Tag Archives: form 1120f

Form 1120-F (U.S. Income Tax Return of a Foreign Corporation) covers three different taxes. Saving International Taxes Requires an International Tax Accountant.

Table of Contents

1. This blog tells you how to protect yourself from the U.S. courts and the IRS.
2. his blog is primarily about U.S.  international income taxation and the branch profits tax.
3. Two important international tax laws to watch.
4. Tax Planning for your Balance Sheet and the Branch Profits Tax.
5. Liability Of Corporate Agent in the USA.

6. You Must Timely File  Form 1120F to Claim Deductions or Credits.
7, Protective Filing of Form 1120F:  Smart International Tax Accounting.
8. What if only part of your U.S. income is U.S. business income?

This just might be the most important blog on international tax that you will ever read. Here is the problem for U.K., EU, Australian, New Zealand, and Canadian corporations with U.S. income.

The internet is full of stories of how the tax treaty permanent establishment article prevents the USA from taxing you.  What the stories don’t tell is that the U.S. Tax Court does not care about your tax treaty.

The U.S. Tax Court is part of the Government.  The Government wants your money.  It is that simple.  Okay, it’s not fair.  But they really  do not care.  This link discusses a few of these anti-tax treaty court cases.

This blog tells you how to protect yourself from the U.S. courts and the IRS.

Foreign corporations have income from U.S. sources are always required to file U.S. tax returns.
Three different taxes are on the form as follows:

  1. Foreign corporations must pay a 30 percent tax on income from U.S. sources not connected with a U.S. trade or business.
  2. Foreign corporations engaged in trade or business within the United States is subject to income tax, alternative minimum tax, and other taxes applicable to corporations on their taxable income.
  3. Foreign corps engaged in business within the U.S. must pay the branch profits tax.

This blog is primarily about U.S.  international income taxation and the branch profits tax.

A foreign corporation with a business in the United States at any time during the tax year or that has income from United States sources must file a return on Form 1120-F.  A foreign corporation with U.S. business income must file (I will explain why later in this blog) even though:

(1) It has no business income (that is income effectively connected with the conduct of a trade or business) in the United States,

(2) It has no income from U.S. sources  or

(3) Its revenues are exempt from income tax under a tax convention or any provision of the tax law.

Two important international tax laws to watch.

  1. If the foreign corporation has no gross income for the year, it is not required to complete the return. However, it must file a Form 1120F and attach a statement (I will explain why later in this blog) to the return indicating the nature of any tax treaty exclusions claimed and the amount of such exclusions to the extent these amounts are readily determinable.[1]  For example, if you believe that you have avoided having a permanent establishment, you need to explain why.  Here is more on court cases on permanent establishment).
  1. To claim tax deductions and credits,  the corporation must file an accurate tax return on time. If the return is not timely file, all of the expenses and costs of goods sold can never be deducted.  If the U.S. income of a foreign corporation includes income that is subject to a lower rate of tax under a treaty, it must attach a statement to its return explaining this and showing:

(a) The income and amounts of tax withheld,

(b) The names and post office addresses of withholding agents, and

(3) any other information required by the return form or its instructions.[2]

Tax Planning for your Balance Sheet and the Branch Profits Tax.

The foreign corporation may elect to limit the balance sheets and reconciliation of income to the U.S. business use assets, liability and equity and its other income from U.S. sources.[3]   The branch profits tax traces the U.S. business equity and debts.  Thus, the balance sheet is the IRS’s primary audit tool.   Reporting your worldwide assets is providing the IRS information that has little or no value.

TAX TIP: A foreign corporation that is not engaged in a trade or business in the United States it is not required to file a return when the U.S. withholding of tax at the source of its payments covers the taxes owed.   A matter of fact, the goal of U.S. withholding tax is eliminated U.S. tax compliance for the foreign person.

Liability Of Corporate Agent in the USA

A representative or agent of a foreign corporation must file a return for and pay the tax on the income coming within his control as representative.   The agent can include a related corporation or an individual.

You Must Timely File  Form 1120F to Claim Deductions or Credits

I can not say this too often. A foreign corporation must its return on time to take deductions and credits against its U.S. business income.[4]

However, the following deductions and credits are allowed even if such a return is not filed:

(1) the charitable deduction;

(2) the foreign tax credit passed through from mutual funds;

(3) the fuels tax credit; and

(4) The credit for income tax withheld.[5]  

Timely filed means the Form 1120-F is filed no later than 18 months after the due date of the current year’s return.  

But it is more complicated, and you must read this:  I know this next section is tricky.  So, please be patient.  However, if you need help, then just give me, Brian Dooley, CPA, MBT a call at 949-939-3414. 

