Tag Archives: tax treaty shopping

Form 1120-F (U.S. Income Tax Return of a Foreign Corporation) covers three different taxes. Saving International Taxes Requires an International Tax Accountant.

Table of Contents

1. This blog tells you how to protect yourself from the U.S. courts and the IRS.
2. his blog is primarily about U.S.  international income taxation and the branch profits tax.
3. Two important international tax laws to watch.
4. Tax Planning for your Balance Sheet and the Branch Profits Tax.
5. Liability Of Corporate Agent in the USA.

6. You Must Timely File  Form 1120F to Claim Deductions or Credits.
7, Protective Filing of Form 1120F:  Smart International Tax Accounting.
8. What if only part of your U.S. income is U.S. business income?

This just might be the most important blog on international tax that you will ever read. Here is the problem for U.K., EU, Australian, New Zealand, and Canadian corporations with U.S. income.

The internet is full of stories of how the tax treaty permanent establishment article prevents the USA from taxing you.  What the stories don’t tell is that the U.S. Tax Court does not care about your tax treaty.

The U.S. Tax Court is part of the Government.  The Government wants your money.  It is that simple.  Okay, it’s not fair.  But they really  do not care.  This link discusses a few of these anti-tax treaty court cases.

This blog tells you how to protect yourself from the U.S. courts and the IRS.

Foreign corporations have income from U.S. sources are always required to file U.S. tax returns.
Three different taxes are on the form as follows:

  1. Foreign corporations must pay a 30 percent tax on income from U.S. sources not connected with a U.S. trade or business.
  2. Foreign corporations engaged in trade or business within the United States is subject to income tax, alternative minimum tax, and other taxes applicable to corporations on their taxable income.
  3. Foreign corps engaged in business within the U.S. must pay the branch profits tax.

This blog is primarily about U.S.  international income taxation and the branch profits tax.

A foreign corporation with a business in the United States at any time during the tax year or that has income from United States sources must file a return on Form 1120-F.  A foreign corporation with U.S. business income must file (I will explain why later in this blog) even though:

(1) It has no business income (that is income effectively connected with the conduct of a trade or business) in the United States,

(2) It has no income from U.S. sources  or

(3) Its revenues are exempt from income tax under a tax convention or any provision of the tax law.

Two important international tax laws to watch.

  1. If the foreign corporation has no gross income for the year, it is not required to complete the return. However, it must file a Form 1120F and attach a statement (I will explain why later in this blog) to the return indicating the nature of any tax treaty exclusions claimed and the amount of such exclusions to the extent these amounts are readily determinable.[1]  For example, if you believe that you have avoided having a permanent establishment, you need to explain why.  Here is more on court cases on permanent establishment).
  1. To claim tax deductions and credits,  the corporation must file an accurate tax return on time. If the return is not timely file, all of the expenses and costs of goods sold can never be deducted.  If the U.S. income of a foreign corporation includes income that is subject to a lower rate of tax under a treaty, it must attach a statement to its return explaining this and showing:

(a) The income and amounts of tax withheld,

(b) The names and post office addresses of withholding agents, and

(3) any other information required by the return form or its instructions.[2]

Tax Planning for your Balance Sheet and the Branch Profits Tax.

The foreign corporation may elect to limit the balance sheets and reconciliation of income to the U.S. business use assets, liability and equity and its other income from U.S. sources.[3]   The branch profits tax traces the U.S. business equity and debts.  Thus, the balance sheet is the IRS’s primary audit tool.   Reporting your worldwide assets is providing the IRS information that has little or no value.

TAX TIP: A foreign corporation that is not engaged in a trade or business in the United States it is not required to file a return when the U.S. withholding of tax at the source of its payments covers the taxes owed.   A matter of fact, the goal of U.S. withholding tax is eliminated U.S. tax compliance for the foreign person.

Liability Of Corporate Agent in the USA

A representative or agent of a foreign corporation must file a return for and pay the tax on the income coming within his control as representative.   The agent can include a related corporation or an individual.

