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The Latest on Tax Challenges Facing Companies Operating in the USTRANSCRIPT
Triumph over Tax:
The Latest on Tax Challenges Facing Companies Operating in the US
Presented by: Philip Stein
.com
US Budget
Year Percentage of Budget on Medicare, Medicaid, Social Security, Debt Interest
2010 47%
2019 56%2030 70%
MESSAGE: GOVERNMENT MUST RAISE REVENUE!!!!!
State Income & Franchise Taxes
States are strapped for cash
Increasing efficiency &
audits
Matching records with IRS
and other departments
within the state
Definition – Connection to State
Can be established via:• Physical Presence: Office, Home Office, Independent
Contractors, Warehouse, Property such as servers• Economic Presence: Exploiting the state’s market• Factor Based Presence: Obtaining a certain level of
activity within the state
State Taxes - Nexus
State Taxes – Nexus
PL 86-272 Exemption
• Enacted by Congress to promote interstate commerce• Nexus is NOT established if the sole activity in the state
is solicitation of sales for tangible personal property• Exemption applies only to income tax. Therefore many
states have imposed a franchise tax i.e. Texas, Michigan, Ohio
State Taxes - Apportionment
Activity is allocated between states based on property, payroll and sales
Many states are shifting to market based apportionment i.e. double weighting the sales factor or using only the sales factor
State Taxes – Combined Reporting
Aggressive states are forcing companies to consolidate affiliated entities and file combined reports
California – Corporations must file a water’s edge election to opt out
MA – Corporation must file a combined report if its foreign affiliate earns more than 20% of its income from intercompany services i.e. cost plus agreement between US parent and Israeli subsidiary
State Taxes – New Jobs Credits
Many states offer incentives to create jobs in enterprise zones
CA recently enacted a new credit equal to $3,000 for each net increase in qualified full-time employees from the previous taxable year
State Taxes - Conclusion
TRIUMPH OVER TAX
• Determine whether eligible for exemption• Concentrate nexus activities in one state• Minimize apportionment factors in each state• Capitalize on incentives and credits available
Sales Tax
Under audit, if sales tax has not been collected, the seller is required to pay the current tax due, plus penalties and interest
Imposed on the buyer, but is the obligation of the seller to collect
MontanaOregon
Delaware
New Hampshire
Alaska
Sales Tax
Applicable only if the following three requirements are met:
1. END USER
2. NEXUS
3. TAXABLE PRODUCT OR SERVICE
Sales Tax – End User
Unlike the Israeli VAT system, the tax is only
paid by the final user of the product
No credits are provided for tax paid by corporations
Reseller Certificates – Mandatory in order to
exempt distributors from sales tax
Sales Tax – Nexus
Definition- Connection to State
Examples include:
1.Sales people2.Offices3.Servers4.Sales at trade shows
Sales Tax - Nexus
Sales tax collection is limited to the states in which your company has nexus
The customer’s location is determined by the shipping address (zip code)
The sale of software licenses are sometimes determined by location of the users
Sales Tax – Taxable Product
Generally, imposed only on tangible products
Many states consider
software to be tangible
Taxability of products vary from state to
state
Sales Tax – Taxable Product
Within one contract, some products may be taxable and some exempt i.e. software may be taxable but the annual maintenance can be exempt
Invoices should clearly state the various components of the sale
Use Tax
Definition - If sales tax has not been collected at the point of sale, it is now the obligation of the user to pay the tax directly to the authorities
Consequently, being subject to sales tax collection does not increase the price of your product as the customer is required to pay the tax regardless
Conversely, if you purchase products and have not paid sales tax, the obligation to pay use tax transfers to you
Sales Tax - Conclusion
TRIUMPH OVER TAX
• Determine whether sales tax collection is necessary• Ensure all documentation i.e. reseller certificates are
on file• File and pay electronically for smooth and simple
filing
Transfer Pricing - Definition
Loans require annual interest according to IRS rates and withholding of 17.5% at the time of the interest payment. Interest expense may be limited for tax purposes
Equity investment may result in dividend tax of 12.5%, although funds my be repatriated to parent company as return of capital
Fundamental Question #1 How will the subsidiary initially be funded?
Transfer Pricing - Definition
Fundamental Question #2 What is the revenue model of the US subsidiary?
Common arrangements include:
1. Cost Plus Agreement2. Commissions3. Comparable Profits Method
Transfer Pricing – Why Does it Matter?
Increasing focus on international compliance
Reported on Forms 5471 and 5472 which carry penalties of 10K for late or non filing
In case of audit, must provide study within 30 days
Penalties for tax adjustments range between 20% – 40%
Transfer Pricing – Optimization
• Corporate tax rates in Israel are declining• Combined US federal and state tax rates can easily reach 45%• Due to the US budget constraints, Obama is considering
increased focus on corporations’ taxes and loopholes• Which economy do you prefer to stimulate anyway?
Transfer Pricing - Conclusion
TRIUMPH OVER TAX
• Plan in advance so you have the ability to build your strategy• Minimize your federal and state taxes by choosing the optimal method• Ensure you have a study in place to support your tax positions