To Receive CPE Credit

Transcription

1 Cross-Border Tax Issues Involving Foreign Construction Projects June 13, 2013 Tom Miller Partner Greg Cislak Director Chris Clifton Senior Managing Consultant To Receive CPE Credit Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group o Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address o All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar o Answer polls when they are provided If all eligibility requirements are met, each participant will be ed a CPE certificate within 15 business days of live webinar 2 1

2 Cross-Border Tax Issues Involving Foreign Construction Projects June 13, 2013 Tom Miller Partner Greg Cislak Director Chris Clifton Senior Managing Consultant Topics Covered Permanent Establishment (PE) o Construction o Architecture & Engineering (A&E) o Real Estate Withholding Tax Other Taxes Foreign Tax Credit Expatriate Tax Issues IC-DISC 4 2

3 Permanent Establishment U.S. company may be subject to foreign country s income tax if the company has sufficient presence in the foreign country Taxable presence is determined under local country law, typically involving low threshold of activity needed to create taxable presence Income tax treaty may override foreign laws, providing for higher threshold of activity needed before company creates permanent establishment in a foreign country 5 Permanent Establishment Term permanent establishment is generally defined in most U.S. treaties as a fixed place of business in a country through which the business of nonresident is wholly or partly carried on If U.S. company s activities within foreign country rise to the level of PE in that country, it will be subject to income tax in that country on its business profits attributable to the PE 6 3

4 Permanent Establishment The U.S. has income tax treaties with its North American neighbors, Canada & Mexico, & with many countries in Europe & Asia, including China The U.S. does not have many treaties with Central or South American or Middle Eastern countries The U.S. does not have an income tax treaty with Brazil 7 Permanent Establishment Brazil The concept of PE in Brazil only applies when there is physical allocation of resources (material &/or labor) to explore a commercial activity within Brazilian borders Frequent travels to present, discuss & overview, as well as follow-up services provided & executed abroad, do not trigger PE Use of Brazil subsidiary can mitigate exposure to PE risk 8 4

5 Permanent Establishment Construction Most U.S. treaties provide that building site or construction or installation project constitutes PE if, but only if, it lasts more than certain amount of time, usually 12 months, hereafter referred to as minimum duration test or period U.S.-Canada treaty provides for a 12-month minimum duration period for building, construction & installation projects, while U.S.-China treaty contains a 6-month minimum duration period 9 Permanent Establishment Construction Minimum duration test applies separately to each site or project. A series of contracts or projects by a contractor that are interdependent both commercially & geographically are treated as single project Minimum duration period can overlap more than one of U.S. company s accounting periods If site or project exceeds minimum duration period, it constitutes PE from first day of activity 10 5

6 Permanent Establishment Construction Minimum duration period begins when work, including preparatory work, physically begins in foreign country & generally continues until work is completed or permanently abandoned Minimum duration period does not cease with seasonal or other temporary interruptions or discontinuance of work 11 Permanent Establishment Construction Time spent by subcontractor at a site is counted as time spent by general contractor at the site for purposes of determining if general contractor has PE Subcontractor has PE only if subcontractor s activities at the site last for more than minimum duration period 12 6

7 Permanent Establishment A&E A few treaties, including U.S.-Canada & U.S.-China treaties, include the concept of service PE where enterprise is treated as having PE if services performed in foreign country through employees or other personnel exceed a certain period of time, typically 183 days or 6 months in any 12-month period Construction PE provision supersedes service PE provision for construction companies 13 Permanent Establishment Real Estate Real estate management activities may constitute PE in foreign country if company has a place of management within the foreign country or if its service activity exceeds the service PE threshold, where applicable Ownership of rental real estate in foreign country generally does not, by itself, constitute PE under the PE treaty article Most treaties & local country law provide that a country may tax nonresident on gains from the sale of real estate located within that country 14 7

8 Permanent Establishment Real Estate Most treaties & local country law also allow a country to tax nonresident on gross income from real property located within the country where income is not connected to PE, such as rental real estate income Therefore, many treaties &/or local country tax law provide an election to treat income from real property as though the income was attributable to PE for the purpose of being taxed on a net basis, with deductions allowed against gross income 15 Withholding Tax Foreign countries will commonly require tax to be withheld at source on gross income earned by nonresident from activities performed within foreign country & from income from real property Where company does not have PE in foreign country under a treaty, it will typically have an opportunity to exempt the income from withholding tax at source or to apply for refund of tax withheld 16 8

9 Brazilian Withholding Tax Brazilian withholding income tax (WIT) is imposed on all service fee payments made by Brazilian payor to nonresident beneficiary at 15% rate, regardless of the nature of service WIT is not refundable or recoverable in Brazil note no treaty between the U.S. & Brazil All payments of services to nonresident beneficiaries are considered to be services imported 17 Canadian Withholding Tax Canada requires recipients of services, both resident & nonresident, to withhold tax at 15% rate on gross payments to nonresidents for services performed within Canada under Regulation 105 U.S. general contractor is responsible for withholding 15% Canadian tax from payments made to non-canadian subcontractors for services performed within Canada 18 9

