The Fair Tax Act, Part LX
Covering Section 905 today, which is an item that in my opinion requires further research before I could discuss the impact:
`SEC. 905. WITHHOLDING OF TAX ON NONRESIDENT ALIENS AND FOREIGN CORPORATIONS.
`(a) In General- All persons, in whatever capacity acting (including lessees or mortgagors or real or personal property, fiduciaries, employers, and all officers and employees of the United States) having control, receipt, custody, disposal, or payment of any income to the extent such income constitutes gross income from sources within the United States of any nonresident alien individual, foreign partnership, or foreign corporation shall deduct and withhold from that income a tax equal to 23 percent thereof.
`(b) Exception- No tax shall be required to be deducted from interest on portfolio debt investments.
`(c) Treaty Countries- In the case of payments to nonresident alien individuals, foreign partnerships, or foreign corporations that have a residence in (or the nationality of a country) that has entered into a tax treaty with the United States, then the rate of withholding tax prescribed by the treaty shall govern.’.
See? These are pretty far-reaching statements. Essentially this means that any non-green-card-holding worker has taxes withheld (plus no prebate) and it also means foreign corporations that don’t start branch businesses within the US also have to withhold tax on income earned in the US. Talk about sticking it to the illegals!
Edit: Well technically it’s illegal to employ non-resident aliens with no work visas in this country anyway, so this is probably limited to attempting to extract taxes from a foreign corporation that might otherwise simply ship all their collective incomes overseas tax-free.
BUT… then there’s this tax treaty bit. I have no idea how many countries have tax treaties with us, but I am willing to bet it’s a lot. It’s entirely possible this paragraph will either have no force of effect or that force of effect may be removed via new treaties. Does anyone have any ideas on what countries have tax treaties with us and what they entail?
My information is dated but may shed some light on this issue. When I worked with Foreign subs of U.S. companies, the only way to get profits out of the country was by declaring a dividend payable to the parent corporation. France for example charged a 20% tax on these dividends. Tax treaties will establish a mutual rate that both countries charge each other. In the absence of a treaty, I assume the 23% rate would be applied. With a treaty the amount could be zero. probably not as big a deal as it appears.
Well that’s why I ask. I wonder exactly how many tax treaties we have and what countries benefit and which ones don’t.
James, google “Tax Treaties”, select Wikipedia Tax Treaties, go to table 3 and you will find over 50 countries that have income tax treaties with the US. Basically, all of Europe, Russia, China, India, Japan, South Africa, and oddly enough, the only country in South America, Venezuela. All the treaties seem to be aimed at preventing double taxation.
As for this Section, I am now confused by the language in the bill. It says: “any nonresident alien individual, foreign partnership, or foreign corporation”. This may sound nit-picky, but does the term nonresident apply to all three or just alien individuals? If all three, what is an example of a nonresident foreign corporation? And what gross income might such a nonresident corporation have from US sources? Other than interest from debt portfolios which is exempt.
I think nonresident means just individuals, but foreign corporations is pretty specific too.
A foreign corporation is a corporation set up in any jurisdiction other than the one you’re in. Corporations use this technique to operate across borders and around the world. Sony has American corporations although their company started in Japan, for example. Today, Sony belongs to no one particular country, it has operations everywhere in lots of tax jurisdictions.
So for this matter we’re talking about corporations incorporated outside the USA. Some of these corporations have representatives that work in the USA or branch offices that earn income in the USA. It is not a requirement to incorporate in the US to operate here, it is just usually advantageous to do so legally and for tax purposes.
So it appears these are the businesses we are talking about.
After reading a few tax treaties, however, it would seem that some of them are simply agreements to obey each other’s tax laws within their respective borders. If so, then they might need to be revised to use the FairTax on business within their treaty agreement, or they would still obey the older tax code.
Doesn’t this mean the whole “tax haven” selling point for the FairTax is bunk? It appears we have treaties with every major industrialized nation and the FairTax would just keep the status quo with those countries.
