Dear Client
I appreciate the opportunity to advise you concerning expanding your business into foreign markets. This letter is to recommend two types of organizations that could be established abroad and the taxable implications.
Facts
IRS regulations states that U.S. citizen or resident alien must report income from all sources within and outside of the U.S. However, depending on the organizational structure there are applicable tax laws relevant to that organization. Therefore, key tools of tax analysis are essential in the establishing a foreign organization abroad. Selection should be made to evaluate taxation of any Foreign Business Relationship, such as Foreign Parent Corporation or joint venture partnership. Consequently, an analysis should be made entering into a relationship with a foreign organization.
One type organization that the can be established is a Foreign corporation with US branches. Foreign corporations and their U.S. branches are subject to U.S. tax only on their income that is effectively connected to a U.S. trade or business. Thus, for federal tax purposes, the foreign parent company will be considered doing business in the United States under its Permanent Establishment, and will have to file Form 1120-F (Income Tax Return of a Foreign Corporation) and be subject to the corporate tax rates applicable to U.S. corporations filing Form 1120 (Pauloman, 2012). The foreign parent may also expose an unbalanced share of its profits to a higher U.S. tax rate since attributing the profits to branch activities requires arm’s length consideration.
Another example of an organizational structure that could be established is a Joint venture partnership. A joint venture partnership is a considered an agreement in which two or more organizations produces a legally independent company to share some of their resources and abilities to advance a competitive advantage. Some advantages of a joint venture company are that it is a separate legal entity so that it is liable in its own right for tax liabilities and other debts. A typical structure for a foreign joint venture requires the transfer of intellectual property to the foreign joint venture in exchange for stock of the venture. Such exchange between a U.S. person and a U.S. corporation would generally receive tax-free treatment. However, in the international sector, the same transaction can have very different and adverse tax consequences to the U.S. venture due to the application the section of the Internal Revenue Code §367 (Legal Information, n.d.) Under this provision, if a U.S. corporation transfers intangible property to a foreign venture in the typical structure described above, the U.S. Corporation will usually be treated as having sold the intangible to the foreign venture in exchange for annual payments that are contingent on the productivity, use or disposition of the intangible by the foreign venture. Depending upon the nature of the assets transferred and the tax position of the shareholder making the transfer, exemptions or reliefs from tax or deferrals of the tax liability may be available (Finnert & Coelho, 2010).
Consequently, the Taxpayer Relief Act of 1997 revised the U.S. federal tax information reporting requirements relating to foreign partnerships. The Act explained that a foreign partnership is normally not vital to file a U.S. federal tax information return unless the foreign partnership has gross income either from U.S. sources or connected with the conduct of a U.S. trade or business. Internal Revenue Code sections 6038, 6038B and 6046A, as revised by the Act, essentially shift the burden of U.S. tax reporting from foreign partnerships to their U.S. partners (Tax Law, n.d.).
A growing number of corporations are using global acquisition structures to lower their tax rates, taking advantage of more favorable corporate overseas tax policies. Under this strategy, a foreign subsidiary can safeguard the assets of a related foreign