Tag Archives: foreign tax credit

Provocative International Tax Planning News for Small Business

A new U.S. Senate study reported that business with International Tax Planning are taxed at only 14%. The report explains why small businesses pay more than the legal share.  Here is why you will always pay too much in taxes.    This is the report that your international tax accountant needs to help you save taxes. 

International tax planning and strategy

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

Fantastic IRS International Gift Tax Plan

This IRS internal letter on this link. Fantastic legal tax avoidance for the foreign person with family in the U.S. is explained in this letter.

Amazing IRS Avoidance of  state income taxes  with this new IRS  designer  Nevada trust.  IRS tells how to use a Nevada trust to avoid state income taxes. Here’s what’s happeningon this link.   

New- Department of the Treasury letter to the U.K. tax authorities on U.S.  tax planning for UK and EU companies.  Here is the letter from the U.S. to the U.K. 

Be an IRS tax planning wizard with our new custom Google search, on this link.  This custom search reads 300,000 pages deep inside the IRS’s website and the tax court’s website.  It is free!.  Find the answers to your tax question quickly and accurately.

18th Century Supreme Court case destroys IRS tax penalty law. Using this case, the Tax Court gave the IRS a significant defeat.  Here is what happen.   The Supreme Court is the “Law of the Land.”  It rules over the IRS and Congress.   

It works both ways.  The blog on this link explains the  Supreme Court Doctrine used by the IRS to blow up an offshore life insurance plan.

offshore trust, foreign trust, nevada trust, estate planning trust, esbt,

Since the Middle Ages, the wealthy have capitalized on trusts to avoid paying taxes. During the Great Crusades, upon the death of a knight, his entire estate went to the king.    Nine hundred years later, things have not changed much except the ‘King” takes only half.

Trusts are the most efficient tax tool. International tax planning should start with a Nevada trust to own a  foreign company.  Learn trust tax planning and asset protection in this easy to read blog post.    It has the blueprint for successful trust tax planning.   Get the IRS memo on asset protection and tax planning with an offshore trust on this blog post.

internet tax planning, saving taxes, cloud tax planning

Saving taxes with the offshore cloud computer. 

Cloud tax planning. Learn how businesses are using the cloud to avoid taxes on this link. 

E-commerce companies are avoiding state income taxes and in some cases deferring U.S. taxes.

Here is how it works.  A computer service that can provide a service (such as a tax research program) or a product (such as music, e-books, video) has special sourcing rules.  The income can be foreign source income when the computer server in a foreign country. 

Is the U.S. a tax haven for citizens of the UK, Sweden, Belgium, Canada, Luxembourg, and Austria?  Yes, says the IRS in its Publication.  Learn the magic Tax Treaty words for these lucky citizens of The UK, Sweden, Belgium, Canada, Luxembourg, Austria on this link.

U.S. International Tax Law for the Privately Owned Business

If you own your own business, understanding United States international tax law is difficult.  The internet has stories about firms such as Google and Apple.   U.S. international tax law for the privately owned business is different from the international tax laws for publically traded corporations.

Publically traded companies are taxed as corporations.   Their profits are taxed twice.  First, as a corporation.  When the profits are paid to the owners, the owners pay tax again.

Privately held businesses avoid double taxes by using LLC’s, sole proprietorships and subchapter S corporations.     U.S. international tax law provides a choice of tax deferral or current taxation but with a dollar for dollar credit of   taxes paid to a foreign country.  This credit is called the “foreign tax credit”.

The use of tax treaties to for international tax planning does not work for a privately held business.  The tax treaties that you read about on the internet are to avoid European taxes and not U.S. taxes.    Setting up and maintaining a tax treaty structure is expensive and complex.

And as I said, the privately owned business gets a foreign tax credit.  Thus, avoiding European taxes does not make sense.

Usually, the privately owned business controls the foreign corporation.  U.S. international tax law provides for generous tax benefits as long as the income is active and is not from a related party (while the related party rules does have some good exceptions).

U.S. International Tax Law for the Privately Owned Business – Tax Challenges and Choices for the Privately Owned Business

If you choose not to pay tax on the income of the foreign corporation, you will never get the foreign tax credit.   You must make the choice as soon as your start the foreign business.  Making the choice in a few years will most likely cause you to pay a tax.

So,  please get together with your international tax accountant before you start your foreign business.

If you would discuss your future tax plans, then email, Brian Dooley, CPA, MBT, at [email protected]

Learn more about international tax planning on this link.

