We Serve Foreign-Owned Businesses

June 26, 2023

If I have a foreign entity, what US tax reports do I need to file?

1. Understanding US Tax Jurisdiction

1.1 The concept of US tax jurisdiction 

Tax jurisdictions are taxation authorities tasked with imposing taxes on transactions, and they are recognized by a “tax jurisdiction code” that provides the location where the transaction is to be taxed. The tax jurisdiction code is not only a key component of the tax code but also one of the parameters determining the tax rate. ¹

This table illustrates the US income tax on income earned within and outside of the country

Source: Federal International Taxation (2023)

1.2 The difference between US citizens, green card holders, and foreign nationals in tax liability

A US tax resident’s worldwide income is taxed. The US Citizen, Legal Permanent Resident, and foreign national who meets the substantial presence test who are subject to income tax for worldwide earnings^. 4.

1.3 Determining tax residency status

Non-U.S. citizens who are not (residents) of America are considered as nonresidents for tax purposes unless they meet one of two criteria. In terms of tax purposes, you are deemed to be a tax resident of the United States of America if you either meet the green card test or substantial presence test.

2. Foreign Income and Information Reporting

2.1 Overview of income reporting for foreign entities

An income tax return for a “U.S. corporate income tax” must be filed by every foreign corporation that operates in the United States.. A foreign company that is involved in a business or commerce of a US nature during any period of the year is required by law to file Form 1120-F ¹². There is a federal law requiring American citizens and foreign residents to file a report of their income worldwide, and this contain income that comes from international banks, trusts and other financial institutions.¹³ Those Americans who work for foreign governments or international organizations in the United States must file a Form 1040 to report the compensation on their taxes as wages, as well as pay self-employment tax ¹⁴.

2.2 Importance of Foreign Bank Account Reporting (FBAR) and Form 8938

Considering that U.S. taxpayers have the responsibility to report and pay taxes on all their worldwide income, it has been a fight for the U.S. government to force taxpayers to disclose offshore bank accounts to the government. The Foreign Bank Account Reporting (FBAR) and Form 8938 are two of the most important forms you will need to file with the IRS when dealing with foreign assets and/or foreign accounts. (If you have questions on each form, please seek an expert). FBAR forms must be filed by U.S. persons that have financial interests or signature authority over foreign financial accounts. Form 8938 must be filed if the total value of your foreign financial assets is above the relevant threshold values. 

Source: Policy Center, 2023

TAX PLANNING   

In addition to the IRS regulations regarding the reporting of foreign income, effective tax planners will need to evaluate which type of business entity is ideal for their particular company and industry.

If a company is looking to eventually go public with an IPO, a C-Corporation is ideal. This is because capital can easily be raised with a share issuance, and ownership can be transferred quickly via a share transfer. 

C Corporations do come with double taxation, however this has not been as big of a drawback in recent years. This is due to the corporate tax rate being reduced to 21%. Tax planners can now evaluate whether the tradeoff between keeping profits in a C Corporation is worth more than having a pass through entity with profits ending up on the owner’s personal tax return. 

C Corporations file form 1120 with the IRS.

LLCs, Partnerships, and S Corporations are also available as business types. LLCs are unique as their tax status can be changed through filing the proper election forms with the IRS. 

S Corporations are pass through entities, and have the advantage of reducing an owner’s self-employment tax liability. This is in contrast to a sole proprietorship, where an owner will owe self-employment tax on all income received. 

As you can see, effective tax planners have many tools to work with. In combination with understanding US Tax jurisdiction and the treatment of foreign income, choosing the proper business entity is vital. 

References

 (1) SAP Help Portal. (2023). Tax Jurisdiction Code. Retrieved June 9, 2023, from https://help.sap.com/docs/SAP_ERP_SPV/3318ebc75ddc4d2994ca75b5fe521f24/44bed153e8b34208e10000000a174cb4.html?version=6.18.06.

(2) Chapter 4 Federal International Taxation – Franchise Tax Board. https://www.ftb.ca.gov/tax-pros/procedures/waters-edge-manual/chapter-4.pdf. Accessed 6/9/2023.

(3) Green Card vs Citizenship | Key Differences & Benefits. (2020, 14. April). Ask Ellis. https://askellis.com/green-card-vs-citizenship-difference/

(4) Are Green Card Holders Taxed on Worldwide Income (New). https://www.goldinglawyers.com/green-card-holder-foreign-income-2018-u-s-tax-fatca-fbar/ Accessed 6/9/2023.

(5) Determining an Individual’s Tax Residency Status | Internal Revenue Service. (n.d.). Retrieved June 9, 2023, from https://www.irs.gov/individuals/international-taxpayers/determining-an-individuals-tax-residency-status

(6) Classifying business entities under the check-the-box regulations. (2020, 1. May). The Tax Adviser. https://www.thetaxadviser.com/issues/2020/may/classifying-business-entities-check-box-regulations.html

(7)Compare Tax Considerations by Business Type. (2023). Retrieved from https://www.wolterskluwer.com/en/expert-insights/compare-tax-considerations-by-business-type

(8) FBR (2023). Retrieved from https://download1.fbr.gov.pk/Docs/20132191124740675FBR-GIZFAQTaxTreaties.pdf

(9) BRIAN J. ARNOLD (2015). An introduction to tax treaties . https://www.un.org/esa/ffd/wp-content/uploads/2015/10/TT_Introduction_Eng.pdf Accessed 6/10/2023.

(10) INTRODUCTION TO TAX TREATIES . Retrieved from https://www.tax.com and.com/wp-content/uploads/2019/07/1.-Introduction-to-tax-treaties-2019.pdf.Accessed 6/10/2023.

