A General Practitioner s Experience with International Taxation Forms, Forms, Forms

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1 A General Practitioner s Experience with International Taxation Forms, Forms, Forms Vance Maultsby, CPA Huselton, Morgan & Maultsby, PC August 4, Introduction Nancy s voic . Huh? My first response to a novel foreign tax question is to call Ben Vesely at BDO. Well, maybe it s not a crazy idea. Possibly a brief overview of foreign tax provisions in the Internal Revenue Code Control F Foreign appeared 6,489 times (including titles and legislative history). Looked like about ½ appearances in current code. 3,245 X 1 minute each about 54 hours. A bit longer than my 50 minute allotted time. Back to the drawing board. The conversation with an attorney It s all about the forms! 2 Introduction, continued We ll begin with a very brief overview of U.S. income taxation of international transactions, international arrangements and foreign persons. We ll review quickly an exhaustive and exhausting list of IRS forms dealing with international taxation. Keep it for your reference. We ll touch on the matter that the plurality of these forms address. We ll conduct a quick unscientific survey which of these forms do we, as a group of CPAs, work with the most? I ll refer you to a couple of relatively inexpensive international taxation resources that are very helpful. 3 1

2 U.S. International Income Taxation U.S. persons (primarily citizens, permanent residents, and domestic corporations) are taxed on their worldwide income. Certain income may be excluded. For example, within limitations, foreign earned income and foreign housing allowances may be excluded from taxation. The. U.S. allows a credit against U.S. income tax for foreign income taxes paid by U.S persons. 4 The U.S. taxes non resident persons (primarily nonresident aliens and foreign corporations) on two different kinds of income separately and differently. Generally taxed same as U.S. persons on all income that is effectively connected with the conduct of a trade or business in the United States ( ECTI ). If a non U.S. person has U.S. income that is not ECTI (i.e., investment types of income such as fixed, determinable, annual or periodical ( FDAP ) sources), such income will generally be taxed at a flat 30 percent rate, absent a lower treaty rate. Absent an exception, the tax is withheld by the payer the withholding agent who is liable for the tax if not withheld and paid to the IRS. Who can be a withholding agent? Just about anyone! 5 Tax Treaties The U.S. has negotiated about 50 bilateral income tax treaties with other countries in order to avoid double taxation, to expedite settlement of international tax disputes, and to prevent taxpayers from evading taxes. Tax treaties between the U.S. and foreign countries generally reduce tax rates or exempt certain types of income from taxation. 6 2

3 Many other topics are addressed by U.S. international taxation law. Just a few examples include: Branch taxes Controlled foreign corporations Foreign personal holding companies Passive foreign investment corporations IC DISCS U.S Residents of U.S. Possessions International property transfers, including transfer pricing Corporate inversions Check the box regulations Foreign estate and gift taxes Sourcing income, expenses, gains and losses 7 International Tax Forms I have identified 56 IRS international tax forms. I also included FinCEN 114 (FBAR) in the list. I have also included some stand alone instructions that might be needed. A quick trot through the forms. See Exhibit 1. 8 Withholding Forms About 40% of the items on my list are directly related to withholding by the IRS or by a foreign government. Chapter 3 withholding addresses withholding of tax on nonresident aliens and foreign corporations. Section 1441 withholding of tax on nonresident aliens Section 1442 withholding of tax on foreign corporations Section 1443 foreign tax exempt organizations Section 1444 withholding on Virgin Islands source income Section 1445 withholding of tax on dispositions of U.S. real property interests Section 1446 withholding on foreign partner s share of effectively connected income. 9 3

4 Withholding Forms, cont. Chapter 4 withholding dictates withholding under the Foreign Tax Compliance Act ( FATCA ). FATCA is designed to flush out U.S. taxpayers that do not report to the IRS and other arms of government offshore taxable income and financial assets. Scientifically speaking, Section 1471 and Section 1472 put the squeeze on offshore financial institutions by exacting huge withholding on foreign institutions that don t cooperate with the Feds. Section 1471 FATCA withholding on foreign financial institutions Section 1472 FATCA withholding on foreign non financial entities FATCA also spawned Form Which Forms Do You Deal With the Most? W 8 Series Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation Form 1040 Schedule B, Part III Foreign Assets and Accounts Form 1040NR U.S. Nonresident Alien Income Tax Return Form 1042 series U.S. Source Income Withholding Form 1116 Foreign Tax Credit (Individual, Estate, or Trust) Form 8938 Statement of Specified Foreign Financial Assets FBAR Report of Foreign Bank and Financial Accounts 11 Where to Get Help Two cheap and easy sources of information about AICPA Tax Section Foreign National Tax Resources IRS.gov Absolutely free, sort of. See, for example, taxmap.ntis.gov/taxmap/internationalindex.htm See, for example, taxpayers See, for example, businesses 12 4

5 Contact Information Any additions to the list? I ll post this presentation, including the forms list, to our firm s website and update it with suggestions and future developments. I will also be posting to the website my updated paper on Form 8938 and the FBAR. Vance K. Maultsby, Jr. vmaultsby@hmpc.com My blog find it at our website