Not exactly. The tax treaties only apply to companies that do not incorporate here. They always have the option to maintain their foreign corporation status or spend the money necessary to set up a new corporation within the USA (a la SCEA).
The FairTax would likely be a far better deal for corporations than sticking to the treaties in most cases, and would influence them to incorporate within the USA instead of merely operate within the USA.
It might even influence some of them to actually move more of their operations here.
And how would the foreign owners (e.g., parent company, stockholders) of the new U.S. corp get their profits without being taxed?
That’s not the point and they aren’t supposed to.
If you’re a stockholder in Japan, you probably pay some kind of Japanese capital gains tax or income tax or the equivalent (somebody feel free to research that if you have time). That will be the case for ALL foreign investors. But…
If you are a stockholder of a company, do you want that company to incorporate in your country, where it will likely make less money due to taxation, or do you want it in the USA, where the FairTax has removed the taxes on corporate income?
Seems to me you’d make more money on your shares of stock with the corporation in the USA.
So no dividends for the foreign owners. They can only realize the profits of their company if they sell their ownership.
And if the stock is traded on a U.S. exchange or through a U.S. brokerage, wouldn’t a person in the U.S. then have “control, receipt, custody, disposal, or payment of any income to the extent such income constitutes gross income from sources within the United States of any nonresident alien individual, foreign partnership, or foreign corporation”
I really don’t see how a foreign individual or company is to derive income from a source within the U.S. without being taxed. And isn’t that the purpose of this section?
You can indeed get dividends from a foreign corporation. Your dividends would hopefully be bigger in a company that is more profitable, but we cannot exempt a foreign investor from taxes in their own country.
If the stock is traded in the US, I am not sure that constitutes withholding for the entire corporation, only for revenues earned in the US (not capital raised via investment here, that’s very different).
But again, this is why they would WANT to incorporate in the US, so that their company would make more money, because the business itself would have an easier time making profits due to not being taxed if incorporated in the USA.
It would not remove taxes for foreign shareholders (those are the taxes in their own countries) but if their companies are making more money by incorporating here, that’s still a much better deal than they had before.
IMO, this section states that if a U.S. corp pays a dividend to a foreign investor they must withhold 23% of it.
Well you may be right at least on that point, (exempting of course that tax treaties overrule that and as you say that tax treaties exist for virtually any country worth mentioning) but here is some further interpretation.
Quoted from the Fair Tax in Plain English:
“This provision acts as an incentive for foreign countries to remain interested in entering into treaties with the U.S. and to not penalize U.S. nationals and U.S. owned firms in their countries by imposing high withholding taxes on payments made from U.S. owned companies to their U.S. parents. Payments of dividends and interest made to foreigners are taxed at a rate of 23 percent (unless a treaty reduces the tax rate).
The current law rate is 30 percent; however, most U.S. tax treaties with foreign countries reduce this rate considerably (mutually) to 5 to 15 percent, and sometimes 0 percent. If the U.S. (or foreign countries) just withdrew from these treaties and had no replacement, U.S. firms doing business abroad would be subject to very high foreign tax rates on funds repatriated from abroad to the United States.”
An example of the way repatriation of profits are taxed today. A German company has a wholly owned U.S. subsidiary. The U.S. corporation has a Canadian sub. Candian sub pays a tax to Canadian government on a dividend to U.S. company. U.S. company is taxed on the dividend received but gets a credit for the Canadian tax paid. A similar thing would occur on dividends to the German parent after the German company has recovered the entirety of their investment in the United States company.
Am not a tax expert but believe the intent of H R 25 is to continue the tax situation that exists today. Remember that H R 25 wipes out the current tax code. U.S. corporations or unincorporated entities that remit profits to a foreign parent will pay a 23% tax on the amount remitted. The amount of tax will be subject to provisions of the tax treaty with that country. This may also be aimed at individuals sending money out of the country. Wonder how they will control that and collect the tax. Will the big new business be smuggling currency out of the country. The Mexican economy is dependent on money sent back home by legal and illegal U S residents. This is as important to Mexico as oil production.