A General Discussion of International Taxes From a USA Perspective
The United States of America is the only country that taxes their citizens and resident aliens on their world-wide income without regard as to where they live. So while a citizen of the United Kingdom is taxed on their world-wide income when living within the UK, if they move to another country, the UK no longer taxes them on income they earn outside of the UK. This is not true for US persons.
If a US citizen or resident alien moves to another country, they must continue to file a US tax return and in many cases continue to pay US income taxes. US corporations, trusts, LLC’s and partnerships also face tax on their world-wide income.
Let’s take a brief look at situations where US income tax law may affect you. From a broad perspective, we have OUTBOUND transactions and INBOUND transactions.
An OUTBOUND transaction involves an individual or business investing, working or otherwise doing business outside of the USA. Typically such activities involve US persons or companies operating in other countries.
INBOUND transactions are just the opposite. Here we have individuals who are foreign nationals or businesses organized outside of the US looking to work or do business within the USA.
Then consider what levels of tax are involved. A US individual working overseas typically incurs income taxes in the country(ies) where they live and work. They also must file an income tax return with the US. They may have foreign tax credit claims, exclusions from US tax on a portion of their wages or earned income, housing allowances and many other complex issues. Refer to the section on this website discussing US citizens working abroad in further detail. Not all companies provide assistance with foreign tax filings, planning, cost of living adjustments or other benefits. Those individuals left on their own to deal with these complex issues don’t know where to turn for help.
US companies operating in foreign countries also must deal with the complex rules involving OUTBOUND transactions and investments. Decisions on whether to create additional entities in foreign locations, the type of entity to select, how to maximize deferral on US tax and all the complex reporting rules they face when doing business overseas requires considerable planning and strategy development. Smaller companies often overlook these issues or ignore them entirely. In some cases they are simply unaware of the laws and requirements. Such oversight can be extremely expensive.
A foreign individual faces US tax on any US income plus potential estate taxes should they die while owning US assets or businesses. Timing of their entry into or departure from the US has a significant impact on their US tax liability.
As an example, let’s consider a foreign person that became a US tax “resident alien” but now wishes to depart and move back home. Further, let’s consider this person is married with two children. Depending on when they “break” US residency impacts their final US income tax liability. The wrong departure date may cost them thousands of dollars in additional tax.
A foreign person or company that fails to plan in advance in regards to investing in US real estate and create the proper legal entities to own the US property may face a flat 30% tax on the gross rental revenues they collect without the ability to deduct their expenses against the income and possibly avoid all US income tax. They may fall subject to the onerous 40% US estate taxes on their US holdings. Contributing the US property to a US corporation AFTER the fact may see them fall victim to the US tax inversion rules. Refer to the Investment in US Real Estate section for further detail.
Foreign corporations, partnerships, trusts and other companies wishing to transact business in the US purchase an existing US business or establish operations within the USA face many issues. Improper planning and structuring of the business could result in paying Branch Profit Taxes which could run as high as 54% of your US income. Failing to comply with US employment reporting and payment of employee and employer taxes are among the most costly in US tax law. A US corporation that has at least 25% foreign ownership has special reporting requirements on their US tax return. Failure to disclose this ownership and filing the proper forms risks penalties beginning at $10,000 per year per form.
Keep in mind the United States currently has the highest tax rate for corporations (35% up to 39.1%). The Branch Profits tax could tax a foreign operation at even higher rates should they fail to avoid Permanent Establishment treatment.
Taking the time to carefully plan and strategize before entering the US is a very obvious requirement. If you have already taken action then the next step is to determine what potential problems you face to avoid expensive and unpleasant surprises.