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CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
CPLD: Cross Border Tax Considerations
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CPLD: Cross Border Tax Considerations

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Business into the United States – how tax issues drive business decision. Slides from Mark Mitchell of GMM Delaware LLC presented on 21st April at the Vancouver Club.

Business into the United States – how tax issues drive business decision. Slides from Mark Mitchell of GMM Delaware LLC presented on 21st April at the Vancouver Club.

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  • 1. Business across the Border Tax Considerations Mark Mitchell, Enrolled Agent, MBA, MST GMM Delaware LLC US and International Tax Services
  • 2. ANY TAX ADVICE IN THIS PRESENTATION IS NOT INTENDED OR WRITTEN BY GMM DELAWARE LLC TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. © GMM Delaware LLC 2010. All rights Reserved. GMM Delaware LLC US and International Tax Services
  • 3. How do you do business now?  Sole proprietorship  Corporation – Regular corporation – CCPC (Canadian controlled private corporation)  Partnership  Trust GMM Delaware LLC US and International Tax Services
  • 4. What drives the current form of your business?  Limited liability  Complexity/simplicity  Customer expectations  Succession planning  Who you are in business with  Tax issues GMM Delaware LLC US and International Tax Services
  • 5. First rule of cross-border business  Don’t let tax drive your business structure!  Otherwise known as “don’t let the tax tail wag the dog” GMM Delaware LLC US and International Tax Services
  • 6. Forms of doing business in the United States  Sole proprietorship  Corporation  Partnership  Limited Liability Company  Trust GMM Delaware LLC US and International Tax Services
  • 7. Comparative maximum tax rates Canada/BC Federal/WA Federal/CA Sole Proprietorship 43% 35% 40% Corporation 28% 34% 39% Branch profits tax or +5% +5% dividend withholding tax Partnership No tax No tax No tax GMM Delaware LLC US and International Tax Services
  • 8. Second rule of cross-border business  Determine whether you are doing business IN the United States or doing business WITH the United States GMM Delaware LLC US and International Tax Services
  • 9. Are you doing business IN the United States?  Probably not doing business IN the United States if ONLY activity is: – Providing services to U.S. customers from Canada – Making investments from outside the United States – NOTE: selling widgets to U.S. customers from Canada could be doing business! GMM Delaware LLC US and International Tax Services
  • 10. What is “doing business”?  Low threshold  “Any personal service performed in the United States or any other activity within the United States that is regular, substantial, and continuous enough to constitute the conduct of a trade or business in the United States” GMM Delaware LLC US and International Tax Services
  • 11. What is “U.S. source income”?  Provision of services in the United States  Rents from U.S. property  Sale of inventory inside the United States  Ignoring investment income for now  Certain other income “effectively connected” GMM Delaware LLC US and International Tax Services
  • 12. Are you doing business IN the United States?  Are your activities sufficient to be a business?  Are your activities giving rise to U.S. source income? GMM Delaware LLC US and International Tax Services
  • 13. Third rule of cross-border business  Don’t let attempting to avoid a U.S. business drive your decisions  Think about the future, not just the present – marketing, expanding customer base, servicing your customers GMM Delaware LLC US and International Tax Services
  • 14. What is a permanent establishment?  Simple rule – No permanent establishment = no federal tax  Only it’s not so simple – Different rules for state taxes GMM Delaware LLC US and International Tax Services
  • 15. Two tests of permanent establishment  Fixed place of business – Office, branch, factory, workshop, construction site – Note that a reserved space at a customer’s office can be a fixed place of business  Dependent agent – Someone who has the authority to negotiate contracts – Who exercises that authority – Who is not independent – say an employee GMM Delaware LLC US and International Tax Services
  • 16. Forth rule of cross-border business  If you believe that you have no U.S. permanent establishment, make sure you file a treaty-based return – $10,000 penalty for failure to comply – No statute of limitations – the IRS can chase you for all back years – May be taxed on gross income  Make sure you review your position each year – Is paying U.S. tax such a bad thing? – Depends on what Canadian tax you’re paying, and what additional tax cost there would be to your business GMM Delaware LLC US and International Tax Services
  • 17. So you’re in the U.S. tax net!  Don’t panic yet  Need to determine what is the optimal structure – Minimize overall tax – Maximize utilization of losses – Keep things simple – Allow flexibility for the future GMM Delaware LLC US and International Tax Services
  • 18. 1. Branch Canadian taxpayer operates directly in the United States  Subject to same federal tax on U.S operations as U.S. person Canadian Canadian  U.S. tax paid will reduce Canadian Corp Individual tax dollar for dollar (up to amount of Canadian tax)  Losses from U.S. operations can be used in Canada US US  Can be difficult to determine Branch Branch profits/losses of branch, especially for deductions such as interest  Liability and other business issues GMM Delaware LLC US and International Tax Services
  • 19. 2. Subsidiary Canadian taxpayer incorporates U.S. subsidiary  Taxed as U.S. person  U.S. tax paid do not reduce Canadian Canadian Canadian tax – but see later Corp Individual  Losses from U.S. operations cannot be used in Canada  May be easier to determine income and expenses of separate US US legal entry Corp Corp  Limited liability and other business issues GMM Delaware LLC US and International Tax Services
