San Francisco Tax Blogs | Diosdi, Ching, & Liu, LLP

15Dec 2022 by Anthony Diosdi

Foreign Contractors- To Withhold or Not to Withhold in a Digital Age

Tax Law

By Anthony Diosdi In today’s global environment, many U.S. businesses hire foreign contractors for a variety of reasons. The very act of a U.S. business of paying a foreign contractor may result in withholding and compliance requirements. This article discusses a U.S. businesses potential obligation to withhold U.S. taxes to a foreign contractor.Introduction to the FDAP RulesUnited States source income that is effectively connected with a U.S. trade or business will be taxable to foreign persons at the usual individual or corporate rates. Appropriate deductions and credits apply in the determination of U.S. federal tax liabilities. On the other hand, United States source income received by foreign persons that is not effectively connected with a U.S. trade or business will be subject to a flat tax of 30 percent on…

07Dec 2022 by Anthony Diosdi

The Cross-Border Taxation of Cloud Transactions and Digital Downloads

Tax Law

By Anthony Diosdi U.S. Taxation of the Digital Economy- a Broad OverviewNew technology and new transactions often raise difficult issues of tax policy and administration in part because existing rules were developed to deal with other situations. The dramatic expansion in electronic commerce facilitated by the use of the Internet and other technology is subjecting existing tax principles to new pressures. One area of concern is the application of source rules to electronic commerce transactions. Suppose, for example, that a corporation delivers software or a digital product to a customer on the Internet. The customer can download the product and use it commercially. Depending upon the nature of the transaction and the property interests involved, the income to the corporation might appropriately be characterized as a royalty for the use…

07Dec 2022 by Anthony Diosdi

Cross-Border Corporation Divisions or Demergers under Section 355

Tax Law

By Anthony Diosdi There are many good business reasons that a corporate group may decide to enter a corporate division transaction to separate one or more trades or businesses from another distinct trade or business. The three types of corporate divisions are commonly known as spinoffs, split-offs, and split-ups. Such corporate divisions are also referred to as demergers or Type D reorganizations. To illustrate the elements of these transactions, assume that Alexis and Bob each own 50 percent of the stock of Diverse Corporation (“D”), which for many years has operated a winery and a cattle ranch as separate divisions. For reasons to be elaborated below, the shareholders wish to divide the business into two separate corporations on a tax-free basis. From a tax perspective, the possibilities are:Spin-off, Assume that…

07Dec 2022 by Anthony Diosdi

Has the IRS Been Illegally Assessing 5472 and 5471 Penalties all this Time? What to do If the IRS Unlawfully Assessed Such a Penalty Against You

Tax Law

By Anthony DiosdiInternal Revenue Code Section 6038 requires certain persons to provide the Internal Revenue Service or IRS with information regarding foreign corporations. This information is typically provided on Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The Form 5471 is attached to a U.S. tax return. The penalty for failure to file, or for delinquent, incomplete or materially incorrect filing is a reduction of foreign tax credits by ten percent and a penalty of $10,000. An additional $10,000 continuation penalty may be assessed for each 30 day period that noncompliance continues up to $60,000 per return, per year. Similarly, Internal Revenue Code Section 6038A requires 25 percent foreign-owned domestic corporations and limited liability companies to report specified information as an attachment to a corporate…

07Dec 2022 by Anthony Diosdi

Planning Ideals for the Modern Day International Corporate Merger or Reorganization

Tax Law

By Anthony Diosdi There are many good business reasons for corporate mergers or reorganization in the international context. Such transactions are commonly referred to as corporate “reorganizations,” “spin-offs,” “split-ups,” or “split-offs.” Generally, corporate mergers and corporate reorganizations are governed by Internal Revenue Code Sections 351, 368 and 355. The main benefit of meeting the requirements of Internal Revenue Code Sections 351, 368 and 355 in the domestic context, is that corporate mergers and reorganizations can be accomplished on a tax-free basis. A corporate merger or reorganization in the case of a multinational group raises difficult issues because Internal Revenue Code Sections 367 and 7874 (the inversion rules). This article discusses planning ideals to mitigate the impact of Section 367 in the context of a cross-border merger or reorganization. This article…

