Tag Archives: foreign source income

IRS International Wish List of Updated Foreign Income Tax Planning Laws

Domestication of a foreign trust

Applying for an IRS ruling on your international tax planning will save you taxes in the long run.

With little money to spend on attorneys (because of the Republican Party’s cut in IRS funding), the international tax division has a short wish list. Here is the list:

1. Guidance under section 954(c), including regarding foreign currency gains.
2. Guidance under section 954, including regarding foreign base company sales and services income. [See T.D. 9733.]
3. Regulations under section 956 regarding the treatment of loans to foreign partnerships and related issues. [See T.D. 9733; REG-155164-09.] This is a hot topic to the IRS. This loophole has existed for fifty years, but the IRS learned about it just recently.
4. Final regulations on the treatment of upfront payments on swaps under section 956. Temporary and proposed regulations were published on May 8, 2015. This is a sophisticated tax saving strategy. If you have a controlled foreign corporation, this method is worth exploring.
5. Final regulations under section 959 on previously taxed earnings and profits. Proposed regulations were published on August 29, 2006. Please note, the IRS started this project a decade ago.
6. Final regulations under section 964 on accounting method elections. Proposed regulations were published on November 3, 2011. This is a KEY international tax planning law. If your CPA has not helped you, then you can contact me.
7. Guidance under sections 1295, 1297, and 1298 on passive foreign investment companies. Proposed regulations regarding foreign insurance companies were published on April 24, 2015. Temporary and proposed regulations regarding reporting requirements were published on December 31, 2013. Another major loophole that the IRS just recently discovered. It has been around for decades.

As you read the list, you may noticed controlled foreign tax planning that you have missed.  May I suggest my tax book for the entrepreneur?  It is an easy two hour read.  Here is the link to Amazon.   The book cost only $9.50.

IRS is Gunning for Small International Businesses with Bad Bookkeeping

International tax planning and strategy

Applying for an IRS ruling on your international tax planning will save you taxes in the long run.

IRS National Office international tax specialist, Anne P. Shelburne, Esq. knows her stuff.  She knows that the Achilles’ heel for small business is that they go “cheap” on bookkeeping.

The best international tax plan crumbles without “books and records” (the term used in the tax law) to support the plan.

This is great for her because, as you will read below, she informs the IRS auditors and special agents that all income is U.S. source unless the taxpayer can prove the amount is foreign source.  That is right.  You lose and they (the IRS wins).  In America, when it comes to civil tax audits, you are guilty!  You have the burden to prove your innocence.

There are other reasons for good bookkeeping.  Here are a two:
Continue reading

3-D Printers — The Tax Havens Are Going Boom

tax haven, 3d printer, offshore tax planning, offshore manufacturing, saving taxes.

The Tax Havens are loving this Christmas. Meanwhile, the IRS is scared to death.

Staples’s $649  3-D printer is coming your way, and the IRS is not happy. Just as your state’s sales tax collector most likely is dreading the fiscal consequences of the new technology.

Shoes, bicycles, and guns are just a few of the items that can be “beamed” into your home. Scientists have already used 3-D printing to arrange human embryonic stem cells, according to an article in Science World Report. Artificial organs and tissues via 3-D printing may soon be next. The applications of 3-D printing have barely scratched the surface.

As an expert on international tax planning, my mind is spinning with ideas on how 3-D printing will impact tax strategies. The ancient tax laws of the United States are already severely behind on the times. The IRS code was designed in 1939 and has had no major changes to address the technological advances in commerce. Cloud business and e-commerce businesses are ages ahead of the tax code.

U.S. international tax laws are based on the shipping of tangible goods. If the foreign manufacturer has an office in the United States, then the IRS gets to tax the manufacturer’s U.S. profit on his U.S. sales.

Now consider for a moment the fundamental shift in business if 3-D printing became commonplace. What if retailers could sell without having an office in the United States? What if they could “beam” their products to their customers?

Mega tax savings through technology? Yummy.

Mega tax savings through technology? Yummy.

A Sweet Deal

Let’s take cookies as an example. We all love Mrs. Fields cookies. Let’s say that Mrs. Fields placed its server in the popular tax haven known as the Isle of Man; an island situated between Great Britain and Ireland. The server belongs to their business entity based there.

You’re a loyal customer living in Los Angeles, which is 5,175 miles away from the Isle of Man. So you visit the Mrs. Fields website and order a dozen of your favorite chocolate chip walnut cookies. Within 30 minutes, your 3-D laser printer spits out a warm batch of mouthwatering cookies. They taste fresh out of the oven.

Now this is perfect for you. You get “home-baked” cookies without ever breaking a sweat. Meanwhile, the Isle of Man company just earned U.S. source income tax-free.

The 3-D Printing Economy: Supply and Demand . . . and Competition

The sale price of goods and services is based upon supply versus demand. However, with product beaming, the supply is infinite. The seller saves money as the cost of products drop.

When a computer located outside the U.S. provides services, the income is foreign source and not U.S. taxable. With 3-D printing, the service sends commands to the end user’s 3-D printer—regardless of where they’re located.

In the 3-D printing economy, competition may ultimately become infinite, too. Theoretically, I could start Brian Dooley’s Cookies in the Isle of Man.  All I would need is the right software and boom! My cookies could be the next Mrs. Fields. (I can tell you that I make the best Irish Oatmeal cookies, and my prices will always be half those of Mrs. Fields.)

As 3-D printing becomes a dominant technology in multiple industries, what’s to stop U.S. businesses from transferring all their business to tax havens? Absolutely nothing.

