new Form 1120F to include an easy to use worksheet for computation of the interest expense portion of the branch profits tax.

International and Global Tax Strategies as the U.S. reduces the business tax rate.

The best international and global tax structure includes an IRS approved Nevada Self-directed trust.

Optimizing your tax savings requires thinking outside the box. Using a foreign trust for tax planning and asset protection will keep you and your family safe.

Optimizing your tax savings requires thinking outside the box. Using a foreign trust for tax planning and asset protection will keep you and your family safe.

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Tax Planning Tricks of Cross-Border Tax Accountants (CPAs)

Just how do cross-border tax accountants (usually a CPA or Chartered Accountant) use different nations tax laws to legally avoid taxes?

One term you will see on the internet is “hybrid” such as a hybrid company or a hybrid trust.

The USA is the biggest source of hybrid companies.   I am sure you have heard of them; they are known as limited liability company (LLC).    Only in America, the tax authorities (the IRS) treats the LLC as non-existing.  Yep, the single member LLC does not file a tax return.  It is completely invisible.

Meanwhile, Europe and even Mexico has complained to the U.S.  The Panama Papers disclosed that the Wymoing LLC is the most invisible tax haven company on the planet.   For example, if a French person owns a Wyoming LLC his government will never know.  Yet, this company can do worldwide cross-border business.  It can open U.S. and foreign bank accounts.

Hybrid Trusts are usually created in Nevada.  Cross-border accountants know that trusts only exist in form British colonies.  Yep, that includes America.   For reasons the baffle many, the U.S Department of the Treasury issued regulations that allow a Nevada trust to be taxed (in the U.S. and only the U.S) as a foreign trust.  Yep, it is as if the Nevada trust is in a  foreign (non-existing) country.

This allows the cross-border family to avoid inheritance tax in their home country and estate and income tax in the U.S.  Below is a fifteen minute audio of my radio show  (BlogTalk Radio Show; see just below my picture, above) on the Nevada Tax Haven Trust.

By the way, the corporate trustee fee is usually $2,500 per year.

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.

 

 

Preparing and Filing a Late Form 5471 for your Foreign Corporation Can Save You Taxes

Preparing Form 5471,

Your first Form 5471 will save you taxes when you elect sophisticated tax accounting methods. The elections must be made on the first Form 5471.

Late is not always bad especially with some IRS tax return.   Of course, some such as the Foreign Bank Account Reporting (FBAR) is a disaster.  The penalties are huge if you are late.

Other forms the penalty is not huge or they can be waived if you are not willful.  In any event, if you are reading this blog and your Form 5471 is late, then you will find a blessing in disguise on this page.

The most important tax return for every business is the first year return.  We call this the “initial return”.    Your tax accounting methods are made on this return.  Smart international tax planners attached a statement of all of the tax accounting methods used by their client.

By the way,  advance international tax planning strategies are always tax accounting methods.

Boring as watching grass grow,  cross-border tax accounting has a plan for every type of transaction.   Yep, every type.   For example, advance payments for products may allow a tax deferral that can last indefinitely.   The result is legal tax avoidance.
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