Caution: More than One Type of U.S. Federal Tax Withholding Could Be Required for Foreign Partners in a U.S. Partnership

It is very important for a U.S. partnership to determine the residence status of all partners in the partnership. A U.S. partnership is required to report whether a partner is a foreign partner on the Schedule K-1 filed with the Form 1065 federal partnership tax return. A partner is considered to be a foreign partner if the partner is a foreign company formed under the laws of a foreign country. A partner is considered to be a foreign partner if the partner is a foreign individual who is not a U.S. citizen, does not hold a U.S. green card or does not meet the substantial presence test to be treated as a U.S. resident for U.S. federal tax purposes. The U.S. partnership is also required to comply with Continue reading »

Transfer Pricing – General Principles, Penalties and Contemporaneous Documentation

General Principles – Transfer pricing is relevant for U.S. companies with foreign subsidiaries or foreign parent companies that engage in certain intercompany transactions.  U.S. transfer pricing rules require that intercompany pricing between a U.S. company and a foreign affiliate must be based on an ‘arm’s length’ price that would be charged in a similar transaction with an unrelated third party.  The arm’s length principle is typically applied to intercompany transactions in which goods, services or property are sold between a U.S. company and a foreign affiliate.  The transfer pricing rules also can apply to Continue reading »

The Basics to Know About Foreign Tax Credits

1. Foreign Taxes Paid by a U.S. Company Conducting Business Activities Directly in a Foreign Country or through a Foreign Branch

• C Corporation – A U.S. company that is a C corporation which conducts business in a foreign country directly or through a foreign branch may claim a foreign tax credit for foreign taxes paid on income earned in the foreign country. The foreign tax credit is subject to limitation and is offset against the U.S. tax liability on the U.S. federal income tax return.
• U.S. Partnership or S Corporation – A U.S. partnership or S corporation which conducts business in a foreign country directly or through a foreign branch will pass through foreign source income and foreign taxes paid to the respective partners in the partnership or shareholders in the S corporation. The partners and shareholders may claim a foreign tax credit Continue reading »

Jurisdiction to Tax Income Earned in a Foreign Country

If a U.S. company performs a contract, provides services or does some type of work directly in a foreign country or through a branch in a foreign country, foreign tax could be imposed on the revenue earned in that country. If the United States has a tax treaty with the foreign country, the business profits earned from the U.S. company’s business activities in the foreign country generally are taxable in the foreign country only if the U.S. company has a permanent establishment which is an office, branch or fixed base in the foreign country. If the United States does not have a tax treaty with the foreign country, Continue reading »

Caution: U.S. Nonresident Tax Withholding May Apply to Payments of Certain Types of U.S. Source Income to Foreign Persons

Payments of certain types of U.S. source income to foreign persons are subject to U.S. nonresident tax withholding, which generally requires 30% gross withholding at source.  The types of U.S. source income subject to U.S. nonresident tax withholding include: interest, dividends, rents, royalties and compensation for services performed by a foreign person in the United States as a consultant or independent contractor.

The U.S. person making the payment must file Continue reading »

IRS Issues Updated F.A.Q. for 2012 Offshore Voluntary Disclosure Program

On June 26, 2012, the IRS posted updated frequently asked questions and answers regarding the extended Offshore Voluntary Disclosure Program that it announced in January 2012 (http://www.irs.gov/businesses/small/international/article/0,,id=256774,00.html). The IRS decided to extend the program indefinitely following the success of the 2011 and 2009 Offshore Voluntary Disclosure Initiatives. In its press release IR-2012-64 on June 26, 2012, the IRS announced that the programs have resulted in the collection of more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures under the 2011 and 2009 programs. Another 1,500 disclosures also have been made since the program was extended in January 2012.

The purpose of the IRS Offshore Voluntary Disclosure Program is to motivate U.S. taxpayers to come into compliance voluntarily with the U.S. international reporting requirements and to prevent offshore tax evasion. The program allows U.S. taxpayers to file delinquent forms such as the Report of Foreign Bank and Financial Accounts (“FBAR”) Form TD F 90-22.1; Form 8938 regarding specified foreign financial assets; Form 5471 regarding foreign corporations owned by U.S. persons; Form 5472 regarding 25% foreign-owned U.S. corporations; Form 8865 regarding foreign partnerships owned by U.S. persons; Forms 3520 and 3520-A regarding foreign gifts and foreign trusts; and Form 926 regarding transfers of property to foreign corporations.

The voluntary disclosure period under the 2012 program includes the most recent eight years for which the filing due date has already passed. According to FAQ #9, the eight year voluntary disclosure period does not include current years for which there has not yet been non-compliance. For example, U.S. taxpayers who submit the voluntary disclosure prior to the original or extended filing due date for the year 2011 must include the years 2003 through 2010 in the disclosure. For U.S. taxpayers who disclose after the original or extended due date for the year 2011, the disclosure must include the years 2004 through 2011.

The applicable penalty for participating in the Offshore Voluntary Disclosure Program is 27.5% of the highest aggregate balance in foreign bank accounts or value of foreign assets during the period covered by the voluntary disclosure. In some limited circumstances, a lower penalty of 12% or 5% could apply based on the requirements in FAQs #52 and #53. The incentive to participate in the Offshore Voluntary Disclosure Program is that U.S. taxpayers are able to file delinquent forms that should have been filed for prior years while avoiding criminal liability.

According to FAQ #3, the 2012 Offshore Voluntary Disclosure Program does not have a set filing deadline by which U.S. taxpayers must apply. However, the IRS could change the terms of the program at any time going forward. For example, the IRS could increase the penalties, limit access to the program for certain taxpayers or end the program altogether.

For further information, please contact your Aronson tax advisor or Alison Dougherty, International Tax Services at 301.231.6795.

Caution: The New Form 8938 to Report Specified Foreign Financial Assets May Need to Be Filed in Addition to the FBAR

The filing of the FBAR or the Form 8938 does not preclude the U.S. taxpayer from being required to file the other form. Both the FBAR (Form TD F 90-22.1) and the Form 8938 may need to be filed. A chart with the comparison of the filing requirements for the FBAR and the Form 8938 is on the IRS website at http://www.irs.gov/businesses/article/0,,id=255986,00.html.

On June 7, 2012, the IRS issued updated basic questions and answers regarding Form 8938 reporting for specified foreign financial assets. The Hiring Incentives to Restore Employment Act of 2010 (Public Law 111-147) enacted Internal Revenue Code Section 6038D which requires U.S. taxpayers to Continue reading »