When the return for  the prior year was not filed, the return for the current year must have been filed no later than the earlier:

  1. of the date which is 18 months after the deadline for filing the current year’s return, or
  2. the date, the IRS mails a letter to the foreign corporation advising it that the current year return has not been filed and no deductions may be claimed it.[6]

The IRS may waive these deadlines when the foreign corporation proves that:

  1. It acted “reasonably and in good faith”  in failing to file a U.S. income tax return (including a protective return), and
  2. cooperates in determining its income tax liability for the year for that the return was not filed.[7]  

 Protective Filing of Form 1120F:  Smart International Tax Accounting 

This is the smartest thing you can do as a foreign corporation.   The chances of an audit are low and the tax protection is high.  I have the rules below. 

A foreign corporation with limited activities in the United States that it believes does  not give rise to U.S. gross business income should file a protective return.  

A timely filed protective return preserves the right to receive the tax savings  of the deductions and credits if it is later determined that the foreign corporation did have a U.S. business.  

Here is the very good news:  On that timely filed protective return, the foreign corporation is not required to report any gross income taxable income and thus pays no net income tax or branch profits tax.  

However, do not forget to attached a statement indicating that the return is being filed as a protective return and to check the box on the Form 1120F.  Also, you must include your tax treaty disclosure IRS form. Be sure to attach the IRS tax treaty disclosure Form 8823, on this link.  

What if only part of your U.S. income is U.S. business income? 

If the foreign corporation determines that part of the activities is U.S. business gross income that U.S. business income and part are not, then the foreign corporation must timely file a return reporting the U.S. business gross income and deducting the related costs and expenses.  

Important: Also, the foreign corporation must attach a statement that the return is a protective return about the other activities.   The protective election ensures that it can deduct the related expenses if the IRS should disagree.  

The same procedure is available if the foreign corporation when if they initially believe that it has no U.S. tax liability due to a tax treaty.[8]  Be sure to attach the IRS tax treaty disclosure Form 8823, on this link

As discussed above, many foreign corporations believe that their home country tax treaty “permanent establishment” provisions protect them since they do not have an office in the U.S.  However, the U.S. courts treat almost any office (even an office owned by an agent or a related person) as a permanent establishment.  

Lastly, U.S. Department of the Treasury will guide you and provide you with a tax guarantee.  This is known as a private letter ruling.  Here is more information.

FOOTNOTES

  1. Section 1.6012-2(g)(1)(i).

If the foreign corporation with a place of business in the United States, the return must be filed by the 15th day of the third month after the end of the tax year.

[2] Reg. Section 1.6012-2(g)(1)(ii).

[3] Reg. Section 1.6012-2(g)(1)(iii).

[4] Code Section 882(c)(2).

[5] Reg. Section 1.882-4(a).

[6] Reg. Section 1.882-4(a)(2).

[7] Reg. Section 1.882- 4(a)(3).

[8] . Reg. Section 1.882-4(a)(3)(iv).

How to Know if You Have the Best International Attorney or International Accountant

International taxation accountants must know both the 1,000,000 pages domestic tax laws, the “common laws” from court cases and international tax law.   

The best international tax attorneys and accountants use the tax pyramid.

The best international tax attorney and tax accountant have an advance degree in taxation.

The best international tax attorney and tax accountant have an advance degree in taxation.

The best tax attorneys and best tax accountants are experts in both the common law and the tax code before they learn international tax law.

The best tax accountants and best tax attorneys have an advance degree in taxation.  Law schools and accounting schools do not teach tax law.  Up tp two additional years of schooling is required to be a tax expert.

The international tax adviser studies the “character of your income.  Each type of income has its own tax laws.

 The tax law for consulting income is different than the tax law for importing income.  The best international tax CPA looks at your business’s operations and dissects each step.

Here is an example:  A U.S.  website designer has employees in India.  After dissecting his activities, he decided to incorporate in a tax-free country.  The tax haven corporation files an IRS Form 1120F (F is for Foreign).  Only half of his net income is U.S. taxable. The other half is not taxable.  His business operates the same.

At International Tax Counselors, our international taxation experts have more than 30 years of experience.  Each expert has an advance degree in taxation.

If you need planning, consulting, or compliance, your team at International Tax Counselors has the needed international accounting and legal expertise and skills.

We have unique expertise in:

1. Foreign tax planning regarding reporting of foreign assets and foreign source income,
2. International tax strategy services with respect to ownership of foreign entities, including foreign corporations, foreign LLC’s, foreign partnerships, or foreign foundations,
3. Analysis of income tax returns filed with foreign governments in connection with the foreign tax credit planning and calculations,
4. International estate and gift tax planning for U.S. citizens living and/or working in foreign jurisdictions and nonresident aliens with U.S. property,
5. Immigration tax strategies for respect to non-resident individuals,
6. Assistance with IRS Tax Amnesty “Streamlined Filing Compliance Procedures,” because of non-reporting of foreign financial accounts and companies,
7. International tax plans relating to compensation structures for U.S. individuals on foreign assignment
8. Handling IRS an  international tax audit and IRS tax amnesty. 