10 Canadian Withholding Tax Where U.S. company does not have PE in Canada, U.S. company must obtain a waiver from Canada Revenue Agency under the treaty in advance of receiving payments to avoid 15% withholding tax If a waiver is not timely obtained, U.S. company can apply for refund of withholding tax by filing Canadian tax return & disclosing its treaty position of not having PE in Canada 19 Chinese Withholding Tax China imposes 10% Enterprise Income Tax withholding on outbound payments for services provided within China Many tax officials in China may not give appropriate consideration to PE provisions under U.S.-China treaty. Thus, U.S. companies receiving payments for services provided in China may find it difficult to secure exemption from Chinese Enterprise Income Tax when service activities do not constitute service PE under the treaty 20 10

11 Other Taxes Other taxes besides income taxes, such as value added taxes (VAT), should also be considered Canada imposes Goods & Services Tax (GST) or Harmonized Sales Tax (HST) in certain provinces Brazil imposes a variety of import taxes on company importing services from nonresident service provider. The total of these import taxes is 24.25% 21 Other Taxes China requires foreign service provider to pay business tax, generally 5%, regardless of whether services are performed in China China is implementing a VAT pilot program to eventually replace business tax regime. Pilot program launched in January 2012, operates in five cities (Beijing, Shanghai, Shenzhen, Tianjin & Xiamen) & six provinces (Anhui, Fujian, Guangdong, Hubei, Jiangsu & Zhejiang) 22 11

12 Foreign Tax Credit If U.S. company is subject to foreign income tax, it (or its owners if the company is an S corporation or partnership) can generally claim foreign tax credit against its U.S. income tax liability Foreign tax credit is limited to the lesser of (1) foreign income tax paid or accrued or (2) U.S. tax on foreign source income calculated under the following formula: Foreign source taxable income Pre-credit U.S. tax = Foreign tax credit limitation Total taxable income 23 Foreign Tax Credit Any foreign income tax that is refundable from foreign government (e.g., pursuant to a treaty, tax was over-withheld, etc.) is not eligible for foreign tax credit on U.S. tax return, even if U.S. taxpayer does not seek refund For example, U.S. company that does not have PE in Canada cannot take foreign tax credit on its U.S. return for the 15% Canadian Reg. 105 withholding tax in lieu of filing Canadian tax return to request refund of withholding tax 24 12

13 Foreign Tax Credit To claim foreign tax credit, U.S. company must have foreign source income Income from performance of services is sourced to where U.S. company performed the services Therefore, income from services performed within the U.S. is generally U.S. source income, while income from services performed outside the U.S. is generally foreign source income 25 Foreign Tax Credit Product sales are sourced to where product is sold (i.e., where title transfers) &/or where taxpayer manufactured the product, if applicable Rental real estate income & gains from the sale of real property are sourced based on where real property is located Deductions must be allocated & apportioned against taxpayer s foreign source gross income in determining foreign source taxable income 26 13

14 Foreign Tax Credit Because construction companies are paid for both material & labor, it is not always clear to what extent construction income should be considered to arise from services as opposed to sale of product Generally, income derived from performance of integrated transaction, such as construction project, is classified in accordance with predominant character of the transaction, even though incidental part of income could be characterized as different class of income 27 Expatriate Tax A&E, construction companies & real estate management firms need to consider the application of foreign income & social taxes on any employees who perform services in foreign country Income tax treaties will typically exempt nonresident individuals from income taxation where the individual s presence in foreign country does not exceed certain period of time, typically 183 days, & compensation is not born by company having PE in the other country 28 14

15 Expatriate Tax Canada imposes withholding requirement on compensation paid to nonresident employees for services performed within Canada To avoid Canadian payroll tax withholding, employee must obtain a waiver from Canada Revenue Agency under the treaty in advance of receiving compensation payments The U.S. also has social security agreements with many countries that can prevent employees from being subject to duplicate social taxes 29 U.S. Taxation of Expatriates Taxed on worldwide income File Form 1040 Tax breaks for expatriates Foreign tax credit Foreign earned income & housing exclusion Treaty relief 30 15

16 EAS Tax Planning Assignment cost projections Tax-efficient compensation Short-term vs. long-term assignments Treaty planning Foreign earned income exclusion $97,600 in 2013 Foreign housing exclusion $13,664 in 2013 Larger in high-cost cities 31 Interest Charge DISC IC-DISC is an export incentive that closely held A&E services firms may want to consider A&E services for projects located outside the U.S. are generally qualified export receipts for purposes of IC-DISC export regime In most cases, IC-DISC can provide permanent 15.8% tax savings for qualifying U.S. exporters 32 16

17 Tom Miller Partner Greg Cislak Director Chris Clifton Senior Managing Consultant Continuing Professional Education (CPE) Credits BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars

18 CPE Credit Up to 1 CPE credit will be awarded upon verification of participant attendance; however, credits may vary depending on state guidelines For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at training@bkd.com 35 18