canadians doing business in the usa
DESCRIPTION
This is a joint presentation I recently did with Kevin Duxbury.TRANSCRIPT
Corporations Doing Business in the United States
Any advice is not intended or written by MacKay LLP to be used, and cannot be used by a client or any other person or entity for the purpose of (1) avoiding penalties that may be imposed on any taxpayer or (2) promoting, marketing, or recommending to any party any matters addressed herein.
2
SUMMARY OF CONTENTS
Federal Taxation No Taxable Presence, Through a U.S. Branch, or Through a U.S. Subsidiary Corporation
State Taxation What Creates State Income Tax Nexus?
CANADIAN COMPANIES INVESTING THROUGH A BRANCH
3
4
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
5
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
6
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
7
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!
8
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.
9
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.
10
CANADIAN COMPANIES OPERATING THROUGH A U.S. BRANCH
Operating 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
CANADIAN COMPANIES OPERATING THROUGH A U.S. ENTITY
11
12
CANADIAN COMPANIES OPERATING THROUGH A U.S. ENTITY
Various U.S. Domestic Entities S-Corporation LLCs Partnerships / Limited Partnerships C-Corporations
13
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
STATE NEXUS ISSUES
STATE NEXUS ISSUES
14
15
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
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
17
PL 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
OTHER STATE TAXES
18
QUESTIONS?
19
Kevin Duxbury, CA David Turchen, CA, CPA (PA)
Senior Manager, U.S. Tax Manager, U.S. Tax
1100 – 1177 West Hastings St 1100 – 1177 West Hastings St
Vancouver, BC V6E 4T5 Vancouver, BC V6E 4T5
604-697-5260 604-697-5265