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Guide to U.S. Taxes presented by PwC December 2018 PwC A guide to the key US ta

Guide to U.S. Taxes presented by PwC December 2018 PwC A guide to the key US tax issues Table of contents This guide is current as of this December 2018, and is not updated regularly. Executive Summary 4 A guide to the keyUS tax issues Federal tax issues 10 State and local tax issues 16 US Tax Treaties 18 How can PwC help? 19 Appendix A: Other Taxes 20 Appendix B: Other Issues 21 Appendix C: Information reporting 22 Appendix D: Foreign company considerations 23 Appendix E: Transfer pricing 25 Appendix F: The OECD’s BEPS project 28 4 PwC Federal Income Tax When are tax payments due? All of your federal income taxes are due by the 15th day of the third month following the close of the tax year, regardless of an extension granted for filing the actual return. Following your first tax year in the US, you may be required to make estimated tax payments at the close of each quarter. Companies expecting a taxable profit for the year should consider whether or not estimated taxes are owed, and how much is required to be paid in the year. When do I have to file my taxes? A corporate taxpayer must file their annual tax return by the 15th day of the fourth month following the close of its tax year. A taxpayer can obtain a six-month extension to file its tax return, provided it timely and properly files Form 7004, and pays the full amount of any tax due by the original due date. For example, if a corporate taxpayer whose year end is December 31, 2018, properly obtains an extension, its 2018 federal tax return that would normally be due on April 15, 2019 is extended to be due on October 15, 2019. How can my taxes be reduced? Numerous credits to reduce tax are available, including credits for certain research activities. If a company is in losses in tax years ending before January 1, 2018, the losses may be carried back two years and, if not fully used, carried forward 20 years. NOLs generated in tax years ending after December 31, 2017, generally may not be carried back and must instead be carried forward indefinitely; for such NOLs the deduction is limited to 80 percent of taxable income (determined without regard to the deduction). Who is subject to US Income Tax? All US corporations must file an annual federal corporate tax return. What do I need to file? Form 1120, the annual corporate tax return, is used to determine your taxable income and federal tax liability. In addition to the 1120, there are other informational forms that may be required. For example, Form 5472, is required to be filed by a foreign owned, US company. How much tax will I owe? US corporations will be taxed at a standard rate on their taxable income. US taxable income is based on the corporation’s gross receipts less various business expenses (e.g., cost of goods sold, salaries and wages). For tax years beginning after December 31, 2017, taxable income of US corporations is subject to a flat rate of 21%. A guide to the key U.S. tax issues 5 State Income Tax Other state tax issues A handful of states impose a franchise or gross receipts tax in addition to or in place of an income tax, reported on the annual tax return. There may be situations in which a company is not required to pay an income tax, but still may be subject to a filing requirement and payment of a franchise, capital, or gross receipts tax. These taxes are a way for states to tax companies based on gross receipts or balance-sheet capital rather than taxable income. Federal vs. State taxable income? The starting point for determining US state taxable income generally is an entity’s federal taxable income. However, there are several items that may be treated differently for state taxable income purposes (e.g., depreciation, state taxes paid, interest deductions and charitable contributions). The states will then apportion taxable income according to the company’s relative presence in the state using various factors (e.g., sales, property, payroll). When are state taxes due? Most states require the corporate taxpayer to file their annual tax return by the 15th day of the third or fourth month following the close of its tax year. Some states permit a five or six-month extension to file the return, provided the taxpayer timely and properly files the extension form for that jurisdiction and deposits the full amount of any tax. Similar to federal income taxes, most require tax-paying corporations to submit estimated taxes on a quarterly basis. What do I need to file? Each state in the US has their own tax system that requires annual filings depending on your activity in the state. These filings are separate from the US federal return submitted to the IRS, and are submitted to tax authorities of the individual states. The tax rates vary across the states but generally result in an additional income tax of up to 10%. Which states do I need to file? A state generally may impose its tax on an entity to the extent a sufficient ‘nexus,’ or taxable connection, exists between the entity and the state. Forty-four US states impose a corporate income tax, and a company can be subject to income tax in as many states as they have nexus. Each state has their own criteria for nexus but, in general, owning property, paying for rental property, or storing inventory in a state are examples of situations that would lead to a filing requirement in that state. Other factors, such as the location of employees and sales activity, can also be considered depending on the state. 6 PwC Transfer Pricing Transfer pricing regulations govern how related entities set prices for the transfers of goods, intangible assets, services, and loans. The US looks to what is known as the arm’s length standard to determine the appropriate price. If you have multiple entities within your structure that interact with each other, transfer pricing may be applicable to you. If multiple related parties within the US have transactions, there may also be state transfer pricing issues to consider. The arm’s-length standard is met if the results of a related party transaction are consistent with results that would have been realized if unrelated parties had engaged in a similar transaction under similar circumstances. Analyzing comparables in your industry is important for appropriate transfer pricing and tax compliance. The IRS may adjust your profits and taxes you owe, as well as impose penalties for incorrect transfer pricing. Having your transfer pricing positions accurately documented can help you avoid penalties. Examples of Transfer Pricing considerations: Example of how profits can be taxed Makes a t-shirt for $5 Sells the t-shirt for $8* In this simplified example, the profit subject to tax in the US ($2) represents its sales less cost of purchasing the T -shirt. The US subsidiary may have other operating expenses that it can also deduct to further reduce taxable income. US Subsidiary provides sales support to foreign parent, in the US • Does the US Subsidiary charge the foreign parent for the services they are providing? • If so, is the rate being charge appropriate under the ‘arm’s length’ standard? • If the neither are considered, the IRS may consider an adjustment and impute income in the US for the services being provided, and the income would be taxable US subsidiary uses the name brand of the foreign parent • What royalty payment does the foreign parent charge the US subsidiary for use of the brand name? • If the IRS determines the rate being charged is too high, when considering the ‘arm’s length’ standard, the deduction taken in the US may be adjusted Foreign parent sells inventory to a US subsidiary which will be used in production of the subsidiary’s inventory. • Is the amount charged by the foreign parent the same amount that they would have charged to an unrelated third party? • If IRS determines the purchase price was not at ‘arm’s length’ then an adjustment will be required on the purchase price Foreign parent licenses software to be used by the US subsidiary • What rate does the foreign parent charge the US subsidiary for use of the software license? • If the IRS determines the rate being charged is too high, when considering the ‘arm’s length’ standard, the deduction taken in the US may be adjusted. Transfer pricing in practice • A and B are related parties in different tax jurisdictions. • T ax authorities can be concerned that differences between jurisdictional tax rules and rates create the opportunity for related entities to shift income from a higher tax jurisdiction to a lower tax jurisdiction (true for cross border transactions both internationally and between states). • T o deal with this concern, transfer pricing regulations govern the price when items or services are transferred between related entities. uploads/Finance/ pwc-tax-guide.pdf