U.S. Tax Planning for the International Transportation of Goods by Containers

TL;dr: A legal case involving a car accident and a lawsuit against the driver and their insurance company. The injured person is seeking compensation for medical bills and lost wages. The case is being handled by a law firm and attorney, and is going to court. U.S. container ports handle a lot of cargo, which is important for the U.S. economy. The amount of cargo being handled has been increasing steadily. This has also led to more shipping containers being transported by rail and an increased need for trucking services. For companies involved in international transportation, there are tax considerations that may be available to them, such as income tax treaties and entity classification regulations.

Generally, a U.S. company doing business abroad has to pay U.S. taxes on all its income, but can get a credit for foreign taxes paid. Foreign companies are only taxed on income that is connected to a U.S. trade or business or is U.S. source fixed, determinable, annual, or periodical income.

There are specific tax provisions for income from international transportation activities. For example, certain foreign corporations are exempt from paying taxes on income from operating ships or aircraft, if their home country also exempts U.S. companies from similar taxes. This applies to a specific part of the international transportation industry. If a company moves goods using ships or airplanes between the US and other countries, it will be taxed on 50% of its income from those activities. However, if the company doesn’t own or operate the ships or planes, it won’t be subject to this tax. For example, a company that owns containers but uses other companies to transport them won’t be affected. TransportCo. could set up a company in a country with a good tax deal with the United States for international transportation. This company could earn profits from transporting goods internationally and avoid paying U.S. income tax on those profits. The profits could eventually be brought back to the United States at a lower tax rate. This would allow TransportCo. to save money on taxes. If an Austrian company earns money from transporting goods or people between the US and Austria, they have to pay income tax in Austria. This means that they might not save as much money on taxes as they thought. There are ways to potentially avoid paying taxes in Austria, like using a company in a low-tax country like the Cayman Islands. It’s also possible to still take advantage of tax treaty benefits with the US, even if the transportation activities are done through the Cayman company. The US-Canada treaty also has similar benefits for companies that use trucks or railways for international transport. The U.S.-Canada income tax treaty allows Canadian companies to make profits from operating motor vehicles in the U.S. without paying U.S. federal income tax. This applies even if the company doesn’t have a permanent establishment in the U.S. However, a new protocol to the treaty makes it more difficult to use a similar structure involving a Canadian company and a hybrid entity in Barbados to avoid taxes. But there are still ways to benefit from the treaty and bring profits to the U.S. at lower tax rates. This ruling says that a Canadian business trust can be treated as a corporation for tax purposes in the United States. This means that distributions from the trust can be taxed at lower rates. The trust also gets a tax deduction in Canada for the amounts paid to its beneficiaries. The trust is considered a “qualified foreign corporation” for tax purposes. If a business trust owns the trucks and conducts international transportation, it can avoid certain taxes. As long as all the trust’s income is given to U.S. shareholders each year, it won’t be taxed in Canada. When the income is sent from Canada to the U.S., Canada will take 15% of it, and the U.S. will give a credit for that tax. Overall, the trust’s income will be taxed at 15% when it’s sent to the U.S. When a U.S. company owns more than 50 percent of a company in Austria and Canada, those foreign companies are considered controlled foreign corporations (CFC) for U.S. tax purposes. This means that the U.S. company has to pay taxes on the foreign company’s income, even if that income is not distributed. One type of income that the U.S. company may have to pay taxes on is foreign base company services income (FBC services income), which is income from services performed for a related person outside the country where the foreign company is located. To avoid this, the foreign company needs to show that the cost of the services it provides is more than 20 percent of the total cost of performing the services. Therefore, it’s important for the foreign company to cover a significant portion of the costs of providing the services. If U.S. companies transport goods internationally in containers, they could save on taxes by using certain income tax treaties and check-the-box regulations. This is because these treaties have favorable transportation provisions that can help reduce taxes. For example, taxes paid on income from international transportation may be lower. This could mean more money for the companies. This article doesn’t talk about how foreign companies that own ships or planes used for international travel could get tax breaks in the U.S. We’re only talking about specific sections of the tax code and the rules that go with them. These rules apply to businesses that move goods between different countries. If a company is currently doing this through a U.S. company, they need to think about other rules too. And there are specific rules for businesses operating in Austria. The U.S.-Austria treaty allows an Austrian company owned by U.S. residents to be considered a resident of Austria for tax purposes. If the treaty exempts the company from U.S. federal income tax, the branch profits tax will not apply. However, the qualified dividend rates are set to expire in 2012. The U.S.-Malta treaty has ownership and base erosion tests for benefits, and it’s unclear how U.S. resident shareholders could qualify for benefits under the treaty. Austria exempts dividends from low tax jurisdictions, but only if the company paying the dividend is engaged in active business operations. No new regulations have been issued regarding tax treaty benefits for fiscally transparent entities. A foreign company could be taxed differently in the U.S. depending on if it has a business presence there. A treaty with Canada allows for certain benefits for international transportation activities. A company in Barbados may have lower tax rates, and Canada may exempt dividends from that company. The IRS’s opinions on tax issues are not meant to be relied on by others, but they do show the IRS’s stance on the issues. There are specific tax laws and regulations that apply to international business activities. Two tax experts from a company called KPMG LLP wrote an article about how U.S. treaties with Austria and Canada treat dividends as foreign source income. They work in the International Corporate Services practice and focus on cross-border tax planning for businesses. The information in the article is general and may change, so it’s best to consult a tax adviser for specific situations. This article was submitted by the Tax Section of The Florida Bar.

Source: https://www.floridabar.org/the-florida-bar-journal/u-s-tax-planning-for-the-international-transportation-of-goods-by-containers/