The new GOP tax bill has created new hidden tax savings. While preparing Form 5471 for the Controlled Foreign Corporation, you want to make important elections.
Starting in 2018, Form 5471 is full of international tax planning and tax savings. As you prepare Form 5471, carefully look at the instructions. They hint at the hidden tax savings. (If this is the first year or a late filing, then please see this link.)
It is here, in the fine but dull print, that you will find your tax savings. Preparing Form 5471 for the Controlled Foreign Corporation is an art form.
For example, did you know that an offshore corporation acting as a captive finance company can avoid U.S. taxes?
Or that a foreign contract manufacturer related party sales are tax-free?
Or the special foreign investment fund (such as a foriegn ETF) and controlled foriegn corporation tax plan on this link.
Video on Preparing Form 5471 for the Controlled Foreign Corporation
The video below is from an international tax class that I gave to the California Society of CPAs on preparing Form 5471 for the Controlled Foreign Corporation
If you want to start to save taxes while preparing your Form 5471, then contact me, Brian Dooley, CPA, MBT at [email protected]
International tax treaty planning for the resident alien that are citizens of Canada, the U.K., Australia, New Zealand, the European Community start with the tax treaty. Many have a unique tax advantage, Tax treaties with these countries provide a unique and little-known tax savings.
This video is an audio clip from my tax radio show, Tax Talk. You will learn why resident aliens are paying more in taxes than they should.
They pay tax on their worldwide income including income from interest, dividends, wages, other compensation for services, rental property, and royalties. The resident alien must report these amounts whether from sources within or outside the United States. Depositing of income outside the U.S. is taxable.
If you are a citizen of a country with a tax treaty, the treaty decides if you are a resident or non-resident. Otherwise, if you have a green card or spend too many days in the U.S., you are a resident alien.
Nonresident aliens are usually subject to U.S. income tax on U.S. source income. In some cases, foreign source business income can be subject to U.S. tax. You will learn more in my book, International Taxation in America for the Entrepreneur.
A dual-status alien is an individual that is both a resident alien and a nonresident alien in the same tax year. This can occur when you obtain your green card.
U.S. Investment income is taxed at a flat 30% of the gross income. If the non-resident alien resides in a treaty country, the tax rate is usually between zero and 15%.
Business income is taxed on a net income basis. The alien has the same tax rates as an American. In some cases, an NRA’s foreign business income is taxed by the U.S. This occurs when the NRA has an office or some other type of business facility or is in the U.S. on a business trip.
Tax Withholding on Foreign Persons
Payments of U.S. income to foreign persons are subject to the withholding tax rules. In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income. This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.
The NRA that comes to the U.S. for business meetings owes U.S. tax on his foreign salary if he or she is paid more than $3,000 by his employer.
Taxpayer Identification Numbers (TIN) for the non-citizen
Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN). Also, non-citizens who request tax treaty exemptions or other exemptions from withholding must also have a TIN.
Sale of Real Estate
Non-Resident Aliens are hit with a fifteen percent withholding tax on the sale of U.S. real estate. In some cases, the withholding tax applies to refinancing. The withholding tax does not replace the income tax. Aliens must file an income tax return. The tax withheld is a credit towards the total tax. If the total tax exceeds the tax withheld, they get a refund.
Saving Taxes with Tax Treaties
The U.S. tax liability of non-resident aliens is determined primarily by the provisions of tax treaties. If the non-citizen is not a national of a treaty country, then the U.S. Internal Revenue Code applies.
Many foreign countries have tax treaties with the U.S. Tax treaties override or modify the provisions of the Internal Revenue Code. Tax treaties allow you to pay less tax.
All though you are a resident alien for income taxes you may be a non-domiciled alien for estate (death) taxes. Non-domiciled aliens are subject to estate taxes on all of their U.S. property (including stocks, bonds, and property) except bank accounts and life insurance. They are not entitled to the $5,000,000+ exemption that is allowed for Americans. Accounts with brokerage firms are frozen upon the alien’s death. Tax treaties may allow the alien to avoid U.S. gift and estate taxes.
Become an Expert
Become an expert with my book, International Taxation in America for the Entrepreneur, available on this link and feel free to call me with any questions that you have.
Source of Income for international tax strategies is used by international tax accountants in foreign tax planning.
The sourcing rules can create a wall between a foreign corporation and the IRS. Of course, the foreign corporation wants to be on the side of the wall that is outside of the United States.
Most foreign source income is not subject to U.S. income taxes. However, there is a small exception involving the sale of inventory property.
Here is a chart of the sources of income for international tax strategies.
Item of subject to source rule
General rules of source of income for international tax strategies
Where services performed
Business income—personal services
Where services performed
Sale of inventory—purchased
Sale of inventory—produced
Allocation of a variety of factors
Sale of personal property
Where title passes, with exceptions
Residence of obligor-payor
Domestic if domestic corporation & foreign if foreign corporation
Location of property
Royalty—patents, copyrights, etc.
Where patent or copyright is used; laws are vague
Sale of real estate
Location of property
Personal service, consulting, training,
Where serviced performed
Where services were performed that earned the pension
Source of Income for International Tax Strategies for the service business.
For example: Ian is a member of a U.K. law firm. The law firm has an office in Florida. This office promotes the law firm’s Cayman Island’s office. Ian manages the Florida office along with two other partners and two secretaries.
In Florida, Ian and his partners meet with clients, potential clients, manage the operation and accounting of the Cayman office.
Often Ian and the other partners travel to the Cayman Islands to work with the attorneys in the Cayman office.
The Florida office has a local bank account.
Under the U.S. international tax accounting sourcing rules, the U.K. law firm has no U.S source income. Having an office (or what is known as a “permanent establishment”) is irrelevant when the income is from a service. The U.K. law firm does not need to file an U.S. tax return.
However, a protective filing of a U.S. tax return should be considered.
Foreign source income for international tax strategies.
The partnership income is foreign source for U.S. international tax accounting purposes.
American tax law ignores the place of banking, the existence of an U.S. office or permanent establishment.
The one factor that determines U.S. taxation is where Ian and his partners do their billable client work. In this case, the legal work is performed in the United Kingdom and the Cayman Islands. The legal work is foreign source income.
Learn why Ian does not pay income tax in the U.S. on his income on this link.
Looking for help with your understanding the source income for international tax strategies and planning? Then, please contact me, Brian Dooley, CPA, MBT via email (at [email protected] ).
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 to draft new regulations and rulings, (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.
Some of these topics have been on the IRS wish list for almost a decade. As you read this list, you can see tax strategies that continue to save you money.
Our most popular and best value book is International Taxation in America for the Entrepreneur. This is the best International Tax Planning Book for small business.
An easy two hour read that will teach you tried and true tax saving plans. You can buy it now for $9.50 at Amazon on this link (return it in seven days if you do not like the book).
Each of our International Tax Planning Books include links to hundreds of additional offshore tax planning strategies. You will learn how small business are saving taxes with properly planning their international businesses.
International Tax Planning Book for the attorney and CPA
For the CPA and attorney, the book on this link provides an indepth explanation of international income tax and international estate and gift taxes. It includes a free PDF version that is used for tax research. The Adobe Reader find function quickly locates the most complex tax issue.
If you would like to explore your international tax questions, then please contact me, Brian Dooley CPA, at [email protected]