Cross-Border Taxation Update

Sue Tuson

The IRS announced 13 audit campaigns last March.  Included in the campaign is an effort to increase voluntary compliance for Form 1120-F Non-Filers.  Form 1120-F, U.S. Income Tax Return of a Foreign Corporation is required to be filed when a foreign corporation is in engaged in a trade or business in the U.S. whether or not it had an U.S. source income and whether or not the income from the trade or business is exempt from U.S. tax under a tax treaty.   If a foreign corporation conducts limited activities in the United States in a tax year that the foreign corporation determines does not give rise to gross income which is effectively connected with the conduct of a trade or business within the United States, the foreign corporation should follow the instructions for filing a protective return to protect its right to take deductions and credits in the event it is later determined that the corporation did have income effectively connected with a U.S. trade or business.   In most cases, a foreign corporation should also file a protective return if it determines initially that it has no U.S. tax liability under the provisions of an applicable income tax treaty (for example, because its income is not attributable to a permanent establishment in the U.S.)  A foreign corporation that does not file a return will lose the right to take deductions and credits against effectively connected income.  Calendar year corporations that are required to file and that have no fixed place of business in the U.S. would have return due date of June 15^th.

Border Adjustment Tax (BAT)

The House Ways and Means Committee began hearings related to the border adjustment tax this week.  Many retailers have been vocal in their opposition to the BAT concept since it was first was raised.  The CEO of Target t appeared before the committee to discuss how this tax would impact business models that rely on imports and ultimately result in increased prices for consumers.  Supporters of the BAT have indicated that the cost to domestic importers will be offset by the strengthening dollar, however, not all economist agree.  President Trump who has expressed support for a “reciprocal tax” or “mirror tax” with a concept of we will charge what you will charge, however, no specific details have been outlined.  While everyone seems to agree that the tax code needs an over-haul and the U.S. needs to be globally competitive for business, there is much division on how this can be accomplished.