Foreign television broadcast in US – is royalty paid to foreign corporation taxable?

French open is around the corner! Some French tennis broadcasting channels will broadcast the matches live via satellites in US. Ever imagined how the tax law would apply to the royalty income paid by US companies to foreign channels?

Interesting issue recently arose when a US subsidiary sought a Private Letter Ruling from IRS to clarify whether the royalty paid by US subsidiary to its foreign parent was subject to any tax withholding.

Facts of the case were, foreign broadcasting company created a subsidiary in US to distribute to US distributors that showed foreign television channels. US subsidiary would collect fee from US distributors and pay royalties to its foreign parent. Income tax treaty between US and the country where the foreign parent was resident of had a tax treaty and a provision for taxing royalty income. However, the royalty article in the US- and foreign country income tax treaty exempts all royalties from US income tax, except royalties or rentals from motion picture films.

IRS ruling favored the Taxpayer.  IRS treated the royalties paid by US subsidiary to Taxpayer (foreign parent) as royalties that are exempt from U.S. income under the royalties article of the income tax treaty between both countries.

It would be interesting to see if the royalties article will include royalties from television broadcasting when the treaty is up for negotiation again!

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Attention foreign investors in US real property! FIRPTA changes are coming

Few days ago Senate Finance Committee approved a Bill that would modify the FIRPTA – Foreign Investment in Real Property Tax Act. The affected foreign investors are primarily the shareholders of REIT – Real Estate Investment Trusts, however, the changes would also encompass other foreign investors in US real property.

Among other things the Bill if enacted would increase the FIRPA withholding tax under IRC 1445 from 10% to 15%. It would also impose additional reporting requirements than those exist now. For example, real estate brokers may also have a reporting requirements when they sell property owned by foreign investors!

It is important to monitor the development as it would significantly increase the burden on the withholding agents and buyers of the properties.

We at CPA Global Tax & Accounting are monitoring the developments and will post an update as soon as the Bill is finalized in its present form or with any changes. Please contact us (info@cpaglobaltax.com) if you need additional information about the provisions of the Bill.

Important News from IRS

American Opportunity Tax Credit not available to students on F1 visas

The American Opportunity Tax Credit is available to help eligible students and their parents offset the cost of higher education by reducing the amount of the federal income tax they owe. If they don’t owe tax, the AOTC could result in a refund.

If a student is in the United States on an F1 Student Visa, the student would generally be considered a nonresident alien for federal tax purposes. A student who is a nonresident alien for any part of the tax year is not eligible and cannot claim the AOTC unless the student elects to be treated as a resident alien for federal tax purposes.

To learn more about resident and nonresident alien status and restrictions on claiming the education credits, read American Opportunity Tax Credit – Information for Foreign Students.

Now you can find your Social Security 1099 or 1042S online

If you receive Social Security benefits but did not receive or misplaced either form SSA-1099 or SSA-1042S, you may now view, print or replace the form online by creating a Social Security account.

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Form 3115 not mandatory for small taxpayers IRS says in IR-2015-29

The Internal Revenue Service today made it easier for small business owners to comply with the final tangible property regulations.

Requested by many small businesses and tax professionals, the simplified procedure is available beginning with the 2014 return taxpayers are filling out this tax season. The new procedure allows small businesses to change a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after Jan. 1, 2014.

Also, the IRS is waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014.

“We are pleased to be able to offer this relief to small business owners and their tax preparers in time for them to take advantage of it on their 2014 return,” said IRS Commissioner John Koskinen. “We carefully reviewed the comments we received and especially appreciate the valuable feedback provided by the professional tax community on this issue.”

“One Person Company” concept introduced in India

Recently Companies Act 2013 was enacted in India. One of the concepts that was introduced for the first time is OPC or One Person Company concept. Practitioners of the erstwhile Companies Act of 1956 never could imagine that a Company can be formed just by one person! However, siding with the developed countries’ corporate laws, this certainly is a welcome change. It is remaining to be seen as to how the concept will be received by the business as well professional community in India.

The Companies (Incorporation) Rules, 2014 provides as following:

  • A natural person who is an Indian citizen and resident in India shall be eligible to incorporate an OPC and to become a nominee for the sole member of the OPC.
  • Corporations, foreigners or a non resident individual cannot incorporate an OPC;
  • A person cannot incorporate more than one OPC or become a nominee in more than one OPC. However, such a person can be a member of one OPC and nominee of another OPC;
  • Where a member of an OPC becomes a member of another OPC by virtue of his nomination in that second OPC, he shall opt out of either one of the OPC within a period of 180 days;
  • A minor cannot become a member or nominee of an OPC or hold shares with beneficial interest; An OPC cannot carry out NBFC activities including investment in securities of anybody corporate.
  • Every OPC will mention “One Person Company“ in brackets below the name of such company wherever it is printed, affixed or engraved. Hence, the name should be mentioned as “ABC  (One Person Company)“  and not any other way.

