Tag Archives: form 8833

Saving International Taxes with Tax Treaty’s Tie Breaker Rules for the Green Card Holder

The tax treaty tie breaker rule can allow a green card holder not to be a U.S. tax resident. 

The tax treaty tie breaker rule overrides the U.S. tax code.  The tax treaty tie breaker rule requires an individual to be a resident of the country where he has the closest connection. 

With the tax treaty tie breaker rule a green card holder who is a citizen of a country with a tax treaty may non-resident for U.S. income taxes.  Tax treaties override the U.S. tax code.

As a non-tax resident, you live and work in the U.S. but only pay tax on your U.S. income and not your foreign income.

Here is what happens:  If you are a dual-resident taxpayer (a resident of both the United States and another country), a tax treaty’s “tie-breaker” rule determine if you are a U.S. income tax resident.   

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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.

 

New: All Green Card Holders Must Report All Foreign Assets and Foreign Companies

Tax Treaty non-resident aliens must file both the FBAR and the Form 8938 (FATCA). They also have to file a Form 1040NR with a statement explaining why they are not taxed on U.S. source income on Form Form 8833.

Lastly, in some cases, the tax treaty non-resident must file Form 5471 regarding their ownership of a foreign corporation and Form Form 8865 reporting ownership is a foreign LLC or partnership. 

A tax treaty nonresident is an individual that passes the days test  (substantial presence) or had a green card but is a non-resident because of a tax treaty.  If you have not filed these forms, the IRS does have a tax amnesty.  My firm can help you with this. 

The new Form 8938 requires individuals to report all of their foreign assets.  Form 8938  filing requirement does not replace or otherwise affect a taxpayer’s obligation to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts). Individuals must submit both forms for which they meet the relevant reporting threshold.  For advanced users of our blog, the New York CPA Society has issued this letter to the IRS regarding Form 8938.

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts).  Individuals must file each form for which they meet the relevant reporting threshold.    

Foreign real estate held through a foreign entity,

  Form 8938, Statement of Specified Foreign Financial AssetsForm TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)
Who Must File?Specified individuals, which include U.S citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets and meet the reporting thresholdU.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold
Does the United States include U.S. territories?NoYes, resident aliens of U.S territories and U.S. territory entities are subject to FBAR reporting
Reporting Threshold (Total Value of Assets)$50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad)$10,000 at any time during the calendar year
When do you have an interest in an account or asset?If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax returnFinancial interest: you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title.Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.See instructions for further details.
What is Reported?Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assetsMaximum value of financial accounts maintained by a financial institution physically located in a foreign country
How are maximum account or asset values determined and reported?Fair market value in U.S. dollars in accord with the Form 8938 instructions for each account and asset reportedConvert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars.Use periodic account statements to determine the maximum value of the currency of the account.Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars.
When Due?By due date, including extension, if any, for income tax returnReceived by June 30 (no extensions of time granted)
Where to File?File with income tax return pursuant to instructions for filing the returnMail to Department of the Treasury
Post Office Box 32621
Detroit, MI 48232-0621For express mail to IRS Enterprise Computing Center
ATTN: CTR Operations
Mailroom, 4th Floor
985 Michigan Avenue
Detroit, MI 48226Certain individuals may file electronically at BSA E-Filing System
PenaltiesUp to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also applyIf non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply

Types of Foreign Assets and Whether They are Reportable

Financial (deposit and custodial) accounts held at foreign financial institutionsYesYes
Financial account held at a foreign branch of a U.S. financial institutionNoYes
Financial account held at a U.S. branch of a foreign financial institutionNoNo
Foreign financial account for which you have signature authorityNo, unless you otherwise have an interest in the account as described aboveYes, subject to exceptions
Foreign stock or securities held in a financial account at a foreign financial institutionThe account itself is subject to reporting, but the contents of the account do not have to be separately reportedThe account itself is subject to reporting, but the contents of the account do not have to be separately reported
Foreign stock or securities not held in a financial accountYesNo
Foreign partnership interestsYesNo
Indirect interests in foreign financial assets through an entityNoYes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail.
Foreign mutual fundsYesYes
Domestic mutual fund investing in foreign stocks and securitiesNoNo
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantorYes, as to both foreign accounts and foreign non-account investment assetsYes, as to foreign accounts
Foreign-issued life insurance or annuity contract with a cash-valueYesYes
Foreign hedge funds and foreign private equity fundsYesNo
Foreign real estate held directlyNoNo
No, but the foreign entity itseentity,specified foreign financial asset and its maximum value includes the value of the real estateNo
Foreign currency held directlyNoNo
Precious Metals held directlyNoNo
Personal property, held directly, such as art, antiques, jewelry, cars and other collectiblesNoNo
‘Social Security’- type program benefits provided by a foreign governmentNoNo

 

 If you would like to brainstorm your tax planning ideas, then please call me, Brian Dooley CPA, at 949-939-3414 for a free one hour consultation.

