International tax planning is at risk.
If you have read my International book (on the right side of this blog), you know that I am a fan of writings of futurist Alvin Toffler (his most famous book is Future Shock). He predicted that in this Century, fewer individuals would be employees and more would be cottage self-employed.
I have had many calls from individuals incorporating to work for one company. Kind of an employee corporation….with the hope to the employer that the corporation would not be an employee,
Uber and similar firms are hoping to beat the employer / employee legal relationship. Here is the problem. States such as California plan to protect the Uber type employee if they like it or not. To protect them, the court will rule that they are not self employed but are employees. This will move unto the the incorporate business with only one employer.
This in turn, will make such a corporation an “dependent agent” and cause the foreign corporation to have U.S . tax nexus.
Well it s almost mid-night and time for me to go to bed. So, I will get back to this in a few days to discuss income effectively connected, form 1120F and of course section 881 and 882.
Here what happens with independent contractors re-classified as employee (dependent agents). U.S. international tax law and tax treaties provide a preferred treatment with independent contractors.
If your tax planner believed you hired independent agents, but a local (city or state) or national government classifies the person as an dependent agent, your tax plan will fail.
Some folks believe if the individual forms a corporation that the corporation is an independent agent. While you might not have an employee, it does not mean that the corporation is not an independent agent.
Inverworld, Inc. v. Commissioner Inverworld Inc. created the tax law that a corporation can be the dependent agent of another corporation. When the other corporation is a domestic corporation, a foreign corporation was held to have a permanent establishment based upon the operations of the domestic corporation.
 979 F.2d 868 (1992).
It gets worse and here is how. Singapore corporation expands into the U.S. They have a key salesperson (an American) that is living in Colorado. They do their own tax planning decide. The American incorporates. Years pass with no problem. But then, the American is audited. The IRS uses the Inverworld court case and assessed the Singapore corporation tax on all of the U.S. sales made by the domestic corporation. Please note my use of the word “all”.
Since the Singapore corporation didn’t file a its IRS Form 1120F on time, the Singapore corporation is taxed on gross income and not net income. The tax law provides that a late Form 1120F can not claim any expenses.
To collect the tax, the IRS merely levies on the accounts receivables from the American customers.
I have an article on this link regarding the concept of a foreign business having an independent agent (with only one customer). This article reviews an ancient case from last century. It is nice to read, but is out of date (even though it is only a few years old),
If you would like to brainstorm your situation, then call me Brian Dooley, CPA, MBT at 949-939-3414, for a free one hour consultation.