Example in the technical interpretations relates to a Canadian law firm that contracts with a Canadian company to assist in a potential buyout of a U.S. company. If that lawyer spends more than 183 days (in any 12 month period) and the gross business income generated is more than 50% of the total firm’s gross active business revenues, then the law firm with have a U.S. PE.
Continuing with the law firm example, the lawyer would not meet test # 2 as long as the Canadian company did not have a PE. Where services are required to be made to resident of the United States (or to PEs of the US), careful attention to the number of days needs to be made in order to prevent PE. A U.S. based employee, who provides services to third party U.S. based customers would likely deem you have a PE (with some exceptions discussed later)
So what happens if you have U.S. employees maintaining a facility that qualifies under the treaty as exempt from PE rules? Answer: The treaty states that the facility rule is notwithstanding the provision of the “deemed PE” rules. As such, the employees in this function are not counted in the days test.
Public Law – PL 86-272 (15 U.S.C. 381), passed in 1959, provides that a state may not impose a tax on income earned by a foreign taxpayer in interstate commerce if the only business activities of the taxpayer within the state are solicitation of orders, by its own salesmen or by an independent contractor, for tangible personal property, which orders are sent outside the state for approval or rejection, and on approval, are filled by shipments or delivery from a point outside the state. From California….. Unprotected activities: Pursuant to the MTC Statement of Information Under P.L. 86-272, the following in-state activities (assuming they are not of a de minimis level) are not considered as either solicitation of orders or ancillary thereto or otherwise protected under P.L. 86-272 and will cause otherwise protected sales to lose their protection under the Public Law: (1) Making repairs or providing maintenance or service to the property sold or to be sold. (2) Collecting current or delinquent accounts, whether directly or by third parties, through assignment or otherwise. (3) Investigating credit worthiness. (4) Installation or supervision of installation at or after shipment or delivery. (5) Conducting training courses, seminars or lectures for personnel other than personnel involved only in solicitation. (6) Providing any kind of technical assistance or service including, but not limited to, engineering assistance or design service, when one of the purposes thereof is other than the facilitation of the solicitation of orders. (7) Investigating, handling, or otherwise assisting in resolving customer complaints, other than mediating direct customer complaints when the sole purpose of such mediation is to ingratiate the sales personnel with the customer. (8) Approving or accepting orders. (9) Repossessing property. (10) Securing deposits on sales. (11) Picking up or replacing damaged or returned property. (12) Hiring, training, or supervising personnel, other than personnel involved only in solicitation. (13) Using agency stock checks or any other instrument or process by which sales are made within this state by sales personnel. (14) Maintaining a sample or display room in excess of two weeks (14 days) at any one location within the state during the tax year. (15) Carrying samples for sale, exchange or distribution in any manner for consideration or other value. (16) Owning, leasing, using or maintaining any of the following facilities or property in-state: (a) repair shop; (b) parts department; (c) any kind of office other than an in-home office; (d) warehouse; (e) meeting place for directors, officers, or employees; (f) stock of goods other than samples for sales personnel or that are used entirely ancillary to solicitation; (g) telephone answering service that is publicly attributed to the company or to employees or agent(s) of the company in their representative status; (h) mobile stores, i.e., vehicles with drivers who are sales personnel making sales from the vehicles; (i) real property or fixtures to real property of any kind. (17) Consigning stock of goods or other tangible personal property to any person, including an independent contractor, for sale. (18) Maintaining, by any employee or other representative, an office or place of business of any kind (other than an in-home office located within the residence of the employee or representative that (i) is not publicly attributed to the company or to the employee or representative of the company in an employee or representative capacity, and (ii) so long as the use of such office is limited to soliciting and receiving orders from customers: for transmitting such orders outside the state for acceptance or rejection by the company; or for such other activities that are protected under P.L. 86-272 or under the MTC Statement). A telephone listing or other public listing within the state for the company or for an employee or representative of the company in such capacity or other indications through advertising or business literature that the company or its employee or representative can be contacted at a specific address within the state shall normally be determined as the company maintaining within this state an office or place of business attributable to the company or to its employee or representative in a representative capacity. However, the normal distribution and use of business cards and stationery identifying the employee's or representative's name, address, telephone and fax numbers and affiliation with the company does not, by itself, be considered as advertising or otherwise publicly attributing an office to the company or its employee or representative. (The maintenance of any office or other place of business in this state that does not strictly qualify as an “in-home” office as described above shall, by itself, cause the loss of protection under this Statement.) (19) Entering into franchising or licensing agreements; selling or otherwise disposing of franchises and licenses; or selling or otherwise transferring tangible personal property pursuant to such franchise or license by the franchisor or licensor to its franchisee or licensee within the state. (20) Shipping or delivering goods into this state by means of private vehicle, rail, water, air or other carrier, irrespective of whether a shipment or delivery fee or other charge is imposed, directly or indirectly, upon the purchaser.
