- How are foreign nationals classified for U.S. federal income tax purposes?
For U.S. federal income tax purposes foreign nationals are classified either as resident aliens or non-resident aliens.
- When does a foreign national qualify as a resident alien for U.S. federal income tax purposes?
According to the Internal Revenue Code a foreign national qualifies as a resident alien with respect to a particular calendar year:
(a) if such foreign national has a "green card", i.e. such foreign national is a lawful permanent resident;
(b) when such foreign national meets the Internal Revenue Code's substantial presence test for the year under consideration, i.e. such foreign national is physically present in the United States for 183 days in the current year or for 183 days in the current and prior 2 years based on the following formula: all of the days in the current year plus one-third of the days in the prior year plus one-sixth of the days in the second preceding year; or
(c) when such foreign national elects resident alien status for the year under consideration.
- What is the Internal Revenue Code's definition of a non-resident alien?
According to the Internal Revenue Code a foreign national qualifies as a non-resident alien for U.S. federal income tax purposes with respect to a particular calendar year when the foreign national is neither a citizen of the U.S. nor a resident alien of the U.S.
- Why is a foreign national's status as a resident alien or as a non-resident alien important from a U.S. federal income tax perspective?
A foreign national's status as a resident alien or as a non-resident alien is important from a U.S. federal income tax perspective because it determines the extent and nature of a foreign national's U.S. income tax liabilities and reporting obligations.
- How are foreign nationals who qualify as resident aliens taxed in the U.S.?
Foreign nationals who qualify as resident aliens are subject to the same income tax liability regime and the same income tax reporting regime as U.S. citizens.
- How are foreign nationals who qualify as non-resident aliens taxed in the U.S.?
Foreign nationals who qualify as nonresident aliens are taxed at standard U.S. rates on their business income that is connected with a U.S. trade or business. Additionally, foreign nationals are taxed the rate of 30% on their gross income from other U.S. sources.
- When does a foreign national who qualifies as a non-resident alien have to file an income tax return in the U.S. and what tax form has to be filed?
A tax form 1040NR return is required if the individual has any income subject to graduated tax rates, is claiming tax treaty benefits, or has had insufficient withholding on fixed or determinable, annual or periodic income.
- Are foreign corporations subject to any U.S. income tax liabilities or any reporting requirements?
Foreign corporations incur U.S. income tax liabilities both on their U.S. trade or business profits and on their U.S. source non-business (investment-type) income. With regard to reporting requirements, foreign corporations are obligated to file tax form 1120F if the foreign corporation has any income subject to graduated tax rates, is claiming tax treaty benefits, or has had insufficient withholding on fixed or determinable, annual or periodic income.
- What is a withholding tax?
A withholding tax is an income tax that is withheld or deducted by a payer from income paid to a payee with the effect that the payee receives a net payment of the full income amount due minus the withholding tax applied. Withholding taxes are typically applied against wages, royalties and dividends. Payers who are obligated by tax authorities to withhold taxes due on payments made are generally held liable for taxes due in the event that they fail to withhold.
- What is a foreign tax credit?
The term denotes the allowance of credit in the case of a citizen of the United States and of a domestic corporation for the amount of any income, or profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States.
- What effect does a tax treaty have on the U.S. federal income taxation of foreign nationals and foreign corporations?
The major purpose of an income tax treaty is to mitigate international double taxation through tax reductions or exemptions on certain types of income derived by residents of one treaty country from sources within the other treaty country.
- What is a transfer price?
A transfer price is the price charged by a company to its subsidiary or to a related company for goods, services or intangible property that are transferred to the subsidiary or related company.
- What is an Advance Pricing Agreement (APA)?
The IRS reviews and agrees to the taxpayer's transfer pricing method before the taxpayer implements it. An APA spells out the factual nature of the related party transactions, an appropriate pricing method, and the expected range of results from applying the agreed-upon method to the transactions.
- What is a Foreign Sales Corporation (FSC)?
Under U.S. law, an FSC is a foreign corporation or a U.S. possessions corporation that is entitled to exclude certain "exempt foreign trade income" from taxation in the United States. A foreign corporation must meet a number of eligibility requirements in order to take advantage of the FSC exemption, including a requirement that its country of organization have a tax information exchange agreement with the United States. The FSC provisions were enacted by the Tax Reform Act of 1984 to replace the DISC provisions.
- What is Value Added Tax (VAT)?
The VAT is an indirect, consumer-oriented transaction tax that closely resembles a sales tax, but varies in the fact that it is actually included, or imbedded, in the actual price of goods and services at each stage of the production process.
- What is effectively connected income?
In connection with tax based on income from sources within or without the United States, income, gain, or loss, which is treated as effectively, connected with the conduct of a trade or business within the United States. The term is used in the case of a non-resident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year.
- What is foreign earned income?
In connection with the taxation of citizens or residents of the United States living abroad, the term means the amount received by such individual from sources within a foreign country or countries, which constitute earned income attributable to services performed by such individual.
- What is a foreign earned income exclusion?
Exclusion from gross income of foreign earned income of an individual provided for any taxable year it does not exceed the amount of foreign earned income computed on a daily basis at the annual rate of $70,000. The Taxpayer Relief Act of 1997 has increased the exclusion to $72,000 for calendar year 1998 with an annual increase thereafter of $2,000 until calendar year 2002 when the exclusion will become $80,000 for that year and subsequent years. Further increases are provided for tax years beginning in 2008 based on the cost-of-living adjustment.