You Must Timely File  Form 1120F to Claim Deductions or Credits

I can not say this too often. A foreign corporation must its return on time to take deductions and credits against its U.S. business income.[4]

However, the following deductions and credits are allowed even if such a return is not filed:

(1) the charitable deduction;

(2) the foreign tax credit passed through from mutual funds;

(3) the fuels tax credit; and

(4) The credit for income tax withheld.[5]  

Timely filed means the Form 1120-F is filed no later than 18 months after the due date of the current year’s return.  

But it is more complicated, and you must read this:  I know this next section is tricky.  So, please be patient.  However, if you need help, then just give me, Brian Dooley, CPA, MBT a call at 949-939-3414. 

When the return for  the prior year was not filed, the return for the current year must have been filed no later than the earlier:

  1. of the date which is 18 months after the deadline for filing the current year’s return, or
  2. the date, the IRS mails a letter to the foreign corporation advising it that the current year return has not been filed and no deductions may be claimed it.[6]

The IRS may waive these deadlines when the foreign corporation proves that:

  1. It acted “reasonably and in good faith”  in failing to file a U.S. income tax return (including a protective return), and
  2. cooperates in determining its income tax liability for the year for that the return was not filed.[7]  

 Protective Filing of Form 1120F:  Smart International Tax Accounting 

This is the smartest thing you can do as a foreign corporation.   The chances of an audit are low and the tax protection is high.  I have the rules below. 

A foreign corporation with limited activities in the United States that it believes does  not give rise to U.S. gross business income should file a protective return.  

A timely filed protective return preserves the right to receive the tax savings  of the deductions and credits if it is later determined that the foreign corporation did have a U.S. business.  

Here is the very good news:  On that timely filed protective return, the foreign corporation is not required to report any gross income taxable income and thus pays no net income tax or branch profits tax.  

However, do not forget to attached a statement indicating that the return is being filed as a protective return and to check the box on the Form 1120F.  Also, you must include your tax treaty disclosure IRS form. Be sure to attach the IRS tax treaty disclosure Form 8823, on this link.  

What if only part of your U.S. income is U.S. business income? 

If the foreign corporation determines that part of the activities is U.S. business gross income that U.S. business income and part are not, then the foreign corporation must timely file a return reporting the U.S. business gross income and deducting the related costs and expenses.  

Important: Also, the foreign corporation must attach a statement that the return is a protective return about the other activities.   The protective election ensures that it can deduct the related expenses if the IRS should disagree.  

The same procedure is available if the foreign corporation when if they initially believe that it has no U.S. tax liability due to a tax treaty.[8]  Be sure to attach the IRS tax treaty disclosure Form 8823, on this link

As discussed above, many foreign corporations believe that their home country tax treaty “permanent establishment” provisions protect them since they do not have an office in the U.S.  However, the U.S. courts treat almost any office (even an office owned by an agent or a related person) as a permanent establishment.  

Lastly, U.S. Department of the Treasury will guide you and provide you with a tax guarantee.  This is known as a private letter ruling.  Here is more information.

FOOTNOTES

  1. Section 1.6012-2(g)(1)(i).

If the foreign corporation with a place of business in the United States, the return must be filed by the 15th day of the third month after the end of the tax year.

[2] Reg. Section 1.6012-2(g)(1)(ii).

[3] Reg. Section 1.6012-2(g)(1)(iii).

[4] Code Section 882(c)(2).

[5] Reg. Section 1.882-4(a).

[6] Reg. Section 1.882-4(a)(2).

[7] Reg. Section 1.882- 4(a)(3).

[8] . Reg. Section 1.882-4(a)(3)(iv).

European Court Allows Google Ireland Billions in French Tax Avoidance

European Court allows Google billions in legitimate French tax avoidance.

European Court allows Google Ireland billions in legitimate French tax avoidance. Learn how this applies to your U.S. state income tax planning. 

The concepts in tax treaties are ancient and provide tremendous tax savings for internet businesses.  International  E-commerce businesses can follow this Google model and avoid taxes.

Additionally, this Google model works in avoiding state income taxes in the United States.

Today’s tax treaties are based on the ides of business from the days of hard assets businesses (factories, warehouses, office buildings).   By keeping these ancient concepts, tax treaties make legal tax avoidance is easy for an internet business and an e-commerce business. 

In the summer of 2017, the Paris Administrative Tribunal, the Court found that France could not charge Google Ireland $1.4 billion in taxes.   Google France had assisted Google Ireland in its advertising business.  However, Google Ireland’s advertising computers were in Ireland, and none were in France.