Corporations Doing Business In The US
Corporations Doing Business in the United StatesAny advice is not intended or written by MacKay LLP to be used, and cannot be used by a client or any other person orentity for the purpose of (1) avoiding penalties that may be imposed on any taxpayer or (2) promoting, marketing, orrecommending to any party any matters addressed herein.
SUMMARY OF CONTENTSFederal Taxation No Taxable Presence, Through a U.S. Branch, or Through a U.S. Subsidiary CorporationState Taxation What Creates State Income Tax Nexus? 2
CANADIAN COMPANIES INVESTING THROUGH A BRANCH 3
CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH First: U.S. Domestic Law U.S. Effectively Connected Income (“ECI”) Less expenses attributable to that ECI Keep good records 35% Net basis taxation Creditable in Canada against corporate tax 5% or 30% withholding tax on repatriated cash Carry net operating losses forward 4
CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH Treaty Protection Overrides Domestic Law ECI only taxed if earned through a Permanent Establishment (“PE”) No PE means US operations may be protected from US tax Note: PE protection generally not available for: interest, dividends, rents, and royalties 5
CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH What Creates PE? Physical “Place of Business” Office in the U.S. Factory Mineral property Activities of Employees (or Other Dependent Agents) Canadian employee or agent concludes contract in the United States U.S. sales agent with U.S. address on business cards 6
CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH New “Deemed PE” Rules Test # 1 (Key-Person Services): o Any employee » present more than 183 days (during any 12 month period) and » that individual produces income that is more than 50% of the company’s gross active business revenues during that period. o Services are to unrelated parties. o Personal days count! 7
CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH New “Deemed PE” Rules (Continued) Test # 2 (Large-Project Services): o Any employee(s) or agent(s) who are » present more than 183 days (during any 12 month period), » the services are provided to unrelated residents or those who have a PE (and the services are related to that PE), and » the services are for a single or “connected project” o “Connected” means a coherent whole, commercially and geographically. o Days do not include non-working days. o Multiple employees on same day counted as one day. 8
CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH What Doesn’t Create PE? Maintaining a storage facility located in the U.S. Using independent contractors to generate sales in the U.S. Conclusion of contracts is irrelevant. 9
CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCHOperating Without a PE No office in the United States Limited scope for any dependent agents in the United States File Treaty Based Return US corporate tax return for foreign corporations Relays taxpayer information and notifies IRS of reliance on Treaty What does it achieve? Only pay Canadian tax on business income and not US tax Treat return should: protects the right to claim deductions if the IRS says you have a PE Treat return starts statute of limitations 10
CANADIAN COMPANIES OPERATING THROUGH A U.S. ENTITY 11
CANADIAN COMPANIES OPERATING THROUGH A U.S. ENTITY Various U.S. Domestic Entities S-Corporation LLCs Partnerships / Limited Partnerships C-Corporations 12
CANADIAN COMPANIES OPERATING THROUGH A U.S. ENTITY Partnerships Canadian corporate partners may have a branch in the United States Required to file corporate income tax return Canadian individual partners may have US effectively connected income Required to file individual income tax return Individual partners pay tax at equal to higher of Canadian and US marginal personal tax rates 13
STATE NEXUS ISSUES What is Nexus or “Doing Business”? Definition of nexus varies by state Visits, equipment, offices in a state can cause nexus in that state Treaty Protection Usually unavailable at the state or local level Public Law 86-272 Can protect taxpayer with minimal state presence from paying state income tax 15
STATE NEXUS ISSUES PL 86-272 Does Not Protect Use of facilities for storage, display or delivery of goods Maintenance of stock Maintenance of stock for processing by another Purchase of goods Collection of information Advertising, supply of information or similar activities that are preparatory or auxiliary character 16
OTHER STATE TAXESPL 86-272 also does not apply to: Franchise Taxes Alternative to income tax Based on factors other than net income Gross Receipts Gross Profit Capital Stock Tax Sales and Use Tax 17
Kevin Duxbury, CA David Turchen, CA, CPA (PA)Senior Manager, U.S. Tax Manager, U.S. Tax1100 – 1177 West Hastings St 1100 – 1177 West Hastings StVancouver, BC V6E 4T5 Vancouver, BC V6E 4T5604-697-5260 email@example.com firstname.lastname@example.org 19