Hello and thank you for your question, and for your helpful clarifications.
This answer may be longer than you were expecting, but this is a
complex area and the best way to get to the answer is to thread one's
way through the Internal Revenue Code and Regulations.
Our starting point is found in the IRS instructions to Form 1120F.
http://www.irs.gov/pub/irs-03/i1120f.pdf
Who Must File
Unless on of the exceptions under Exceptions From Filing below applies
or a special return is required ... a foreign corporation must file
Form 1120-F if, during the tax year, the corporation
*overpaid income tax that it wants refunded
*engaged in a trade or business in the United States, whether or not
it had income from that trade or business [more about that later]
*had income, gains, or losses treated as if they were effectively
connected with that U.S. trade or business
*had income from any US source (even if its income is tax exempt under
an income tax treaty or code section [more about that later too]
So we need to see how this fits with the two situations that you
describe - - one where purely services are provided outside the US to
US customers, and the other where goods are shipped into the US to US
purchasers.
In the example that you provide in your original question, where only
services are being provided outside the US and no goods are being
shipped into the US, the answer is clear. Under these circumstances,
the company's income will not be U.S.-source income, nor is
foreign-source services income never effectively connected income.
The nearest authority for the 'services' answer is
Regs. § 1.861-18 Classification of transactions involving computer programs
http://www.intltaxlaw.com/shared/source/softwareregs.htm
If you will read this regulation, you will see that the IRS
distinguishes between "a transaction involving the transfer of a
computer program, or the provision of services or of know-how with
respect to a computer program"
and what is your case,
"(d) Provision of services
The determination of whether a transaction involving a newly developed
or modified computer program is treated as either the provision of
services or another transaction described in paragraph (b)(1) of this
section is based on all the facts and circumstances of the
transaction, including, as appropriate, the intent of the parties (as
evidenced by their agreement and conduct) as to which party is to own
the copyright rights in the computer program and how the risks of loss
are allocated between the parties."
So as long as the services you are providing abroad are not transfers
of copyrighted articles and the like, you clearly incur no US tax
liability for those services.
Nor is the services income effectively connected with a US trade or
business, since you don't have one and, further, Section 864(c)(4)(B)
makes no reference to services income
Internal Revenue Code Section 864
http://www4.law.cornell.edu/uscode/26/864.html
See also Code Section 861(a)(3)
http://www4.law.cornell.edu/uscode/26/861.html
The question is more complicated when you are selling goods into the
US, but it is not difficult to structure sales in a way that avoids US
tax.
We will return to IRS-sanctioned authority, but let's take a look at a
reputable tax lawyer's website for a convenient and accurate summary
of the inbound sale of goods issue:
The Tax Prophet
http://www.taxprophet.com/foreign/Foreign_co_ETB.shtml
The Tax Prophet is copyright © 1995-2003 Robert L. Sommers,
attorney-at-law, so we must limit the extent of our quotations from
the website. I do suggest you read the entire page cited above. Mr.
Sommers asks and answers the question,
"When is a Foreign Corporation Engaged in a Trade or Business in the U.S.?
Example I: Parent Corporation (hereafter "Parent"), an FC based in
Taiwan negotiates the sale of computer display screens (hereafter
"screens") to Compac, a U.S. corporation based in Texas. All
negotiations take place in Taiwan and the contract is signed in
Taiwan. Shipment will be made to ACME TRADING (U.S.A), Corp. ("ACME")
who will then clear the shipment through customs and place the screens
in its bonded warehouse."
Mr. Sommers differentiates in example I between two possible ordering
and shipping arrangements
a. Example I, Situation A: When Parent merely ships goods directly to
its customer in the U.S.;
b. Example I, Situation B: When Parent ships goods to ACME who will
inventory the goods in its bonded warehouse under the concept of JIT
inventory
Mr. Sommers conludes (correctly) that
"1. Under Example I, Situation A, Parent will not be engaged in a
trade or business in the U.S. and will not file a U.S. tax return.
and
2. Under Example I, Situation B, the activities of ACME with respect
to the JIT inventory of Parent?s screens, where the sale of those
screens occurs once Compac decides to purchase the screens, will cause
Parent to be engaged in a trade or business in the U.S. and Parent and
will have to file a U.S. tax return."
If you will read Mr. Sommers' explanation, you will see the Code and
Case authority that requires this distinction, particularly the
finding that "sales by a foreign corporation to U.S. customers
directly, without the use of an office, agent or employees in the U.S.
is generally not a trade or business. U.S. v. Balanovski, 131 F Supp.
898 (S.D.N.Y. 1955). Green Export Co., v. U.S. 285 U.S. 383 (Ct. Cl.
1961); Perry Group, Inc. v. U.S., 1980-2 USTC ¶ 9603 (D.C. N.J.
1980)."
The Tax Code authority for all this is set forth in the sections of
the Internal Revenue Code, particularly sections 861 - 865.
http://www4.law.cornell.edu/uscode/26/stAch1schNpI.html
But I think Mr. Sommers puts it best in the extract cited above.
Search terms used:
internal revenue code
"effectively connected" "trade or business" corporation services goods
income from any US source Balanovski
Thank you again for bringing us your question. I hope you are
satisfied with my answer.
Sincerely,
Google Answers Researcher
Richard-ga |
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