The Google victory was ruled on Ireland-France Tax Treaty (1968).  The victory reflects the flaw of the ancient permanent establishment concept found in the 2014 European Model Treaty and the American model treaty. 

Continue reading

IRS Wins a Big One with a New Make Believed Tax Treaty Shopping Theory “Cramping”

Maybe the taxpayer just used the wrong court?   The taxpayer, Starr International Co. appeared to have had smart tax planning.   It moved its operation to Switzerland.  In part because the Swiss are very pro-business and in part because the Swiss have a good tax treaty with the U.S. 

But U.S. District Court Judge Christopher R. Cooper would just didn’t like it.  So, Judge Cooper made up a new tax term and theory, “Cramped Conception“.

Not knowing that U.S. law allows one to arrange their affairs to pay the lowest tax (except in the case of a sham transaction without economic substance), Judge Cooper ruled for the IRS.

In tax planning, this is known as the “hazards of litigation”.  I have a portion of the Judge opinion below with my author notes in bold print. 

5. Starr’s Test Would Result In a Cramped Conception of Treaty Shopping

Starr’s proposed test is not only at odds with Article 22 and the Technical Explanation, but it also depends on an unduly narrow definition of treaty shopping. Starr insists that “treaty shopping is a well-defined legal standard,” which categorically excludes situations that do not involve on-paper third-country residents. Pl.’s Cross-MSJ 2.

But, tellingly, the term is nowhere to be found in the U.S-Swiss Tax Treaty (or any bilateral tax treaty, for that matter).  (Author note: The Judge admits that the law is not defined but then, below talks about the 1,000s of articles and other commentaries.  I doubt if the Judge read all of the articles).

Rather, as indicated by the commentaries, legislative testimony, and agency guidance cited by the parties, there is a fair amount of imprecision surrounding the phrase.  (Again the Judge admits the term treaty shopping  is not defined…so he just makes up his own theory of “cramped”).

As used by these authorities, treaty shopping does frequently involve the participation of a third-country resident, but it need not. Rather, its essential characteristic is treaty abuse — manipulating on-paper residency for the purpose of obtaining treaty benefits.

Starr insists that “treaty shopping is a well-defined legal standard,” which categorically excludes situations that do not involve on-paper third-country residents. Pl.’s Cross-MSJ 2.

But, tellingly, the term is nowhere to be found in the U.S-Swiss Tax Treaty (or any bilateral tax treaty, for that matter).  (Author note: the Judge admits that no tax law exists).

Rather, as indicated by the commentaries, legislative testimony, and agency guidance cited by the parties, there is a fair amount of imprecision surrounding the phrase. As used by these authorities, treaty shopping does frequently involve the participation of a third-country resident, but it need not.  (In this case, a third-country resident did not exist).

Rather, its essential characteristic is treaty abuse — manipulating on-paper residency for the purpose of obtaining treaty benefits.

Rather, its essential characteristic is treaty abuse — manipulating on-paper residency for the purpose of obtaining treaty benefits.(Author note: this is not the facts… the Judge is merely “papering” his opinion with “fake news”.)

For example, the Government cites commentary from the Organisation for Economic Co-operation and Development (“OECD”) on its model tax treaty, which expresses concern regarding “the creation of usually artificial legal constructions, to benefit both from the tax advantages available under certain domestic laws and the reliefs from tax provided for in double taxation conventions.” OECD Committee on Fiscal Affairs, Model Double Taxation Convention on Income and on Capital 47 (1977).11    

The commentary explains that such abuse (this Judge loves the word “abuse”; it sounds so righteous) would occur, “for example, if a person (whether or not a resident of a Contracting State), acted through a legal entity created in a State essentially to obtain treaty benefits which would not be available directly to such person.” Id. (emphasis added).

(According to the Europeans and not the Americans) Treaty abuse would also occur, according to the commentary, if an individual “transferred his permanent home [from one Contracting State] to the other Contracting State, where [capital] gains were subject to little or no tax.” Id. (California will love this judge… if I move from California to Washington state, this Judge will rule that I still owe tax in California since Washington has not income tax).