The Nevada or Delaware Limited Liability Company (LLC) for International Business

The domestic LLC is the worst entity for the small business owner with a foreign operation.  Doing business in countries that have a tax treaty, with the U.S. requires the use of a corporation or a partnership.

The limited liability company is an American tax entity.  Other countries do not have the U.S. tax concept of the LLC.    For example,  you are planning to operate in Europe.  While the Dutch has a fantastic tax treaty with the United States, the American small business owner can fail to get all of the intended tax benefits.   The major tax treaty benefit is avoidance of paying tax in the foreign country and not filing a tax return with the foreign government.

Here is the international tax problem with the LLC

The permanent establish article does not reference a limited liability company.   The small business owner is in a risky position.   If the/she can lose the U.S. foreign tax credit if they fail to pay the foreign country’s tax when the tax is due.   For example, you are based in the Netherlands and you decide not to file a dutch income tax return for the LLC for year 2017,

In 2021, the Dutch audit you.  Since you never filed a return, they can charge you the tax.   In 2023, you make the decision that the legal fees of fighting the tax are too expensive.  So, you pay the tax.   Since the U.S. taxable year was 2017, you are six years late in claiming the foreign tax credit.

You end up paying tax twice.  First, to the IRS in 2017 on the Dutch income.  Then in 2023, you pay the tax a second time to the Dutch government.

The Best Small Business International Tax Structure and Entity

The United States Department of Treasury decided to help the small business owner obtain the maximum tax benefits by allowing you to treat your foreign corporation as a domestic corporation.  This process is known as a domestication.    As a domestic corporation, the American can elect taxation as a subchapter S corporation.

Tax treaties give corporations permament establishment protection.  If you do pay a foreign income tax, the IRS foreign tax credit rules apply to a subchapter S corporation.  The foreign tax credit allows you to offset your IRS taxes with the tax you pay to a foreign government.

Below is a short video on the domesticated foreign corporation.  While the video is about Mexico, the same rules apply to Europe.

Learn about the Small Business Foreign Tax Credit and How the Credit Saves Taxes

How the  Foreign Tax Credit Saves Taxes for an S-corporation of a Limited Liability Company (LLC)

When you read about Apple or GE not paying American taxes, it is because of the foreign tax credit (for taxes they paid to the foreign government).   

The purpose of the foreign tax credit law is to avoid double income taxation. It works well for publicly traded corporations. However, it does not work for individual owning a foreign entity unless he does fancy footwork to have the entity be a “pass-through” for the IRS.

Here is the problem: For the individual shareholder, income earned by a foreign corporation does not allow you credit for the foreign income taxes  Why?  No reason.  It is just the law, and yes, it is not fair.  Just keep reading for the solution. 

If the corporation has paid an income tax, you are not allowed to offset your US tax. You will pay tax twice. First, the corporation will pay the foreign tax.

Next, you will pay US (and state) income tax on the Subpart F income or when the corporation invests in US property or when you receive a distribution (whichever event occurs first).

Here is the solution.  Your foreign corporation needs to change to or elect to be a pass-through entity for U.S. tax law.  Three type of pass-through entities exist.  They “disregarded,” “partnership” and “Subchapter S corporation.”  These topics are discussed in my book.  However, first I would like to explain the issue with a hypothetical example.:

You own a foreign corporation doing business in the United Kingdom. The corporation’s net income in the tax year is $1,000. The UK income tax $250. Your corporation invests its profits in the US stock market. You have a “deemed dividend” of $750 taxable to the US. Your US tax is an additional $250. Thus, of the $1,000 earned, your worldwide tax is $500.

Once you are allowed the foreign tax credit, you use IRS  Form 1116  or Form 1118 to claim your money.

Here is the best international tax strategy: The UK corporation becomes a “pass-through” entity for US tax purposes. Some, not all, foreign corporations can elect to be a “disregarded entity.”

A corporation that does not qualify for the election can arrange to have a charter as a domestic corporation. This is known as “dual resident corporation.” At this point, the corporation is both foreign (UK) and domestic. As a domestic corporation, the corporation can elect to be a Subchapter S corporation.

Back to the example, the $1,000 of income passes through to your individual income tax return. The $250 UK corporate income tax is a credit against your US income tax. You are U.S. taxable on $1,000. Assuming a US income tax of $300, your tax after the foreign tax credit is $50.

As a pass-through entity, none of the controlled foreign corporation rules applies. 

Learn how the foreign tax credit works and how you can save money with my easy two-hour to read book,  International Taxation in America for the Entrepreneur.  Learn more on this link or call me, Brian Dooley, CPA, MBT, for a free foreign tax brainstorming consultation at 949-939-3414

U.K. and Europe’s Tax War on the U.S. Treasury Heats Up.

