The International Tax Code for Small Business Importing, Exporting & Ecommerce just got much much better. The new tax laws 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)
Summary of the General Source Rules for Income of Foreign Corporations and Nonresident Aliens.
Item of income
Factor determining source
|Salaries, wages, other compensation||Where services performed|
|Personal services||Where services performed. This includes some E-commerce websites providing information or a service.|
|Sale of inventory—purchased||Where sold. One of the key points is where the change of title to the inventory occurs. Contact your CPA.|
|Sale of inventory—produced||Allocation – this law is more complex. Contact your CPA or me.|
|Interest||Residence of payer|
|Dividends||Whether a U.S. or foreign corporation*|
|Rents||Location of property|
|Natural resources||Location of property|
|Patents, copyrights, etc.||Where property is used|
|Sale of real property||Location of property|
|Sale of personal property||Seller’s tax home (but see this special IRS report on Personal Property, for exceptions)|
|Pension distributions attributable to contributions||Where services were performed that earned the pension. See the new IRS tax planning on this link.|
|Investment earnings on pension contributions||Location of pension trust. The IRS just issued a new tax savings ruling on this topic on this link.|
|Sale of natural resources||Allocation 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.|