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Going Global and US Tax Considerations

Understand basic filing requirements, double taxation relief, international scenarios, US tax forms for foreign activity, potential tax issues, and the process at the IRS.

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Going Global and US Tax Considerations

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  1. Going Global and US Tax Considerations

  2. OBJECTIVES • Define Basic Filing Requirements • Explain Relief from Double Taxation • Review International Scenarios and the US Tax Implications • Note US Tax Forms for Foreign Activity • Discuss Potential Tax Issues • Describe Process and Structure at IRS

  3. People who complain about taxes can be divided into two classes, men and women. Of death and taxes, both are certain, but only taxes can get you an automatic extension. Income tax has made more liars out of Americans than golf. Paying taxes means you have a job.

  4. Your customers & vendors You are here

  5. In General . . . . . • Domestic (U.S.) entity • Worldwide Customers & Vendors (Canada, Mexico, UK, South America, Singapore, and all points in between) • Buy and Sell worldwide

  6. 16th Amendment “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”

  7. … from whatever source derived …

  8. Entity Classification - Domestic • Sole Proprietorship (Form 1040) • S-Corporation (Form 1120-S) • C-Corporation (Form 1120) • Partnership (Form 1065)

  9. Entity Classification - Internationally • U.S. Branch • Corporation • Partnership • Hybrid Entity “Must choose wisely”

  10. Double Taxation • U.S. taxes on “worldwide” income • Taxed by U.S. on income within the U.S. • Taxed by U.S. on income outside the U.S. • Foreign jurisdictions impose income taxes too (territorial taxation)

  11. Double Taxation Relief • Foreign Tax Credit reduces double-taxation (U.S. and foreign) of the same incomes • Subject to limitations • May deduct the tax instead of credit • Carry forward unused credits for 10 years • Characterize as active or passive

  12. Foreign Tax Credits Issues • Computing Errors • Translation Errors • Sourcing of Income • Passive vs. Active • Cash Basis vs. Accrual

  13. GLOBAL SCENARIOS

  14. Do Nothing Scenario • US mfg. of biological 3-D printer • Has worldwide sales associates • Sells directly to customers • Pays commission to sales associates • Tax implications – All US sourced income and expenses

  15. U.S. Branch • Client opens office in Toronto • Register as an unincorporated entity and files all necessary Canadian paper work • No advice from CPA or Attorney • Tax implications – All US sourced (consolidated on US return)

  16. Corporation • Client sets up a corporation in Mexico • Ships directly from Mexico to EU and to other destinations within Mexico • How to report income (loss) from Mexico • How to report return on investment

  17. Partnership • Form Partnership by making a contribution • Partnership conducts R&D and license products for use in South America market • Filing Requirements • How to report income (loss) • How to report return on investment

  18. Hybrid • Hybrid entities have a foreign tax status different from a US tax status • Example: Foreign Corporation but US Branch, Section 1504(d) election • What is best foreign structure and what is best US tax structure

  19. Treaties • Residence • Filing Requirements • Withholding Tax • Sourcing • E & P • Transfer Pricing • FTCs • Subpart F • E.C.I. • P.E.

  20. INTERNATIONAL FORMS • Form 926 – Transfer of Property to Foreign Corp • Form 5471 – Controlled Foreign Corporation • Form 8865 – Return with respect to certain foreign partnerships (note foreign PS files 1065 if ECI or USI) • Form 8858 – Disregarded Entities • Form 1118 – Foreign Tax Credits • TD F -90.22-1 Foreign Bank and Financial Accounts • Form 1042/1042S – Withholding Taxes

  21. Penalties may be assessed for failure to file certain international forms. The penalties can be substantial and may affect the statute of limitations

  22. Potential International Issues Inter-Company Transactions • Inbound / Outbound • Transfer Pricing • Shifting of Income • Allocation and Apportionment of Deductions

  23. Transfer Pricing

  24. Documentation / Production of Records • Informal Document Request • Formal Document Request • Pre-Summons Letter • Summons • Penalties IRC §§ 6038, 6038A, 6662

  25. Return filed and input Returns reviewed by International Agent Stamped “Accepted as Filed Referral Not Mandatory” Decision made. Should return be worked by International? No Yes Case stamped “International – Selected”Case assigned to an International Agent to work Case assigned to field agent with international aspects involved. International issues may STILL need to be worked, and a referral may still be proper. How a filed return flows through International review

  26. IRS International Organization • IRS Commissioner • Deputy Commissioner, International • Industry Directors (IBC, IIC, TPO) • International Field Operations and Programs

  27. Int’l Field Operations and Programs Overseas Operations • Exchange of Information • Tax Attaché Programs • Offshore Voluntary Disclosure • Global High Wealth / SBSE Int’l • Transfer Pricing Practice • APMA

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