 
  

Quick Reference Guide to IRS International Penalties

 I have assembled a guide to the tax penalties including the new FATCA.

 While the USA does not have exchange controls, Congress is intimating any citizen that dares to do business or invests outside of the country with complex forms at the confiscation of assets by using tax penalties exceeding the value of the assets.  

If you wish to brainstorm your tax ideas with me, Brian Dooley CPA, then please call me at 949–939–3414 for a free one-hour brainstorming consultation.

I marked with an “***” the three rules that surprised me.

Taxpayer –These are applied to each tax year with no statue of limitation 

Filing Requirement

IRC Penalty section

U.S. person with interest in:

Foreign Corporation (FC)

Form 5471 – IRC 6038(b)

up to $25,000

Foreign Partnership (FP)

Form 8865

  

FC or FP with Foreign Disregarded Entity

Form 8858

  

Penalty reducing Foreign Tax Credit:

Foreign Corporation (FC)

IRC 6038(c)

Form 5471- loss of credit

Foreign Partnership (FP)

Form 8865

  

FC or FP with Foreign Disregarded Entity***

Form 8858

  

25 percent foreign-owned U.S. corporations

Form 5472

IRC 6038A(d)

 

25 percent foreign-owned U.S. corporations that fail to: 1) authorize the reporting corporation to act as agent of a foreign related party, or 2) substantially comply with a summons for information

N/A

IRC 6038A(e)

 

Transferor of certain property to foreign persons:

Foreign Corporation

IRC 6038(c)

Form 926 

Foreign Partnership

Form 8865 Schedule O

  

Foreign corporations engaged in U.S. business

Form 5472

IRC 6038C(c)

 

Individuals receiving gifts from foreign sources exceeding $10,000 (adjusted annually for cost of living)*** use to be $100,000

Form 3520

IRC 6039F(c),

 

Individuals that relinquish their U.S. citizenship or abandon their long-term resident status

Form 8854

IRC 6039G(c)

 

Foreign persons holding direct investments in U.S. real property interests

N/A

IRC 6652(f)

 

U.S. person who transfers to, or receives a distribution from, a foreign trust

Form 3520

IRC 6677(a)

 

U.S. Owner of a foreign trust

Form 3520-A

IRC 6677(b)

 

Failure to file returns with respect to acquisitions of interests in:

Foreign Corporation

IRC 6679, 

Form 5471 Schedule O

Foreign Partnership

Form 8865 Schedule P

IRC 6679,

 

Foreign corporation failure to file personal holding company tax return

Form 1120 Schedule PH

IRC 6683(Repealedin 2005)

 

DISC, IC-DISC, or FSC failure to file returns or supply information:

DISC

IRC 6686

Form 1120-DISC

IC-DISC

Form 1120-IC-DISC

  

FSC

Form 1120-FSC

  

Allocation of Individual Income Tax to Guam or the CMNI

Form 5074

IRC 6688

 

Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession

Form 8898

IRC 6688

 

Taxpayer’s failure to file notice of foreign tax redetermination under IRC 905(c) or IRC 404A(g)(2)

Form 1116 or Form 1118 (attached to Form 1040-X or Form 1120-X)

IRC 6689

 

Taxpayer’s failure to file notice of foreign deferred compensation plan under IRC 404A(g)(2)*** (did not know and I note there is no form- just a penalty.

N/A

IRC 6689

 

Taxpayer’s failure to disclose treaty-based return position

Form 8833 or statement

IRC 6712

 

Failure to Provide Information Concerning Resident Status (Passports and Immigration)

N/A

IRC 6039E

 

Information with Respect to Foreign Financial Assets Yearly penalty 

Form 8938, Form TDF90.22-1

IRC 6038D

50% of assets