U.S. Tax Responsibilities for Non-Resident E-Commerce Sellers
When you sell on a U.S. marketplace as a foreign entity or as a U.S. entity, it is essential to understand your U.S. responsibilities.
When you sell on a U.S. marketplace as a foreign entity or as a U.S. entity, it is essential to understand your U.S. responsibilities.
Your U.S. tax responsibilities will come into play, whether you are a foreign LTD company doing business in the U.S. or you are a single-member LLC in the U.S. owned by your foreign LTD
There are three levels to consider. This is a complex subject that requires consulting with a tax professional(s):If you are in the first situation, where your company is selling on Amazon.com but shipping products outside the U.S. into the U.S. with no employees, which is NOT engaged in a U.S. trade or business, a U.S. return may still be required.
If you form a U.S. single-member LLC in this situation, you are required to submit form 5472, along with 1120 proforma. No U.S. taxes are paid at the federal level. State sales and income tax rules would come into play as needed.
If you are engaged in a U.S. trade or business, more returns come into play. The ownership of your U.S. entity will dedicate what additional U.S. returns are required. For example, if a foreign entity is an owner in most cases, a 1120F protective return along with the treaty position 8833 is required The IRS has separately cracked down on foreign entities doing business in the U.S. who are engaged in a U.S. trade or business and don’t file form 1120F and 8833 for the treaty position. Learn more here about the harsh IRS penalties.
Even with a tax treaty and if you are not sure if you have “effectively connected income,” filing a “protective U.S. tax return,” one that files an information return in the U.S. and all the taxes are paid in your home country, is recommended.
A filed U.S. protective return will protect you in the future if the IRS challenges your position in the U.S.
In the end, most foreign sellers filing a U.S. federal protective return due to the tax treaties and lack of a permanent establishment may be paying federal income taxes on all profits back in their home country.
If you open a U.S. company, depending upon how taxed, the factors above will determine if any U.S. tax is due or not and which U.S. tax return is to be filed.
In the end, most foreign sellers filing a U.S. federal protective return due to the tax treaties and lack of a permanent establishment may be paying federal income taxes on all profits back in their home country.
If you open a U.S. company, depending upon how taxed, the factors above will determine if any U.S. tax is due or not and which U.S. tax return is to be filed.
If you are selling on Amazon.com via FBA from a country that does NOT have a U.S. tax treaty and, due to the FBA stock, are considered to be “engaged in a U.S. trade or business,” your foreign entity would file a U.S. tax return and pay U.S. taxes on profits in the equivalent entity.
This foreign U.S. taxpayer would receive full credit in their home country for the taxes paid in the U.S.
Go to this link to see the IRS list of countries with a tax treaty with the U.S.
Most foreign Amazon FBA sellers will not fall into this category. If your company did fall into this category, you would pay U.S. taxes and look to receive a credit on the taxes paid in your home country.
In this situation, form 8833 is typically unnecessary since the tax treaty will no longer protect your income with your country (assuming there is one).*
To be deemed to have a permanent establishment in the U.S., you will generally need to be physically present in the country. For example,
When a foreign seller establishes a U.S. entity required to pay taxes, that also creates a permanent establishment.
The U.S. entity that is most common is either a U.S. corporation or an LLC taxed as a corporation. An LLC taxed as a corporation requires form 8832 to be filed separately with the IRS.
In both situations, the U.S. entity would file form 1120 and pay taxes on profits at a flat 21%.** In this situation, it is typical for a U.S. company to be owned by a foreign company.
Often, the foreign seller’s goal is to lower the U.S. profits and pay less tax while moving the profits to the foreign entity.
The challenge with these transactions is you must be aware of the price transfer rules, which measure these types of transactions. Click here to learn more. These transactions must be arm’s length, and many times they are not.
Besides, your company will be subject to the state filing requirements in the state where you are deemed to have a Permanent Establishment (P.E.).
When a foreign seller establishes a U.S. entity required to pay taxes, that also creates a permanent establishment.
The U.S. entity that is most common is either a U.S. corporation or an LLC taxed as a corporation. An LLC taxed as a corporation requires form 8832 to be filed separately with the IRS.
In both situations, the U.S. entity would file form 1120 and pay taxes on profits at a flat 21%.** In this situation, it is typical for a U.S. company to be owned by a foreign company.
Often, the foreign seller’s goal is to lower the U.S. profits and pay less tax while moving the profits to the foreign entity.
The challenge with these transactions is you must be aware of the price transfer rules, which measure these types of transactions. Click here to learn more. These transactions must be arm’s length, and many times they are not.
Besides, your company will be subject to the state filing requirements in the state where you are deemed to have a Permanent Establishment (P.E.).
When a foreign seller establishes a U.S. entity required to pay taxes, that also creates a permanent establishment.
The U.S. entity that is most common is either a U.S. corporation or an LLC taxed as a corporation. An LLC taxed as a corporation requires form 8832 to be filed separately with the IRS.
In both situations, the U.S. entity would file form 1120 and pay taxes on profits at a flat 21%.** In this situation, it is typical for a U.S. company to be owned by a foreign company.
Often, the foreign seller’s goal is to lower the U.S. profits and pay less tax while moving the profits to the foreign entity.