- What is a foreign housing exclusion?
In addition to the foreign earned income exclusion, a taxpayer may also separately claim an exclusion or a deduction from gross income for the taxpayer's housing amount if the taxpayer's tax home is in a foreign country and the taxpayer qualifies under either the bona fide residence or the physical presence test.
- What does the term "tax home" mean?
Place of a taxpayer's principal business or employment. In general, the tax home is a taxpayer's main place of business or post of duty, without regard to the place of the taxpayer's family home. A taxpayer's tax home is the entire city of general area in which the taxpayer's main place of work or business is located, regardless of where the taxpayer maintains his family home.
- What is a foreign tax credit limitation?
A foreign tax credit limitation is a limitation on the foreign tax amount that a U.S. taxpayer can apply as a credit against the U.S. taxpayer's U.S. tax liability. The purpose of the foreign tax credit is to protect U.S. tax rates from effective erosion by high foreign tax rates.
- What is a permanent establishment for U.S. federal income tax purposes?
A permanent establishment term is used in double taxation agreements to determine when a non-resident is taxable in a country; that is, an enterprise in one country will not be liable to the income tax of the other country unless it has a "permanent establishment" through which it conducts business in that other country.
The concept of permanent establishment defines the requisite level of presence and contacts in a country to support income taxation at source. A permanent establishment is usually defined as a place of management, a branch, an office, a factory, a workshop, a building site or assembly project which exists for more than a certain period (6 to 12 months) and in certain circumstances an agent or permanent representative. The definition usually excludes the use of facilities solely for purposes of storage, display or delivery of goods belonging to the enterprise and other similar restrictions.
- Do U.S. citizens need to file tax returns while on foreign assignments?
Yes. U.S citizens and resident aliens are subject to tax in the U.S. on their worldwide income, regardless of whether the income is derived from foreign or domestic sources. Most other countries impose taxes based on residency in that country or on locally sourced income of nonresidents. The U.S. federal income tax is imposed on an individual’s worldwide income without regard to residence.
- What is the foreign earned income exclusion?
The earned income exclusion is found in section 911 of the Internal Revenue Code (IRC). It permits a U.S. citizen or resident alien to exclude from annual gross income certain foreign earned income and foreign housing allowances. The exclusion is dependent, in part, on where the individual resides and the amount of time the individual spent abroad. It is subject to limitation and is complemented by the IRC’s foreign tax credit provisions, which permit qualified individuals to offset qualifying foreign income tax credits against U.S. tax liability resulting from foreign source income.
- Are U.S. citizens who move abroad subject to social security taxes (“FICA”) in the U.S.?
Generally, if a U.S. employer pays a U.S. citizen or resident alien working outside the U.S., the employer and the employee will be subject to U.S. FICA taxes. If the citizen works for a foreign subsidiary, the U.S. parent corporation may elect to pay all FICA taxes in which case the U.S. citizen will not have a FICA liability. The U.S. citizen who moves aboard is likely to be subject to the foreign country’s social security taxes. The U.S. however has social security totalization agreements with a number of countries to curb the double imposition of social security taxes if certain requirements are met. U.S. citizens or resident aliens working outside the U.S., employed by a foreign employer not affiliated with a U.S. corporation generally pay into the foreign country’s social security system.
- Are U.S. citizens who work abroad for a foreign employer permitted to participate in a foreign company’s retirement plans?
The answer depends on the company’s retirement plan. If you are legally employed by a non-U.S. employer and that employer has a retirement plan, you may be allowed to participate in it. However, most foreign retirement plans are not considered to be a qualified retirement plan for U.S. tax purposes. This means that “pre-tax” contributions would not reduce your U.S. taxable wages. The employer contributions to a foreign retirement plan would generally be considered income for U.S. tax purposes.
- What is tax equalization?
Tax equalization is a process where a U.S. employer makes a U.S. employee whole for any differential in taxes resulting from a foreign assignment. It allows the employee to take the risk of higher or lower taxes out of the decision making process of whether to take the foreign assignment.
Under a tax equalization program, a U.S. employee would be reimbursed by his/her employer if the employee’s taxes are higher then if he or she stayed in the U.S. Alternatively, if the taxes were lower, the employee would reimburse the employer.
- Which countries refund VAT?
The following countries refund VAT: Austria, Belgium, Bulgaria, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Luxemburg, Monaco, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
- What is an Advanced Pricing Agreement (APA)?
An Advanced Pricing Agreement (APA) is a written contract that is binding between the taxpayer, the IRS and in the case of a bilateral APA, a foreign tax authority. An APA provides transfer-pricing methodology to apportion or allocate income, deductions, credits, or allowances between the parties. The aim of an APA is to achieve prospective agreement between the taxpayer and the relevant taxing authorities on three issues:
- The factual nature of the intercompany transactions to which the APA applies;
- An appropriate transfer pricing methodology (TPM); and
- The expected range of results from applying the TPM to the transactions.
- What fees are involved in obtaining an APA?
The user fee for original requests for an APA for taxpayers with a gross income of $1billion or more is $25,000, and $6,500 for each additional multilateral request. Renewals require a $7,500 user fee. Designated small transactions require a $7,500 fee. Taxpayers with gross income less then $1billion and greater then or equal to $100 million are required to submit $15,000 for an original request, $7,500 for each additional multilateral request, $7,500 for each routine renewal, and $7,500 for small transaction APAs. Taxpayers with a gross income of less then $100 million are required to submit $5,000 for an original request.
