Tag Archives: international tax strategy

Transfer of Know-How to a Foreign Corporation International Tax Planning

United Kingdom claims U.S. LLC is a tax haven company

The United Kingdom is beating America as the better business country with a 17% tax rate.

Jeff is the founder of a new computer based start-up.  He contacted me regarding tax planning for the transfer of know-how to a foreign corporation.  

His business is virtual in that it has no store front.  The business is e-commerce.  Its website determines the walking score of locations.   His customers are real estate website, large apartment complex promoting their location and hotels by showing a good walking score. 

He is expanding into England and Ireland and would like to tax advantage of Ireland’s 12% tax rate. 

Jeff is in California and the businesses effective tax rate is 44%.  He needs unique e-commerce tax planning. 

Here is Jeff’s tax issue on the transfer of know-how to a foreign corporation.

“The tax code section 367 attempts to keep a successful domestic business within the U.S.  Small businesses want to expand into new markets and not pay U.S. tax on their non-U.S. income.  

Section 367 provides that if intangible property (also known as intellectual property) is transferred to a foreign corporation, the tax savings are reduced.  

Know-how is one of the types of property and is included in this law. When a transfer of know-how is to a foreign corporation section 367 can cause unexpected income taxation. 

The other types intangible properties are trade-secrets and those created by a government such as a patent, copyright, trade name, and trademark. 
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Best International Tax Attorney or International Tax Accountant

The best international tax attorney international tax accountant 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:

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Biggest Goof for American Corporations moving Offshore to a Low Tax Country or a Tax Haven Corporation

I liken an American corporation to a steel cage.  The assets are trapped in this cage by the tax law.   This applies to an S-corporation, a C-corporation, a foreign corporation,

International Tax Planning foreign or offshore or domestic corporation is like a steel cage

International Tax Strategies when a foreign offshore or domestic corporation is like a steel cage

When a corporation transfer any type of property (tangible and intangible property, a taxable  sale occurs.  The exception is a domestic reorganization that is classified as tax free by the tax law.

A reorganization  by  an American corporation  with a foreign corporation is not tax free.

Tom called the other day.   His  Nevada corporation has unique software to search big data.  The data is hosted by an unrelated business outside of the United State.  He is the only employee.  The corporation pays Tom a salary and withholds the payroll taxes.  Tom told me that the corporation has no assets. He just wants to start using a tax haven corporation.

Here is what’s going on.   The corporation has goodwill and that is intangible  property,   Goodwill includes. among other items,  a trade name, customers, knowhow, websites, unique software, and workforce in place.    The corporation will owe taxes when the business transferred.

Tom believed that he owned the software and knowhow to search and manipulate big data.  However, he worked for his corporation and result of his work is owned by his corporation.

What is the solution for others.   In starting new business, which may move offshore, create a foreign corporation and not an American corporation if you can afford the expensive legal fees and annual CPA fees.   Do not do this yourself without both an attorney and a CPA.

 

Tax Pirates Invade America

Wikimedia Commons, modified by Gretchen McCulloch

Wikimedia Commons, modified by Gretchen McCulloch

Avast me matey!   Tax pirates have found a new tax haven.

They exploit the IRS mistake on the Form W-9  and uses the Delaware LLC to evade taxes.  Wyoming and Nevada are also popular, as explained in this footnote1.

It started in 1996 when the IRS changed the law on limited liability companies (LLC).   The LLC is an invisible corporation. It does not file a tax return!
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International Tax Strategy with the Preparation of Form 5471 for your Controlled Foreign Corporation

The most important part of Form 5471 is not on the Form.  The Form is merely the tip of an iceberg.

You maximize your tax savings by knowing the loopholes found in the IRS regulations.  Let me say that again.  The income tax regulations contain the complex rules of Subpart F income (which is the income that you do not want if you own a small business) that will save you money.

You will find a summary of these tax breaks on the overlooked IRS worksheet (I have it below).  This worksheet ties into the IRS regulations.

The worksheet has a section for each type of subpart F income.  As you study the international income tax regulations, you will see that most active foreign income is not subpart F.   However if your foreign corporation has related party transactions, then it may have subpart F income.   The IRS has many exceptions to this general rule in their regulations.  Related party transaction includes related party purchases of inventory or services and related party sales of inventory or services.

As you will see on the image of the worksheet, you need to complete page one and two.

On the worksheet, you enter the total of each category of your subpart F income.   The worksheet then guides your arithmetic in computing the total subpart F income.

But here is the problem.  You must compute the total gross subpart F income yourself.  Next, you allocate your overall expenses related to each category.

For example,  your foreign corporation manufactures and sells products worldwide.   Some of the sales are to a related corporation.  Related party sales are often subpart F income (see an exception for contract manufacturing on this link).    You compute your gross income (this is the sale price minus the cost of the good sold).

You enter this amount on the form on line 3 (regarding foreign base company sales income).  Next, you get some special tax breaks on line 15.  On page 2 of the worksheet, you complete line 19 by including the amount from line 15.

 And there are more tax savings to come on page 2 of the Form 5471 worksheet.

Form 5471 tax planning

Form 5471’s worksheet is full of tax savings.

Lines 26, 27, 28 and 29 involve heavy duty tax planning.  They include the concept of  “earnings and profits“.     U.S. corporate taxation (for both a domestic corporation and a foreign corporation) focuses on earnings and profits.

To save taxes, you need to be an expert in this concept.   You want your CPA to know this concept like the back of his hand.  You can test your CPA by asking him about this.  If the answer is vague, this means you need someone else to prepare the Form 5471.

Lastly, you take the amount from page two line 38(b) to line 1 of Form 5471 Schedule I.

Smart tax planners use this worksheet to monitor their taxable subpart F income.  This means you should be preparing a proforma worksheet after the six months of your year.    As you read the worksheet, your will see other IRS tax saving ideas such as related party interest expense.