Ross Stafford Treeby
M.S.Tax Degree | Advanced Studies Tax Law Designation | CPA
MS International Business & Business Marketing, University of South Carolina (1991)
Author has 642 answers and 678.7K answer views
2019
Sure, I can address tax issues here based on the comment section. You have a foreign corporation (“FC”) formed in
Hong Kong with no US offices selling an app through Apple USA.
A FC pays tax in the US on its effectively connected income coming from a United States Trade or Business (“USTB”) under Section 882(a). While the internal revenue code and treasury regulations do not specifically define a USTB, the courts have looked at this issue extensively over the years. Selling from the US to a US customers represents a USTB. Then, we look to see if the FC has effectively connected income.
While US source income represents effectively connected income, Treasury does not consider foreign source income as effectively connected if the FC has no US offices (Section 864(c)). So, we need to evaluate the income source here from the App transactions.
Here, we use the so called software treasury regulations for the answer. An App transaction falls under copyrighted articles if the transferee receives a copy of a program but acquires no rights (Treasury Regulation Section 1.861-18(c)(1)(ii)). So, we most likely categorize the App transfer as a sale. And, a copyrighted article represents inventory as defined in Section 865(i)(1).
Treasury sources inventory property to the physical location of the buyer under Sections 861(a)(6) and 862(a)(6). However, post year 2017, Treasury has altered a tax provision here affecting a FC which produces its own unique product. Thus, App produced in the FC’s home country represent foreign source income (Section 863(b)).
If the FC receives any advertising monies from the Apps, this income represents service income. And, Treasury sources service income to the place services performed. So, a FC operating out of home country office with no US office, has foreign source income for services performed (Section 862(a)(3).
Given both the App sales and advertising both represent foreign source income, Section 882(a) addressed in the second paragraph does not apply. So, the FC does not pay pay tax in the US on the App transactions (sales or service from advertising). Of course, most likely the FC’s home country will tax these transactions.
Even though the FC does not have any tax paying requirements, the FC may have reporting requirements. As Treasury says a FC with a USTB even if it has no effectively connected income still files a
1120 F corporate
tax return as noted In Treasury Regulation Section 1.6012-2(g). While
no tax penalty exists here not filing, the FC’s filing this return represents a protective return. If the FC does not file the return and Treasury later finds the FC has effectively connected income, the FC may not use its prior deductions as means for reducing gross revenue as noted in Section 882(c)(1)(A), (c)(2) and Treasury Regulation Section 1.882-4(a)(1) and (2)). This means the FC could face tax on its revenue versus its taxable income.
If you are a US person owning the the FC shares, you would face personal taxes on adjusted FC profits based on the new global intangible low taxed income provisions (Section 951A(b)). Here, you hold the FC in a domestic corporation as means for avoiding this tax given
Hong Kong has a tax rate greater than 13.5% (Section 250(a)(1)(B)). Further, a US persons or domestic corporations holding shares in a foreign corporation have annual Treasury information reporting requirements subject to a $10,000 fine for not complying (Section 6038).
I have completed the above tax analysis based on certain facts. If the facts change in any way, the tax results may change considerably.