More 3-D Printing Applications

Here are just a few more exciting developments in 3-D Printing:

  • NASA beams tools, such as adjustable wrenches, to the space station. 3-D Printers can also use plastic, cement, and metals to make their product.
  • Nokia has published the files necessary for people to 3-D print their Nokia Lumia 820 cases on this link. You merely go to the website and print a new case in the color you want.
  • Here’s a video of a group who made a working bicycle with a 3-D printer.

 

The Future of 3-D Printing and Tax Strategies

tax planning, international tax strategies, foreign tax strategies, foreign tax plan, international tax plan, offshore tax,

Learn how to save taxes with “International Taxation in America for the Entrepreneur” using tried and true methods.

Every day, there are new experiments on 3-D printing and for me, new ways to consider the impact on tax planning. Most business owners and their tax advisors aren’t taking advantage of the incredible tax saving opportunities in e-commerce and cloud-based businesses.

That’s why I wrote International Taxation in America for the Entrepreneur, available at Amazon on this link for $9.50. Business owners, entrepreneurs, and tax advisors: start thinking outside the box and learn about the major tax planning strategies many mega corporations have already implemented.

If you’re curious about tax  haven trusts, foreign corporations and proven, legal strategies to build wealth through tax planning, this book is for you.

The Alluring Tax Benefit of Using Your Own Loan Guarantor Abroad

Another taxpayer victory reminding the IRS of the income sourcing rules.

Another taxpayer victory is reminding the IRS of the income sourcing rules.

The U.S. tax code might have worked for the Industrial Age, but in today’s world, where international business connections and virtual currency dominate, the tax code is severely outdated.

Luckily for tax-savvy business owners, that translates into opportunities for significant tax savings.

Take the case of the Container Corporation, a global company that used its resources abroad to back up notes issued by its U.S.-based company. International, the domestic company, paid guaranty fees to its parent corporation, Vitro, based in Mexico.

To clarify the details of Container Corporation v. the Commissioner of the Internal Revenue, Vitro did not loan money to its U.S.-based subsidiary, International. Instead, Vitro promised to pay notes issued by International in the event of a default. International paid its parent company a guaranty fee in exchange for that service.

Initially, the IRS argued that guaranty fees were similar to interest and therefore, taxable. On the other hand, the Container Corporation argued that the fees were equivalent to payment for services. Moreover, because the fees weren’t generated from within the United States, those fees weren’t subject to withholding taxes under 26 U.S.C. § 881(a).

When the case initially went to the U.S. Tax Court, the court agreed with the Container Corporation. International did not have to withhold 30 percent of the guaranty fees paid, according to the Tax Court ruling.

Nevertheless, the IRS refused to give up. They presented the case to the U.S. Court of Appeals for the Fifth Circuit in 2011. Once again, the victory went to the taxpayers.

The IRS never stood a chance. Guaranty fee income is sourced where the service provider resides. End of story.

In the ruling, the Court of Appeals referred to the landmark 1942 case Comm’r v. Piedras Negras Broadcasting Co., which established the standard for determining the source of income. In the Container Corporation case, the court said, “It is clear that the source of payments for services is where the services are performed, not where the benefit is inured.”

Frequent readers of the International Tax Counselors blog are well aware that avoiding U.S. source income in the virtual world has never been easier. The use of virtual currency has opened a new gateway to tax savings, and for the last 30-plus years, I’ve dedicated my CPA practice to uncovering new strategies to take advantage of that.

If you’re interested in learning more about using virtual currency and income source rules to gain the maximum tax benefits, my book International Taxation in America will get you up to speed. The Piedras Negras Broadcasting Co. case—referenced in the 2011 ruling above—is one of three historic court cases highlighted in the book.

If you are interested in exploring international tax strategies for your business, I invite you to email me, Brian Dooley, CPA, at [email protected]

Easy Tax Planning for Tax Free Foreign Income for the Non-resident and Foreign Corporation

A foreign person does not pay U.S. income tax on many types of U.S. income.  Unlike the UK and Europe, the U.S. can be the company’s headquarters and not pay tax U.S. taxes on the foreign income.

Avoiding the value added tax increases the business working capital by 25%.  While the VAT is often as low as 17%, the UK or EU business pays the VAT with after income tax profits.   This causes the VAT to be a 25% drag on working capital.

The U.S. is the only industrialized country that does not charge this anti-business tax. The tax planning rules for determining tax-free foreign source income are summarized in the guide below in blue print.

Learn the easy tax international planning  in my ten minute Blog Tax Talk Show below.
Summary of Source Rules for Income of Nonresident Aliens
Item of IncomeFactor Determining Source

Salaries, wages, other compensation

Where services performed

Business income:
Personal services
Where services performed
Business income:
Sale of inventory -purchased
Where sold- where the customer takes possession of the property.  A foreign business can warehouse and store their inventory in the U.S. This is a popular way to avoid the VAT.

Business income:
Sale of inventory -produced

Where produced (Allocation may be necessary)

Interest

Residence of payer- except for bank deposit interest is tax free to the foreign person

Dividends

Foreign source when paid by a  foreign corporation
U.S. source from a domestic corporation

Rents

Location of property

Royalties:
Natural resources
Location of property

Royalties:
Patents, copyrights, etc.

Where property is used

Sale of real property

Location of property

Sale of personal property

Seller’s tax home

Pensions

Where services were performed that earned the pension

U.S. Stock Market & Commodity ProfitsTreated as tax-free foreign source income

Sale of natural resources

Allocation based on fair market value of product at export terminal. For more information, see IRC 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 Puerto Rico economic activity credit or possessions tax 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.