It is perceived that the new development will not be attractive from the Indian income tax point. Indian tax law imposes a secondary tax on dividend (called distribution tax) on the Companies. If OPC has to pay the dividend tax, it looses its attractiveness as compared to a sole proprietorship.

It will be interesting to watch the evolution of the concept and see if the law will accommodate foreign investors and allow them to use OPC in future.

Thinking of abandoning green card without a formal surrender? Think again!

In a recent court case, the taxpayer who argued that by living in Germany for many years and selling his US properties a long time back, he had relinquished his Lawful Permanent Residence (LPR) or a green card and hence should not be subject to US taxes on his income. However, IRS did not accept this and court agreed with IRS making the taxpayer liable for the tax.

IRS contended that the taxpayer was liable for income tax deficiencies for 2004 and 2006 – 2009 (almost all of which was attributable to the gain on his installment sale of stock). IRS argued that (1) because the taxpayer did not formally abandon his LPR status (obtained in ’77) until 2010, he remained an LPR during the years in issue, and (2) because he was not taxable by Germany as a German resident during those years, he was not a German resident under Article 4 of the Treaty. Therefore, he was not exempted from U.S. taxation by the Treaty.

The Tax Court reasoned that the taxpayer did not formally renounce or abandon that status until Nov. 10, 2010, when he filed a Form I-407 and surrendered his green card to the USCIS consistent with the requirements of Reg. § 301.7701(b)-1(b)(3).The Court rejected the taxpayer’s argument that he “informally” abandoned his LPR status. The Court held that for Federal income tax purposes, the taxpayer’s LPR status turns on Federal income tax law and was only indirectly determined by immigration law. The taxpayer’s reliance on an immigration case that recognized “informal” abandonment was misplaced. Unlike immigration law, the Code and regs were not silent on the point at which a taxpayer’s LPR status was considered to change. The requirements set out in Code Sec. 7701(b)(6)(B), Reg. § 301.7701(b)-1(b)(1), and Reg. § 301.7701(b)-1(b)(3) for abandoning LPR status

IRS says inverted companies won’t be allowed to access foreign earnings without paying US tax

IRS announced that it intends to issue regulations under Code Sec. 304(b)(5)(B), Code Sec. 367 , Code Sec. 7701(l), and Code Sec. 7874 with respect to corporate inversion transactions.

Among others, the regulations will prevent inverted companies from accessing a foreign subsidiary’s earnings while deferring U.S. tax through the use of creative loans, which are known as “hopscotch” loans (under section 956(e) of the code).

In general, the forthcoming regulations will prevent inverted companies from using certain techniques to access the overseas earnings of the U.S. company’s foreign subsidiaries without being subject to US tax. This would close a loophole to prevent inverted companies from transferring cash or property from a controlled foreign corporation to a new parent to completely avoid U.S. tax, and make it more difficult for U.S. entities to invert.

Notice 2014-52 further added that regulations will generally apply to transactions completed on or after Sept. 22, 2014.

You can now pay your taxes on IRS website

 

The Internal Revenue Service announced the successful start of its new web-based system — IRS Direct Pay — on IRS.gov, which lets taxpayers pay their tax bills or make estimated tax payments directly from checking or savings accounts without any fees or pre-registration. 

 

IR 2014-67 further reports that “To date, more than 150,000 taxpayers have paid more than $340 million in taxes through the new IRS Direct Pay system. With IRS Direct Pay, taxpayers receive instant confirmation that the payment has been submitted, and the system is available 24 hours a day, 7 days a week. Bank account information is not retained in IRS systems after payments are made. 

 

From the “Pay Your Tax Bill” icon at the top of the IRS home page, taxpayers can access IRS Direct Pay, which walks the taxpayer through five simple steps. The steps include providing your tax information, verifying your identity, entering your payment information, reviewing and electronically signing and recording your online confirmation. 

 

IRS Direct Pay offers 30-day advance payment scheduling, payment rescheduling or cancellations, and a payment status search. Future plans include an option for e-mailed payment confirmation, a Spanish version and one-time registration with a login and password to allow quick access on return visits.”

For further guidance please contact any of the CPA Global Tax professionals at info@cpaglobaltax.com.