  • 20. Branch versus subsidiary Branch Subsidiary Subject to same federal tax on U.S Taxed as U.S. person operations as U.S. person U.S. tax paid will reduce Canadian tax U.S. tax paid do not reduce Canadian tax dollar for dollar (up to amount of – but see later Canadian tax) Losses from U.S. operations can be used Losses from U.S. operations cannot be in Canada used in Canada Can be difficult to determine May be easier to determine income and profits/losses of branch, especially for expenses of separate legal entry deductions such as interest Liability and other business issues Limited liability and other business issues GMM Delaware LLC US and International Tax Services
  • 21. A couple of notes to remember  What’s an s-corporation? – “Like” a partnership for U.S. tax purposes – No entity level federal tax – Cannot be used by foreign shareholders  What’s an LLC? – Generally taxed as a partnership or “branch” for U.S. tax purposes – No entity level tax – Problems with Canadian tax GMM Delaware LLC US and International Tax Services
  • 22. Fifth rule of cross-border business  Don’t forget the tax on repatriation of profits! – US withholding tax or branch profits tax – 5%-15% – Canadian tax on foreign income – 0%-43% – If you’re leaving cash in the business, may be less of a concern GMM Delaware LLC US and International Tax Services
  • 23. Tax on repatriation to Canadian corporation  If using a branch structure, no tax on first C$500k, thereafter 5%  If using a U.S. corporation, 5% withholding, provided that Canadian corporation owns 10% of voting stock of U.S. corporation  Otherwise 15%  If U.S. corporation has “active business”, no Canadian tax on repatriated earnings (dividends)  If U.S. branch, likely no Canadian tax due to foreign tax credit GMM Delaware LLC US and International Tax Services
  • 24. Overall comparative maximum tax rates Canada/BC Federal/WA Federal/CA Sole Proprietorship 43% 35% 40% U.S. Corporation 28.5% 34% 39% Canadian corporation: Branch profits tax or +5% +5% dividend withholding tax Individual Canadian +14.5% +28% +26% investor GMM Delaware LLC US and International Tax Services
  • 25. Note on tax rates  United States has a lower rate for corporations with “small profits” – 15% to $50,000 – 25% on next $25,000 – 34% up to $10,000,000 – Benefit of lower rates is withdrawn  For individuals, maximum tax rates reached at significantly higher income than in Canada – 10%/15%/25%/28% to $104,625 – 33% to $186,825 – Add 0% to 9% for state income tax GMM Delaware LLC US and International Tax Services
  • 26. Sixth rule of cross-border business  Don’t forget about state tax – Each state has its own tax laws and collects its own taxes – Localities within states have their own rules and may collect their own taxes – No “harmonization” of state taxes – apart from multi-state tax compact rules GMM Delaware LLC US and International Tax Services
  • 27. State (and local) taxes  Income taxes  Franchise taxes (what’s that?)  Capital taxes  Turnover taxes  Sales taxes  Use taxes  Property taxes  Excise taxes  …..and so it goes on! GMM Delaware LLC US and International Tax Services
  • 28. Income and Franchise Taxes  Based on taxable income – Modified form of federal taxable income – Tax deductible for federal income tax purposes  Based on “apportioned income”, not on determination of profits realized in a state  Need to have “nexus” to be subject to state income tax  If using a branch or permanent establishment, foreign tax credit in Canada GMM Delaware LLC US and International Tax Services
  • 29. What is “nexus”?  “Minimum” connection with a state  Not the same as “permanent establishment”  Specific rules for income tax – Public Law 86-272 – solicitation rules  Case law applies for sales taxes – States are becoming very aggressive in this area  Can you avoid nexus? GMM Delaware LLC US and International Tax Services
  • 30. Sales and use taxes  Sales tax “similar” to provincial sales tax  Tax on end-user – not value-added tax  Sales tax is NOT a taxpayer’s liability – should be added to price and collected from customer  Exemption certificates are used to avoid application to businesses  Use tax is “self assessment” of tax where items brought into a state and used in business rather than being sold GMM Delaware LLC US and International Tax Services
  • 31. Turnover taxes  Washington Business and Occupation Tax  Hawaii General Excise Tax  Taxes based on gross income  Far wider application than sales taxes, but generally significantly lower rate  Since not income tax, no protection for “solicitation activities”  No foreign tax credit for Canadian tax purposes GMM Delaware LLC US and International Tax Services
  • 32. The rules again… 1. Don’t let tax drive your business structure! 2. Determine whether you are doing business IN the United States or doing business WITH the United States 3. Don’t try too hard to avoid having a U.S. business 4. If you believe that you have no U.S. permanent establishment, make sure you file a treaty-based return 5. Don’t forget the tax on repatriation of profits! 6. Don’t forget about state tax GMM Delaware LLC US and International Tax Services
  • 33. And finally... if you are working in the USA As an employee – Earning over $10,000 in a year from U.S. activities? – Costs of your employment paid by a U.S. company or branch? – Spending significant amounts of time in any State? As a sole practitioner – Do you have a U.S. permanent establishment? – Do you have nexus in any state? GMM Delaware LLC US and International Tax Services
  • 34. Contact details Mark Mitchell GMM Delaware LLC 303-1860 Robson Street, Vancouver BC V6G 3C1 Tel. 604-562-0733 Fax. 604-357-1172 Email markmitchell@gmmdelaware.com GMM Delaware LLC US and International Tax Services

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