Tag Archives: subpart f income

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.

International Tax Strategy for Importers with Contract Manufacturing

International tax planning for the Contract Manufacture

International tax planning for the Contract Manufacturing

A new contracting manufacturing international tax law is allowing small business to reduce taxes.  If you import products into the U.S., you want to look at this new law.

Briefly, you form and control a foreign corporation where you contract your manufacturing.  The corporation manufactures products for you.  It sells these products, at a profit, to your U.S. business or directly to your customers.

The tax law does not tax you on the profit made by this corporation.

The tax provides that the shareholder of a  foreign corporation is not taxable on the income from the sale of personal property (including inventory) manufactured by a corporation formed in the same country as the manufacturing.[1]  In other words, tax on this profit from manufacturing is not taxed.[2]

The sale of the property takes place outside the U.S. This means title to the property occurs anywhere other than the U.S. Usually, the sale takes place when the property leaves the factory of the contract manufacturer.

You or an employee must only do one or more of these activities either via the internet or in person:
(1) Oversee and direct the activities or process which the property is manufactured, produced, or constructed or
(2) Select the materials or the vendor or
(3) Control the raw materials or the work-in-process or the finished goods or
(4) Manage the manufacturing costs or capacities or
(5) Control of manufacturing logistics or
(6) Control the quality such as overseeing the sample testing or establishing the quality control standards or
(7) Develop and direct the use or development of the product, design, and specification.

This is a fantastic tax law.  Importers are reaping significant tax savings. Importer tax plans rely upon a solid IRS regulation for contract manufacturers.

I know that you are busy and   I wish I could place all the tax breaks on a few paragraphs.   However, to have a blog post for as many different types of businesses, this post is a few pages.

If you want to schedule a time to talk, then email me Brian Dooley, CPA, MBT [email protected],

Here is how contract manufacturing tax avoidance works  You do not pay income tax on your controlled foreign corporation income that is not classified as “subpart F income.”  Subpart F is the location in the tax code that talks about the taxable income.  You want your controlled foreign corporation to earn income that is not Subpart F income.

Subpart F income does not include income from the sale of personal property manufactured, produced, or constructed by a foreign corporation.[1]

For example, Ford Motor manufacture in England.  These cars are sold in the U.K. and Europe through independent dealers.  None of the income is Subpart F income.  The income is not taxed by the United States.

Avoiding U.S.  taxes for Big Business like Ford is easy.  They can afford to build a factory.

Now, small businesses have the same opportunity for tax planning.  Contract manufacturing allows the small business to manufacture its products.
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Controlled Foreign Corporation’s Offshore Income Taxed at 15% to 20%.

I am back from teaching my course for the California Society of CPAs on avoiding International Tax malpractice.
Here is what CPA’s are doing:  Their clients pay more than the legal tax.  Yep, many CPAs think all the offshore income is taxable, and this was the theme of the seminar.

When the income is taxable, they make it worse by using a 44% tax rate instead of a 15% to 20% rate.

If you want to save taxes like Google and Apple, you need to do what Donald Trump stated; you need to work very hard to pay the lowest tax.     You have to do it because your CPA is too busy with tax returns and financial statements to research what you will find in this blog.

The rest of this blog explains how to get the low tax rate on your offshore income earned by your foreign corporation.

Here is the first thing a CPA misses:  They starts international tax planning using international tax laws.  However,  domestic corporate tax law is the foundation of international tax law.
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The Limited Department Store and Victoria Secret’s International Tax Planning Lesson for You

This popular clothing store chain[1]  attempted “clever” tax planning.  The changes of tax audit were high since this is a major public company.    The Tax Court reviewed their tax plan (The Limited, Inc. v. Commissioner, 113 T.C. 169).   The Court was not impressed. 

The Tax Court held that certificates of deposit purchased from a taxpayer’s private label credit card bank subsidiary by a foreign subsidiary of the taxpayer’s controlled foreign corporation are U.S. property.  When a controlled foreign corporation (CFC) invest in U.S. property, the amount invested is classified as a dividend income.

 You may have heard how firms like Apple have $billions that they can’t bring back to the U.S.  This is why.

Limited formed a new corporation to lend money to Limited’s domestic private label credit card company.  They named the loan “certificate of deposit” hoping to use an exception to section 956 that applies to banking transactions.  They also used a new foreign corporation that had no earnings, which would have made a distribution not taxable.

Of course, Limited’s credit card company is not a bank and thus, the “certificate of deposits” was not with persons carrying on the banking business.

But it got worse!  And this is what I want you to know. The court also attributed ownership of the certificates to the CFC that formed the foreign subsidiary because a principal reason for the formation of the foreign subsidiary was the avoidance of Subpart F and tax code Section 956.  This last part invokes an old tax doctrine[2] that one must have a business purpose other than saving taxes in entering into a transaction (or as in this case, form a corporation).

