Doing business with the USA – Do I need to file?
For any New Zealand or Australian business selling internationally, a potential minefield of various tax implications awaits.
This is especially relevant when dealing with the USA, and is something we frequently consult on.
When selling into the US using a foreign corporation, the main factor to consider, is whether there is “effectively connected income”. This is specifically referring to income which is effectively connected with a US trade or business (further reading is available in Section 1.864-4).
You might now be wondering, “what is effectively connected income?”. While there isn’t a specific definition of the term, it generally does cover most types of income sourced in the US (by a foreign corporation). This may be sales into the US on a continuous basis (from outside the US), or sourcing and then selling your products into the US. Your tax advisor should be able to clarify whether you have “effectively connected income”.
Should a foreign company have “effectively connected income”, it may be required to file Form 1120-F, which is an income tax return for a foreign corporation. In many cases, this doesn’t result in any tax owing, due to the tax treaties in place between both Australia and New Zealand, and the US.
In order to use the tax treaty to ensure that income is taxable in the home country of the foreign company, we refer to Article 5 (Permanent Establishment). As a broad overview, this defines the rules regarding the cases in which the US may tax the “effectively connected income”. A number of factors are taken into consideration, such as whether the foreign company has staff on the ground in the US, warehousing, offices, or any other presence.
Once these factors are considered thoroughly, we should be able to establish:
- Is there any “effectively connected income” and,
- Whether the foreign company holds “permanent establishment” in the USA.
While point 1 above will be used to determine if there will be a tax obligation for the foreign company in the US, a filing obligation exists regardless if the answer to point 2 is “yes’.
Even if the foreign company has no tax to pay, a tax return filing obligation will likely still exist (Section 1.6012-2(g)(1)(i) and (ii)).
If your NZ or Australian company is considering selling into the US, or are already underway with such an endeavour, it is essential that you understand the tax obligations.