Clearly, these examples do not turn on a third-country participant, and yet the OECD’s more current commentary describes this treaty abuse as “the problem commonly referred to as ‘treaty shopping.’” OECD Committee on Fiscal Affairs, Model Tax Convention on Income and on Capital C(1)-26 (2014).

Similarly, the parties have cited and discussed testimony regarding the U.S.-Swiss Treaty, presented before the Senate Committee on Foreign Relations, from former Deputy Assistant Treasury Secretary Joseph H. Guttentag. See Bilateral Tax Treaties and Protocol: Hearing Before the S. Comm. on Foreign Relations, 105th Cong. 354, at 11 (1997). Mr. Guttentag explains that one   major objective of U.S. tax treaty policy is to . . . prevent abuse of the treaty by persons who are not bona fide residents of the treaty partner. This abuse, which is known as “treaty shopping,” can take a number of forms, but its general characteristic is that a resident of a third state that has either no treaty with the United States or a relatively unfavorable one establishes an entity in a treaty partner that has a relatively favorable treaty with the United States. 

Id. Guttentag elaborates that, while treaty shopping “general[ly]” involves a third-country resident, it “can take a number of forms,” and it is primarily concerned with treaty abuse “by persons who are not bona fide residents of the treaty partner.” Id.  (Author note: Starr was a bonafide resident in Switzerland)

Starr’s definition of treaty shopping, by contrast, would narrow the concept to such an extent that even some persons who are not bona fide residents of a treaty nation — persons who lack a “sufficient nexus” to either contracting state — would be entitled to benefits. Of course, that is likely Starr’s reason for proposing such a standard, since it largely concedes that it was not a bona fide resident of Switzerland or the United States at the relevant time.12

Before proceeding to Starr’s remaining arguments, some qualifications are in order.

First, the Court does not mean to suggest that an entity’s on-paper residency (and that of the individuals it associates with) is irrelevant to its bona fide residency.

Surely, in exercising its discretionary judgment under Article 22(6), it would be reasonable for the Competent Authority to consider Starr’s lack of affiliations with on-paper third-country residents in evaluating the company’s bona fide connections to treaty states.

There is simply no per se Article 22 rule, however, requiring the Competent Authority to reach such a determination.

Second, clearly any bilateral tax treaty is intended to benefit the legitimate residents of the two signatory nations. Accordingly, it would also have been permissible as a matter of policy, but was not required as a matter of law, for the Competent Authority to consider an argument that Starr’s majority-control by U.S. citizens should counsel in favor of awarding it benefits under Article 22(6).13

In any event, the point remains that it is difficult to square Starr’s version of the Article 22(6) standard with Article 22’s text, structure, and accompanying Technical Explanation.

The Court therefore reaffirms that the proper standard for determining benefits under Article 22(6) is “whether the establishment, acquisition, or maintenance of the person seeking [treaty] benefits under the Convention, or the conduct of such person’s operations, has or had as one of its principal purposes the obtaining of [treaty] benefits.” Technical Explanation 72. The Competent Authority clearly applied this standard. A.R. 274.  (Can you  imagine this Judge ruling against a Subchapter S election because the election was with the “principal purpose of obtaining the [tax} benefits?)

 

For the Business Manager of the Foreign Author, Actress or Actor How the IRS Taxes the Resident Alien Entertainer

International tax planning and strategy

Applying for an IRS ruling on your international tax planning will save you taxes in the long run.

This is the second part of my blog’s article on international tax planning for the foreign actor, foreign actress, and foreign author.  

The first part of this private IRS report (written for the foreign actor, actress, and author) can be found on this link.   The first part is easy to ready with a limited amount of tax jargon. 

This blog is for the business manager, the tax CPA (not all CPA’s have a graduate degree in taxation) or the tax attorney.  This part of the IRS report has tax jargon causing the report difficult to understand.

This part of the IRS report is on how the IRS audits the foreign actor and the foreign actress. It is for the business manager, the tax CPA  and for the tax attorney.   

These two blogs contain the private IRS report given to its international tax agents that are auditing the foreign actor, foreign actress, and foreign author.  

To better understand this blog, I recommend that you read part one first.  This blog is the technical explanation of part one.   If you would like to brainstorm the IRS report, then just give me, Brian Dooley, CPA, MBT, a call at 949-939-3414.