The Financial Times of London  reported that the Obama administration is continuing its protest of the gangster-like theft by the EU and the UK government’s.   This week President Obama told the EU to back off from taxing Apple (more on this link).

But if you can’t make your wealth, you need to take it from others.  This is called taxes.

As the socialist spending of the UK and the EU countries increase European poverty in France, Spain, Greece and Italy, the EU continues its raid on the U.S. Treasury.  

To get America’s money, these countries merely break the tax treaty that has prevents tax wars.  Each tax treaty has a “permanent establishment”  safeguard.  So, far the White House is silently allowing the English and the Europeans to win this war. 

The Financial Times of London reports, that European Commission is intensifying its attack on American digital and wealth companies.  The list includes, Skype, Netflix, Amazon, Apple and Google.   And why not?  All the U.K  and EU taxes will be paid by you and me.    Why? Will read a little more.  (Update Sept. 17, 2016: Microsoft has moved  Skype from the U.K. laying off all the British employees; Update Sept 19, 2016 the UK wants McDonalds to pay half a $billion despite the U.S-U.K. Tax Treaty). 

Since I first posted this article, the UK intimidated Starbucks to make a “donation” of million of dollars.  The EU has gone after McDonald’s fast food.  Maybe it is time for the U.S. to get tough.  We can save $billions by letting bringing home our troops in Germany.

The Times reports “The EU’s intensifying assault on big American tech groups has triggered mounting criticism in the US, including by President Barack Obama, of European protectionism.”  But there is more at stake.  It is money….lots of money.

The Raid on the U.S. Treasury

The Europeans and the British are simply ignoring the tax treaty with the United States. For a century, these treaties do not tax a foreign business unless they have a “fixed place of business” and a “permanent establishment” in the other country.  The EU and the UK is squeezing money out of American businesses by ignoring these rules.

The raid on the U.S. Treasury is from a flaw in U.S. tax law:  The U.S. is one of the few countries that taxes its businesses on their worldwide income.  EU countries do not tax  worldwide income.    Thus, by targeting American business, they know that Uncle Sam will be force to give them money.  And why not.. .it is the history old battle between the haves (USA) and the have nots (UK and EU).

(Learn how small international businesses are protecting themselves at the end of this article.)

When the UK and the EU violate the treaty and grab taxes from an American business, “foreign tax credit” law requires the US Treasury to pay the foreign income tax. 

 The U.S. Treasury needs U.S. companies to compete in the global market.  The  Federal, and state are about 43%.   While EU companies pay taxes at 25% and  foreign profits are tax free. EU firms have more money to expand into international markets and into their domestic markets.

The U.S. Treasury reimburses Americans their foreign taxes.  This is known as the “foreign tax credit” (American business pays tax at 43%  while EU firms pay tax at 20% to  25% and nothing on foreign profits).

 Congress Blasts EU for Raiding the U.S. Treasury, on this link, but does nothing. 

Starbucks is an example of the EU and UK successful raid on the U.S. Treasury.   Starbucks announced that it was moving its headquarters to Britain so that it can pay more taxes.  Yes, it is moving to increase their taxes which will be paid by us.  

By the way Starbucks and Amazon have both paid more than a $billion dollars in value added tax each year and every year to the UK and the EU.  But, these governments want more… they want all that they suck from you and me. 

 U.K. and E.U. international taxation is based on the location of the firm headquarters.  Starbucks headquarter is in Holland.  The Netherlands is one of the few European countries that provides a lower tax to  create jobs.  The Dutch tax laws are always in the news.  The U.S., U.K. and E.U. disdain Holland for its tax policy. 

Starbucks UK tax is paid by the American population.  Because the U.S. taxes everyone’s worldwide income, we all get a credit for the foreign income taxes we pay (the “foreign tax credit”). The British Government  knows  this.

Starbucks, after being bullied in the British press and threaten by the UK Government, gave up and move  its headquarters to the UK to pay more UK taxes. 

This week, the UK Government is bullying Amazon. As an American company, Amazon is protected by the US-UK Tax Treaty.  However, this protection requires the Department of the Treasury to say “no” to the UK.

Small business international tax planning

The advantage of being a small business is being small.  They do not have    1000s of employees in the UK and Europe.  So, small business with the help of a smart computer can run their operation from zero tax haven countries.

The two best are the Isle of Man (in the North Irish Sea) and the British Virgin Islands.  In third place are two U.S. tax havens – Puerto Rico (business and personal tax at 4%) and the U.S. Virgin Islands with a 90% tax abatement.
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