05Dec 2022 by Anthony Diosdi

End of Year Tax Concerns

tax planning

Once January 1 rolls around, you generally lose the ability to make any changes or elections that can impact the tax return for your previous year. Therefore, you must make any moves prior to the end of the year to put you in a better position when you file taxes. Otherwise, you can be hit with a large bill unnecessarily on tax day. Your ending income for the year can significantly impact your taxes. It can put you in a higher tax bracket or make you subject to the alternative minimum tax. Many taxpayers are hit with the surprise that their income makes them subject to the AMT, and they only learn it in the following year. You should consider ways of reducing your income in the current year or…

29Nov 2022 by Anthony Diosdi

Has the IRS Been Illegally Assessing 3520 Penalties all this Time? What to do If the IRS Unlawfully Assessed a 3520 Penalty Against You

Tax Law

By Anthony DiosdiUnder Internal Revenue Code Section 6677(a), if any United States Person beneficiary receives (directly or indirectly) a distribution from a foreign trust, that person is required to make a return with respect to such a trust using Internal Revenue Service (“IRS”) Form 3520, and show thereon the name of the trust, the amount of the aggregate distribution received, and any other data the IRS may require. A foreign gift, bequest, or inheritance that exceeds $100,000 must also be disclosed on a Form 3520. The IRS may assess an annual penalty equal to 35 percent of the gross value of the trust or 35 percent of the gross value of the property transferred from the trust if a Form 3520 is not timely filed. The IRS may also assess…

29Nov 2022 by Anthony Diosdi

What Foreign Nationals Relocating to the U.S. Needs to Know About the Check-the-Box Rules

Tax Law

By Anthony DiosdiOnce a foreign national immigrates to the United States, he or she will likely become a U.S. person for income tax purposes. A U.S. person is subject to U.S. income tax on his or her worldwide income. He or she may also become subject to a comprehensive information reporting regime. This includes the filing of a Form 5471 for any foreign entities treated as a corporation for U.S. tax purposes. The Form 5471 is an incredibly complicated information return that can be costly to prepare. Sometimes an understanding of the U.S. check-the-box rules can result in significant reduction in U.S. tax on foreign holdings and tax compliance savings. We will begin with a discussion regarding the taxation of U.S. business entities. Foreign nationals may operate domestic entities through…

23Nov 2022 by Anthony Diosdi

Is a 962 Election the Cure for the Hardships Caused by GILTI or Subpart F Inclusions?

Tax Law

By Anthony Diosdi IntroductionU.S. shareholders of a controlled foreign corporation (“CFC”) must include any subpart F income or global low-taxed income (“GILTI”) as ordinary income on their taxable income. The current highest federal tax rate applicable to individual CFC shareholders is 37 percent. Individuals receiving GILTI inclusions may also be subject to an additional Medicare tax of 3.8 percent. To make matters worse, individual CFC shareholders cannot offset their federal income tax liability with foreign tax credits paid by their CFCs. Under these circumstances, it is not too difficult to imagine scenarios where a CFC shareholder pays more in federal, state, and foreign taxes than the actual distributions they receive from the CFC. On the other hand, for federal tax purposes, domestic C corporations that are shareholders of CFCs are…

23Nov 2022 by Anthony Diosdi

The Separate Basket Limitations for Foreign Tax Credits

Tax Law

By Anthony Diosdi U.S. taxpayers are generally subject to U.S. tax on their worldwide income, but may be provided a tax credit for foreign income taxes paid or accrued. The main purpose of the foreign tax credit is to mitigate the double taxation of foreign source income that might occur if such income is taxed by both the United States and a foreign country. An individual U.S. taxpayer may receive a “direct” foreign tax credit for foreign taxes that he or she pays to a foreign government. A U.S. corporation that owns at least 10 percent of stock in a foreign corporation (by vote or value) may receive an “indirect” or “deemed” foreign tax credit for foreign taxes paid by that subsidiary. Internal Revenue Code Section 901 limits the foreign…