The IRS has examples discuss the U.S.-United Kingdom Income Tax Convention. The term “tax convention” means “tax treaty.” The examples in this report using the U.K.-U.S. Tax Treaty apply to residents of other nations with tax treaties.  The best tax treaties for the resident alien and the non-resident alien actress, actor and author are  Canada, Australia, the United Kingdom (which covers Scotland, England, Wales and Northern Ireland), Ireland, Sweden, Korea and Japan.

Continue reading

How the Foreign Actor, Actress or Writer Can Avoid Taxes and Avoid an IRS Tax Audit

Foreign actors, actresses, and writers are the much-forgotten industry on the tax websites.

international tax, expatriate, offshore tax planning,

Foreign authors and writers can avoid taxes by working and enjoying the Bahamas (or any other tax haven). Foreign actors, actresses and other using the Nat King Cole tried and true tax strategy can also avoid taxes.

To change this, I decided to expose a private IRS report on how the IRS audits foreign actors, foreign actresses, and foreign authors and how they can avoid audits and legally avoid taxes.

The foreign actor, actress, and writer have unique tax strategies because they are not U.S.citizens. You will learn them in this blog article.

Writer’s and author’s tax planning is even more obscure. So, if you are a foreign writer of books or screenplays, this blog includes remarkable tax strategies for you along with IRS examples of tax planning.

I divided my blog postings into two parts. This first part uses everyday English to explain the IRS auditing of an entertainer and writer and the tax saving strategies.

The second part is the tax authorities (such as court cases, IRS rulings, and IRS regulations) supporting the explanation of the tax law in the first part. The “Endnotes” are found in the second part of this blog. Endnotes have sophisticated tax ideas and strategies.  The second part is found on this link.

If you are a foreign actor or actress, your business manager and your tax planner needs both parts one and two of my blog posting.

If you want to learn how Nat King Cole whipped the IRS’s ass with his offshore trust and tax haven corporations, then please get my book, International Taxation in America for the Entrepreneur.    The Nat King Cole strategy works well for an American.  It works fantastic for the resident alien and for the non-resident alien actor, actress, and author.

The book is an easy two-hour read and includes the Nat King Cole tax plan. Amazon has the book on sale for only $9.50.

Nat King Cole’s tax court victory is the blueprint for international tax planning. He was successful with the double loan-out corporation international tax strategy.

Lastly, if you want to brainstorm your tax situation or plan, then please feel free to call me, Brian Dooley, CPA, MBT at 949-939-3414 for a free brainstorming consultation.

Introduction to IRS Audits of Resident Alien (Foreign) Actors and Actresses

Resident aliens and non-resident aliens are considered as foreign individuals.  

Every year many motion pictures are made, television series and movies produced, and stage productions developed in the United States. These productions bring many highly compensated foreign actors and actresses into the United States.

By its nature, the entertainment business leads to complex and creative accounting. An examiner must deal with the complexity and creativity of the industry and be aware of the laws that govern specific types of income and expenses.

Overview of Law on Characterizing Income of the Actor and Actress

The character of the income determines if the actor or actress must pay U.S. income taxes.  Each type of income has its own international tax rules.  These rules decide when the income is nontaxable to the resident alien.  

If the foreign actor or actress is a citizen of a country with a tax treaty,  he or she has unique tax savings laws.

Western Europe, Canada, Australia and Korea have favorable tax treaties.  This is discussed later in this report in the many examples.

An actor or actress (here in after, both will be indicated by “actor”) may receive revenue from the following activities.

Wages or Salaries: Actors and actresses may receive wages for performances in movies, videos, television productions, stage performances, personal appearances, etc. in the United States. Actors and actresses may receive wages from a loan-out corporation that may own the rights to their services. (Loan-out corporations will be discussed later in more detail.)

This income is considered to be personal services income, and U.S. source income effectively connected with the conduct of a U.S. trade or business, taxable in the United States at U.S. graduated rates.  <<Endnote 1>>

Author’s note: Income Tax Treaties have favorable rules for actors, actresses, authors and other entertainers.

 The nations with the best tax treaties are  Canada, Australia, the United Kingdom (which covers Scotland, England, Wales and Northern Ireland), Ireland, Sweden, Korea and Japan.

Continue reading