(11) Taxation of Services under Tax Treaties . https://www.un.org/esa/ffd/wp-content/uploads/2013/01/20130130_Presentation_LottKana.pdf Accessed 6/10/2023.

(12) U.S. Income Tax Reporting Requirements for Foreign Businesses. https://www.gamburgcpa.com/blog/us-income-tax-reporting-requirements/ Accessed 6/10/2023.

(13) Reporting foreign income and filing a tax return when living abroad …. https://www.irs.gov/newsroom/reporting-foreign-income-and-filing-a-tax-return-when-living-abroad Accessed 6/10/2023.

(14) Employees of a Foreign Government or International Organization – How …. https://www.irs.gov/individuals/international-taxpayers/employees-of-a-foreign-government-or-international-organization-how-to-report-compensation Accessed 6/10/2023.

(15)Reporting Foreign Accounts on the FBAR versus Form 8938. https://www.cpajournal.com/2020/09/01/reporting-foreign-accounts-on-the-fbar-versus-form-8938/ Accessed 6/10/2023.

(16) How to report foreign bank and financial accounts. https://www.irs.gov/newsroom/how-to-report-foreign-bank-and-financial-accounts Accessed 6/10/2023.

 (17) How to Report Foreign Earned Income on your US Tax Return – CompareRemit. https://www.compareremit.com/money-transfer-tips/reporting-foreign-income-on-us-tax-return/ Accessed 6/10/2023.

(18) How To Avoid the Consequences of Noncompliance in Business. https://www.diligent.com/insights/grc/consequences-of-noncompliance/ Accessed 6/10/2023.

(19) Penalties for Non-compliance | United States | Global Data Privacy …. https://resourcehub.bakermckenzie.com/en/resources/data-privacy-security/north-america/united-states/topics/penalties-for-non-compliance Accessed 6/10/2023.

(20) Penalties for non-compliance – What penalties are most effective when …. https://regulationbodyofknowledge.org/faq/price-level-and-tariff-design/penalties-for-non-compliance-what-penalties-are-most-effective-when-the-operator-is-in-non-compliance-with-regulatory-rules-e-g-for-providing-data-setting-prices-or-meeting-targets/ Accessed 6/10/2023.

(21) Transfer Pricing (Meaning, Examples)| Objectives & Purpose – WallStreetMojo. https://www.wallstreetmojo.com/transfer-pricing/ Accessed 6/10/2023.

(22) How Does Transfer Pricing Affect Managerial Accounting? – Investopedia. https://www.investopedia.com/ask/answers/061615/how-does-transfer-pricing-affect-managerial-accounting.asp Accessed 6/10/2023.

(23) International Money Transfer Limits | MoneyTransfers.com. https://moneytransfers.com/sending-money/international-money-transfer-limit-irs Accessed 6/10/2023.

(24) International wire regulations: The IRS, limits, laws & your rights. https://wise.com/us/blog/international-wire-transfer-regulations Accessed 6/10/2023.

(25) Managing intercompany transactions – Business Central. https://learn.microsoft.com/en-us/dynamics365/business-central/intercompany-manage Accessed 6/10/2023.

(26) Advance Pricing Agreement (APA) – Application Procedure – IndiaFilings. https://www.indiafilings.com/learn/advance-pricing-agreement/ Accessed 6/10/2023.

(27) Transfer pricing | Advance Pricing Agreements – Deloitte US. https://www2.deloitte.com/ro/en/pages/tax/solutions/advance-pricing-agreements.html Accessed 6/10/2023.

(28) Advance Pricing Agreement (APA) – Revenue. https://www.revenue.ie/en/companies-and-charities/international-tax/transfer-pricing/advance-pricing-agreement-apa.aspx Accessed 6/10/2023.

(29) Tax Cuts and Jobs Act: A comparison for businesses. https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-businesses Accessed 6/10/2023.

 (30) Preliminary Details and Analysis of the Tax Cuts and Jobs Act. https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/ Accessed 6/10/2023.

(31) United States – Taxation of cross-border M&A – KPMG Global. https://kpmg.com/xx/en/home/insights/2021/03/united-states-taxation-of-cross-border-mergers-and-acquisitions.html Accessed 6/11/2023.

(32) An Overview of Tax Implications for Foreign-Owned Businesses in the U.S …. https://bench.co/blog/tax-tips/tax-implications-foreign-owned-business-us/ Accessed 6/11/2023.

(33) How to Calculate GILTI Tax on Foreign Earnings | Bloomberg Tax. https://pro.bloombergtax.com/brief/how-to-calculate-gilti-tax-on-foreign-earnings/ Accessed 6/11/2023.

(34) Global Intangible Low-Taxed Income (GILTI): How Calculation Works. https://www.investopedia.com/global-intangible-low-taxed-income-gilti-definition-5097113 Accessed 6/11/2023.

(35) Ephraim Moss (2017). U.S. TAX CLASSIFICATION OF A FOREIGN BUSINESS ENTITY. Retrieved June 11, 2023, from https://expattaxprofessionals.com/blog/article/us-tax-classification-business-entity

(36) Transfer pricing. Grant Thornton LLP Canada. Retrieved June 11, 2023, from https://www.grantthornton.ca/service/tax/transfer-pricing/

(37) Policy Center. Analysis of the Tax Cuts and Jobs Act. Tax .Retrieved June 11, 2023, from https://www.taxpolicycenter.org/feature/analysis-tax-cuts-and-jobs-act