Academic journal article Journal of Accountancy

Taxing International Transactions: A World of Difference

Academic journal article Journal of Accountancy

Taxing International Transactions: A World of Difference

Article excerpt

Globalization has brought many new opportunities for U.S. businesses. By pursuing broader horizons, however, your clients can find themselves in unfamiliar shoals of the tax code. Here are 10 of the leading situations in which clients might need help navigating through international transactions. A "person," in these tips, can mean a business entity, estate or trust, as well as an individual.

* U.S. property is purchased from a foreign person. Withholding tax, generally 10%, can be required for purchases of U.S. real estate from a foreign person--even for a personal residence, if the amount realized exceeds $300,000, under IRC section 1445(b)(5). Even a buyer of non-publicly traded stock in a U.S. corporation may be liable for withholding if the corporation owns or owned real property.

* Payments are made to a foreign person. Payees need to be aware of the types of income that are subject to withholding. They include rent, royalties, interest, dividends, license fees and U.S. source income that is not "effectively connected" with a U.S. trade or business. Persons making payments should either obtain representations from sellers that they are not subject to withholding or determine the proper withholding before any payments change hands. Payments may need to be reported on forms 1042, 1042-S or 1042-T.

* A foreign person acquires stock in a U.S. corporation. U.S. corporations may be subject to reporting requirements in addition to withholding. A corporation that becomes at least 25% foreign owned may be required to file form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.

* A foreign person becomes a partner in a U.S. partnership. A U.S. partnership's reporting requirements increase when it has foreign partners. For example, the partnership may be required to file form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax.

* A U.S. person becomes a partner in a foreign partnership. U.S. members of foreign partnerships, including LLCs that elect to be treated as a partnership or disregarded entity, cannot assume the partnership will file U.S. taxes. Thus, they may be required to file form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.

* Transactions are denominated in a foreign currency. …

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