It is a doctrine overlooked by many tax planners.   I want all of my readers to have excellent tax planning.  So, please take this gift of learning how a major corporation missed an essential doctrine into your tax planning.

If you need a corporation for tax planning, then embed the corporation with a business activity, have a business plan and corporate minutes.     This story has a happy ending for the taxpayer.  They appealed the court and provided a business purpose of the new foreign subsidiary.

They presented a witness that stated that the sole reason behind the creation of subsidiary was to shield the parent corporation’s assets from Chinese expropriation.   The Appeal Court bought the story, and the IRS was defeated.

Lesson:  Always document your business purpose.  If you need to up the quality of your tax planning, then contact me, Brian Dooley, CPA, MBT, [email protected]

Here is a link to this court case.

If you want to learn how to save taxes with an offshore business, then listen to the first five minutes of the audiobook (International Taxation in America for the Entrepreneur) by clicking on this link.

[1] Among the popular stores owned by petitioner (the stores) were The Limited, Lane Bryant, Lerner New York, Victoria’s Secret, and Abercrombie & Fitch.
[2] A “tax doctrine” is a tax law created by court cases.  One court case does not make a doctrine.  Usually, the Supreme Court has ruled on the concept.  Congress told the IRS to make the regulations clear on this point.  So, the IRS issued 1.956-1T (b)-4 with examples of this rule.

The Best Offshore Tax Strategies courtesy of the Congressional Research Service

Saving taxes with legitimate offshore tax planning.

Saving taxes requires an innovative tax plan. The Congressional report gives the secrets of successful international tax planning.

International tax planning uses strategies that are legal. In this internal Government report has tried and true offshore tax plans that the Government can’t stop. This Book is the January 2015 internal report to Congress on the best offshore tax plans.

Small e-commerce businesses have discovered that the cloud allows them to create tax free foreign income just by having the computer server in a foreign country. If you would like to brainstorm you tax idea, then please call me, Brian Dooley, CPA, MBT at 949-939-3414 for a complimentary consultation.

The Best Legal Offshore Tax Strategies on in this Report

The report explains in detail the international tax planning that the IRS must allow.  If you want the PDF version, then contact me on this page and let me know.

The summary below provides the theme of the 86 page internal Government report.    I have the report below in a innovative E-book format.   If you have a technical problem with the E-book format, then please call me, Brian Dooley, CPA, MBT at 949-939-3414,  and I will send you a  PDF file with the report.

Some tips for the E-book.
1.  Full screen makes the book larger.
2.  Make the book even larger by a double click of your mouse on the full screen text
3. Search for any words or phrase with the icon on the top second from the right.

Here is the summary:  Addressing tax evasion and avoidance through use of tax havens has been the subject of a number of proposals in Congress and by the President. Actions by the Organization for Economic Cooperation and Development (OECD) and the G-20 industrialized nations also have addressed this issue. In the 111th Congress, the HIRE Act (P.L. 111-147) included several anti-evasion provisions, and P.L. 111-226 included foreign tax credit provisions directed at perceived abuses by U.S. multinationals. Numerous legislative proposals to address both individual tax evasion and corporate tax avoidance have been advanced.

Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions using a variety of techniques, such as shifting debt to high-tax jurisdictions. Because tax on the income of foreign subsidiaries (except for certain passive income) is deferred until income is repatriated (paid to the U.S. parent as a dividend), this income can avoid current U.S. taxes, perhaps indefinitely.

The taxation of passive income (called Subpart F income) has been reduced, perhaps significantly, through the use of hybrid entities that are treated differently in different jurisdictions. The use of hybrid entities was greatly expanded by a new regulation (termed check-the-box) introduced in the late 1990s that had unintended consequences for foreign firms.

In addition, earnings from income that is taxed often can be shielded by foreign tax credits on other income. On average, very little tax is paid on the foreign source income of U.S. firms. Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary substantially.

Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting income earned abroad. In addition, because interest paid to foreign recipients is not taxed, individuals can evade taxes on U.S. source income by setting up shell corporations and trusts in foreign haven countries to channel funds into foreign jurisdictions.

The Foreign Account Tax Compliance Act (FATCA; included in the HIRE Act, P.L. 111-147) introduced required information reporting by foreign financial intermediaries and withholding of tax if information is not provided. These provisions became effective only recently, and their consequences are not yet known.

Most provisions to address profit shifting by multinational firms would involve changing the tax law: repealing or limiting deferral, limiting the ability of the foreign tax credit to offset income, addressing check-the-box, or even formula apportionment.