One thing is clear for the American tax reform debates. The U.S. wants jobs and more jobs. Nowhere is this clearer than in the U.K -U.S. income tax treaty. Continue reading
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.
A successful foreign corporation doing business in the U.S is taxed a second time. The tax is called the branch profits tax.
A U.S. business includes real estate, investments in a domestic (American) limited liability company or partnership, manufacturing, retail, distribution and providing services.
With a rate of up to thirty percent (less if the corporation is taxable in a tax treaty country), the successful business wants to minimize or eliminating the branch profits tax. The tax is reported on Form 1120F.
The Problem: The Hidden Branch Profits Tax Trap
This tax applies when the foreign corporation has accumulated profits beyond the needs of its active business. The theory of the branch profits tax is similar to the accumulated earnings and profits tax that applies to a domestic corporation. This domestic tax has applied to domestic C corporations for more than half a century. Thus, the tax planning, below, is based upon the tax court cases regarding the domestic tax.
For example, In 2000, a foreign corporation invests $2,000,0000 of cash into a partnership that owns commercial rental property in the U.S. The partnership is successful and has distributed profits each year of $100,000. The U.S. and state income tax are $40,000. The net cash after tax is $60,000. After 15 years the $ 60,000 annually plus the investment income has grown to $1,000,000.
The foreign corporation has kept the money in U.S. banks and the U.S. stock market. These assets are not used in the foreign corporation business, that of being a partner.
The IRS audit the foreign corporation and successfully assessed the branch profits tax. The foreign corporation owes $300,000 in tax and a $60,000 penalty for reporting the tax.
How to avoid the branch profits tax
Here are few tried and true methods that have been used by U.S. corporations to prevent a similar tax known as “the accumulated earnings tax.”
By the way, merely keeping the profits in U.S bank accounts or investments does not avoid the tax unless you can prove the funds are necessary for the business activities. Below are some business activities that have been accepted by the courts.
(1) Convert the business arrangement into a non-corporate structure. The most popular is a combination of a Nevada trust with a Nevada single member limited liability company. Since many corporations do not know what their earnings and profits are, the corporation’s earnings and profits should be calculated before deciding whether the conversion is a good idea.
(2) Increase salaries within the reasonable compensation rule limits. Avoid issuing bonuses since the tax court often sees a bonus as a non-deductible and taxable dividend.
(3) Provide more fringe benefits (e.g., a qualified pension plan).
(4) Have the corporation invest in securities generating capital gains. Since the accumulated earnings tax only falls on taxable income, the corporation should invest in securities, the sale of which generates capital gains.
(5) Redeem stock, using a deferred payment obligation as Consideration. Accumulating money to pay for a redemption is not considered a valid purpose for accumulating earnings but redeeming now and paying off the debt later is permissible.
(6) Establish a qualified pension plan. A resulting unfunded pension liability should reduce unreasonable accumulations.
(7) Recapitalize the corporation to shift dividends to selected shareholders.
(8) Buy business assets instead of leasing them.
(9) Most important! Keep corporate minutes. Do the minutes within a reasonable time after the meeting of the board of directors of the corporations. These minutes must prove the business reason for the corporation retaining its profits. The eight items above are examples of business reasons.
If you want to increase the quality of your tax planning, then email me, Brian Dooley, CPA, MBT, at brian
 Mountain State Steel Foundries, Inc. v. Commissioner, 284 F.2d 737 (4th Cir. 1960); C.E. Hooper, Inc. v. Commissioner, 539 F.2d 1276 (Ct. Cl. 1976).
International Tax Planning: Best international tax strategy for doing businesses in the United States.
I start this post with some bad tax news: Code Section 163(j) denies corporations an interest deduction for interest paid to related persons when the related persons are not taxable by the U.S. on the interest received. The purpose of this law is to punish the foreign business that establishes a domestic corporation with money from a related foreign corporation.
To avoid this bad law, you use a different type of business entity. This blog will explain this to you.
The section applies to any corporation that has the following two characteristics:
(1) the interest that exceeds 50 percent of the corporation’s adjusted taxable income, plus the amount of any excess limitation carryforward; and
(2) the corporation’s debt/equity ratio exceeds 1.5:1.
The ratio of debt to equity is the ratio of the corporation’s total debt to the sum of its net assets. In determining the amount of the corporation’s assets, non-cash assets are taken into account at their adjusted bases. For example, you fund your corporation with $1,000 of capital. You also loan the the corporation $4,000. This law applies and your interest expense deduction is limited.
Okay, now some foreign tax planning for the small business.
The best tax structure for the privately owned international business doing business in the U.S. is a limited liability company owned by the entrepreneur and a Nevada trust. In the diagram below, the LLC on the top would be belonging to a Nevada trust and the entrepreneur. The irrevocable discretionary trust can avoid the U.S. death tax (about 45% of the value of assets in the U.S.).
If you wish to brainstorm your international tax planning, then, please call me, Brian Dooley, CPA, MBT at 949-939-3414 for a complimentary one-hour consultation.
For the best tax structure to own U.S. real estate, please see our article our this link.
 This law applies to interest on loans from unrelated parties if the loan is generating interest to a related party that is not subject to U.S. taxation and there is no gross-basis tax imposed by the United States on the interest paid.
 Code Section 163(j)(2)(C)(i).
Learn the tried and true strategy with my easy to read book (in Kindle, paper and audio).
Last year, it was the French government who yelled lack of patriotism as its citizens moved to lovely Switzerland.
Now the British are setting up a similar environment.
The Financial Times of London reports “David Cameron ramped up his rhetoric against the rich on Friday, describing the 50% rate of income tax as “fair” and insisting he would stop the Royal Bank of Scotland paying a rumored £500m in bonuses. Speaking on BBC Radio, Mr. Cameron issued his strongest words yet…”
Meanwhile, the Swiss surprise (and anger) other European countries as the Swiss continue to thrive with less than four percent unemployment and a stable currency.
Maybe the USA will get some of the UK rich folks. If they are reading this, please remember we have great weather in the SouthWest. Unions are not in control as they are in the UK and the EU. The new U.S. corporate tax rate is 15%. Lastly, the United States has no value added tax.
Lastly, the United States has no value added tax. That VAT is a growth killer. Learn why Airbus and the Virgin Air Spaceships are built in the U.S. on this link.
The states in the SouthWest, including California, allows an employer to fire employees without cause. Lastly, California has the best weather in the world.
If you would like to brainstorm your international tax plan, then please call me, Brian Dooley CPA, at 949-939-3414.