The challenge with these transactions is you must be aware of the price transfer rules, which measure these types of transactions. Click here to learn more. These transactions must be arm’s length, and many times they are not.
Besides, your company will be subject to the state filing requirements in the state where you are deemed to have a Permanent Establishment (P.E.).
It is prevalent for a foreign e-commerce seller to form a U.S. single-member LLC, disregarded, owned by a foreign corporation. When a U.S. tax treaty is involved, and there’s no permanent establishment in the U.S., this can be a simple situation where profits flow to the foreign entity and taxes are paid at that country’s tax rate.
Sometimes, the foreign country will treat the money received in different terms, which creates a hybrid entity.
A “hybrid entity,” from the U.S. perspective, is an entity that is fiscally transparent for U.S. tax purposes but not transparent for foreign tax purposes, such as a U.S. LLC that is treated as a corporation in other countries. A reverse hybrid entity would be just the opposite—treated as a flow-through entity in a foreign country and a corporation in the U.S.
Learn more here about hybrid entities.
In the end, your accountant from your home country must be onboard regarding how the money received from a U.S. entity will be taxed in your home country.
The branch profits tax falls under Sec. 884(a), enacted as part of the Tax Reform Act of 1986, P.L. 99-514. This tax law will impose a branch profits tax on the effectively connected income (ECI) of a U.S. branch of a foreign corporation when those earnings are repatriated, or deemed repatriated, to the branch’s home office.
What does this mean? As a foreign e-commerce seller, this comes into play when you form a U.S. entity, and your foreign entity is engaged in a U.S. trade or business. In this case, your U.S. entity may pay an additional branch profits tax
Also, unless reduced or exempted by an applicable tax treaty, a 30% branch profits tax is imposed on after-tax effectively connected earnings and profits of a foreign corporation’s U.S. trade or business that is deemed to be distributed by the branch out of the United States
The good news is that the U.S. branch profits tax of 30% can be reduced to 5% with a tax treaty to your country. (ask Raymond CPA if branch profits apply to Amazon FBA sellers in a country with a U.S. tax treaty).
Here is a resource by the IRS and another resource that will help better understand branch profits.
Today, most sellers have heard that Amazon is now collecting sales tax in “most all the states,” so there is no need to worry about U.S. sales tax or registrations. That is not true.
Since the 2018 U.S. Supreme Court Decision Wayfair vs. South Dakota, 45 states have approved an economic nexus standard today.
Soon after, states started passing legislation to enact marketplace nexus, which means the marketplace seller (i.e., Amazon, Walmart, eBay) is responsible for collecting and remitting sales tax for all sellers.
This is excellent news because sales tax registration is not required in most of those states.
A few still require you to register because you may have FBA stock there, and Amazon is not collecting (Florida, Kansas, and Missouri are examples). Amazon began collecting and remitting in Tennessee in October 2020. A couple of other states require you to register, even though Amazon is collecting and remitting.
Below is a current map of the U.S. showing which states require sales tax registration for selling on any marketplace facilitator, including Amazon.
If you start selling on a non-marketplace, such as Shopify, or your website, that is where you may trigger economic nexus, and registration would be required.
If you are behind on sales tax because you have been selling for 2-3 years, a sales tax nexus study is recommended to determine when you first had liability and your total exposure.
In the end, the good news is that for new sellers looking to expand to U.S. markets, sales tax is a lot easier for marketplace sellers than it was two years ago.
Fixed, determinable, annual, or periodic (“FDAP”) income is subject to U.S. federal income tax (even if not connected to a U.S. trade or business). This refers to interest, dividends, rents, royalties, and certain commissions.
In general, FDAP income is subject to 30-percent U.S. withholding at source on a gross basis.
Nonresident Aliens (NRA) are subject to U.S. taxes only on their U.S. SOURCE passive income (dividends, rents) that is effectively connected with a trade or business conduct. Effectively connected income includes compensation for services (employment or self-employment) performed in the United States and pension distributions related to U.S. services.
Nonresident aliens with effectively connected income, such as wages, must submit a Form 1040NR.
Suppose the taxpayer’s only income is wages that do not exceed the personal exemption amount. In that case, no tax return is required unless a tax-treaty exemption from withholding was claimed on the income.
Also, nonresident aliens whose only income is passive U.S.-source income on which the correct amount was withheld (including at a reduced tax treaty rate) has no U.S. tax return filing obligation, provided the income and withholding taxes are reported on a Form 1042-S by the payer.
Form 1040NR and 1040NR-EZ (collectively Form 1040NR(-E.Z.)) are due June 15, unless the taxpayer has wages subject to federal income tax withholding, in which case the return is due April 15.
1040NR is NOT required if you file form 1042-S.
When you work with NCP, not only do we provide training before you form your U.S. entity, as part of our new client process, we will provide an introduction to the right tax professionals you will need. Their fees are separate, and the good news is we know they will be able to help.
* Be sure to check with your tax preparer on how they plan to file your U.S. tax returns. If you need a recommendation and are a client, let us know.
** The current U.S. corporate income tax rate is 21%. This may likely change in 2021, under the new administration.
Legal disclaimer: NCP and Sales Tax System does not provide tax, legal, or accounting advice. This website has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction