Tax planning for foreign corporations and non-resident aliens starts with looking at the income. A foreign person does not pay U.S. income tax on many types of U.S. income. Unlike the UK and Europe, the U.S. can be the company’s headquarters and not pay tax U.S. taxes on the foreign income.
Avoiding the value added tax increases the business working capital by 25%. While the VAT is often as low as 17%, the UK or EU business pays the VAT with after income tax profits. This causes the VAT to be a 25% drag on working capital.
The U.S. is the only industrialized country that does not charge this anti-business tax. The tax planning rules for determining tax-free foreign source income are summarized in the guide below in blue print to be used for tax planning for foreign corporations and non-resident aliens
|Item of Income||Factor Determining Source|
Salaries, wages, other compensation
Where services performed
|Where services performed|
Sale of inventory -purchased
|Where sold- where the customer takes possession of the property. A foreign business can warehouse and store their inventory in the U.S. This is a popular way to avoid the VAT.|
Where produced (Allocation may be necessary)
Residence of payer- except for bank deposit interest is tax free to the foreign person
Foreign source when paid by a foreign corporation
Location of property
|Location of property|
Where property is used
Sale of real property
Location of property
Sale of personal property
Seller’s tax home
Where services were performed that earned the pension
|U.S. Stock Market & Commodity Profits||Treated as tax-free foreign source income|
Sale of natural resources
Allocation based on fair market value of product at export terminal. For more information, see IRC section 1.863–1(b) of the regulations.
Tax planning for foreign corporations and non-resident aliens
Tax planning for foreign corporations and non-resident aliens sometimes requires a non-U.S. office to be involved with certain aspect of the international business. This part is complicated. You will need the help of your CPA and attorney. I suggest that you consider my book to learn the fundamentals. Amazon has it on sale for $9.50.