International Tax CPA Prepares Form 1120F and Avoid the Branch Profits Tax

The branch profits tax is a sneaky beast.   It has three prongs.  One is your interest expense. Next, the amount of equity in your U.S. business,  Lastly, the reason you have equity in your U.S. business.

If you kept equity in your U.S. business to avoid the branch profits tax, then you owe the branch profits tax.   Form 1120F’s balance sheet is where you study this topic.

The branch profits tax is designed after the domestic corporate tax law known as the “accumulated earnings and profits tax”.  This law is found in tax code section 531.  This key factor is the accumulation of profits to avoid paying a dividend (and thus the income tax on the dividend).

My course to the California Society of CPA’s on international tax planning included the branch profits tax.  Below is part of the course.   If you need help preparing your Form 1120F, then call me, Brian Dooley, CPA, at 949-939-3414.

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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Amazon Fulfillment International Tax Strategies with a Tax Treaty Corporation

Wow, the speed of change in business is leaving worldwide governments in the dust. From Netflix streaming to Google AdWords, the 21st Century business has many legitimate tax avoidance strategies.

This blog explains U.S. taxation (I should say lack of U.S. taxation) for the foreign corporation doing business via the Amazon fulfillment center (referred to as FBA). At the end of this blog is Amazon’s short video explaining their FBA.

Let me tell you about Sam. He is an entrepreneur. He also is wise. He has a tax team of a CPA and a business attorney.  He does not read a blog like this and then goes out and does his tax planning by himself. This blog gives the concept. But the tax savings are in the legal details that only your attorney and CPA can do for you.

Sam has decided to sell beauty products that he has manufactured in Switzerland to U.S. consumers. He will create a fantastic e-commerce and branding website. He will use Google Adwords as part of his marketing. Sam plans to have no employees.

Sam met with his CPA and attorney. After careful research, they have decided on an Irish company. His tax team explained that his Irish company must create the website, contract with the Swiss manufacturer of the products, pay for the marketing including Google Adwords and be the party to the contract with Amazon FBA.

His tax team informed Sam that he must request an IRS private letter ruling before he starts an international business.  Sam is a smart business person. He knows that working with the IRS is the best way to create wealth.

The Irish company needs a U.S. bank account and credit card processing. Sam’s bank required the Irish company to qualify to do business in the state where the bank is located. Sam and his bank are in Florida. The Irish company registers with the State of Florida.

Okay…now it is time to build the business. The Irish company hires an Irish web design firm to create and host the website. In Ireland, many chartered accountants and law firms provide the registered office. As part of this process, the firm provide directors and their staff to help with the management. The Irish company signs the contracts with Amazon and the Swiss manufacturer.

The beauty products are shipped to the Amazon fulfillment centers, and Amazon does the rest.

Back in Florida, Sam checks up on the operations. He gets fantastic reports from Amazon. He talks to the Irish web consultant about the SEO for his website.  He looks at the Google Adwords dashboard. From time to time, Sam travels to Europe to meet with the Swiss manufacturer of new products and to meet with his team in Ireland.

The Irish company files many tax returns. First, an Irish income tax return (the tax rate is about 12%). Here in the U.S., the IRS gets two returns, a Form 1120F (a foreign corporation income tax return) and a Form 5471 (an information return for controlled foreign corporations).  Sam’s CPA explains the tax treaty to the IRS using Form 8833.

The U.S. Irish tax treaty provides that If an Irish company has what is known as a “permanent establishment” in the U.S., it owes tax on its U.S. source income (the sales to its U.S. customers). The definitions of a “permanent establishment” are from the 1960’s, and they do not include the concept of a fulfillment center’s contract with the vendor(fn1).    While the Irish Tax Treaty has been updated many times, the updates have been for the exchange of information and the American concept of pass-through entities (such as an S-corporation or a trust).

Your tax team must carefully review the fulfillment center’s contract and compare it to the definition of a permanent establishment in the Tax Treaty.

Get a tax study for your business from us.  We will look at your business and provide you with a tax study for only  (USD) $1,000.  We accept credit cards and wire transfers.  Email me, Brian Dooley, CPA. MBT at [email protected] to get started. 

Footnote (1)  Treaty Article Five, Paragraph 6 states:  ” An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business as independent agents.”

If Sam was using a non-treaty corporation (such as the Isle of Man company) then  pursuant to tax code section 864(c)(5)(A), the office or other fixed place of business of an independent agent will not be attributed to a foreign corporation even if the agent has the authority to negotiate and conclude contracts on behalf of the foreign corporation or maintains as stock of goods from which to fill orders on the foreign corporation’s behalf.    

This is where the tax law is tricky.  The agreement with the fulfillment center must be carefully examined to determine if section 864(c)(5)(A) applies. 

Learn more about permanent establishment vs. fixed place of business, section 864(c)(5)(A)  on this link.  As in all international tax strategies, the company should apply for an IRS ruling before proceeding.  Learn about IRS rulings on this link.