Reducing U.S. Taxes for Outbound Business Operations
There are several techniques that are available at a tax professional’s disposal, and we will only be able to scratch the surface of what is available out there.
Utilization of Offshore Losses.
One primary technique surrounds the utilization of unrealized losses or ongoing losses incurred by a business to offset U.S. taxable income.
In planning for cross-border operations, one important focus is the ability to obtain a deduction in the United States for built-in losses offshore and loss operations conducted in foreign countries.
Because the U.S. imposes tax on worldwide income of a U.S. corporation, structuring foreign loss operations as a branch of a U.S. corporation or a flow-through entity owned by a U.S. corporation may reduce U.S. taxable income.
Captive Insurance Companies
Another strategy commonly used to reduce U.S. taxable income is the formation of a “captive insurance company”. This strategy is only applicable for companies who are willing to commit the capital necessary to operate one.
A “captive insurance company” is generally considered to be an insurance company owned by a single shareholder (or a small group of shareholders) that insures only its shareholder(s) and its affiliates. In a typical captive arrangement, a corporation purchases insurance from a commonly controlled brother/sister insurance affiliate.
If utilized, the “captive insurance company” applies insurance tax accounting rules in calculating its taxable income and the insured will deduct the premiums paid to the insurance subsidiary. The premiums paid to an insurance subsidiary may be deductible by the insurance subsidiary’s owner or its affiliates. The insurance subsidiary itself would include the premium income in income but be allowed to offset its premium income with loss reserves, including discounted unpaid loss reserves.
State and Local Tax Planning
State income tax is another important component of lowering a company’s U.S. taxable income. The normal starting point for state taxable income is that defined by the federal government, subject to a number of adjustments and modifications. Accordingly, in the absence of a specific state modification, federal taxable income (or lack thereof) will determine the calculation of state taxable income.
At the state and local tax levels, the income of a controlled foreign corporation is generally treated as dividend income as opposed to an income inclusion calculated for federal tax purposes. This could qualify such deemed dividends for a dividend received deduction.
Transfer of U.S. Assets to a Foreign Corporation
Another method commonly used to reduce U.S. taxable income is to shift the location of certain income-producing assets overseas.
In evaluating the manner in which assets are transferred to a foreign corporation, the tax consequences surrounding the transfers will depend on a number of factors, including the types of assets being transferred (tangible or intangible property, and the manner in which the transfer is effected (i.e. contribution, license, or sale).
Inbound Business and Tax Planning Services
At its core, the U.S. tax framework governing the taxation of income earned by non-U.S. persons is straightforward. The key to understanding international taxation is the concept that it treats a non-U.S. person differently depending on the level and extent of that person’s U.S. activities.
A non-U.S. person who is engaged in an active trade or business in the United States and earns income from that business generally is taxed on its U.S.-source (and some foreign-source) income that is considered “effectively connected” with that business.
Not all non-U.S. persons operate in the United States with sufficient regularity and continuity to create a U.S. trade or business. In the absence of a U.S. trade or business, a non-U.S. person who does not operate a U.S. trade or business is taxed only on U.S.-source passive-type income (dividends, interest, royalties, rents — defined as “fixed or determinable annual or periodical” income, or “FDAP”). FDAP income is taxed at a rate of 30%, but this rate often is reduced or eliminated under an applicable U.S. income tax treaty and when certain procedural requirements are met.
In addition to the federal income tax, there are various other tax obligations and reporting requirements a foreign person or business with inbound operations to the US needs to consider.
- State Income Taxes
- State Gross Receipts Taxes
- State Franchise Taxes
- State and Local Personal and Real Property Taxes
- State and Local Sales Tax
- Use Tax
- Federal and State Employment Taxes