Overview of Tax Compliance Services in the USA
The US tax structure is segregated into federal, state, local, and special-purpose jurisdictions. Unlike India, wherein there exists central taxation, USA’s taxes are primarily divided into federal and state, having various tax implications, implying that, , there is a requirement to filing only one income tax return in India , whereas, in the US, two separate tax returns are required to be filed, one for the federal and another for the state.
USA taxation of income earned by non-USA persons is dependent on the income having a nexus with the USA and the extent and level of the non-USA person's presence in the United States of America.
Enterslice operates across the USA with the aim of helping businesses in the navigation of the USA's complex regulatory landscape. Our services help businesses in complying with the prescribed laws and regulations with the purpose of avoiding costly legal issues, thereby permitting our clients to focus on the core business activities and achieve their business goals.
Different Types of Taxes in the USA
The different types of taxes present in the USA are discussed below -
Corporate Income Tax (CIT)
On 22 December 2017, US tax reform legislation was enacted by the name of Public Law or P.L. 115-97, which moved the US from a 'worldwide' taxation system to a 'territorial' system of taxation. Most importantly, P.L. 115-97 provided for the permanent reduction of the 35% of Corporate Income Tax (CIT) rate on resident corporations to a flat 21% rate for tax years commencing after 31 .12.17
Before the enactment of P.L. 115-97, on 31.12.17, a non-USA corporation involved in a USA trade or business attracted a tax @ a 35% USA CIT rate on income from US sources effectively related to that business (i.e. effectively connected income or ECI). However, there was a significant revision in the federal tax regime pursuant to P.L. 115-97, which provided for the permanent reduction of the 35% Corporate Income Tax rate on ECI to a 21% rate for tax yrs starting after 31.12.17. Some USA-source income (e.g. interest, dividends, and royalties) not effectively related to the business of a non-USA corporation continues to be taxed on a gross basis at 30%.
Corporate Branch Income
The corporate branch income attracts a gross 30%of branch profit tax on earnings and profits for the year of a US branch of foreign corporations that are effectively related to a USA business to the extent that they aren’t reinvested in the branch’s assets and are imposed as per the US tax legislation.
Hence, the taxable base for the branch profits tax is increased (decreased) by any decrease (increase) in the branch's USA net equity. There can be a reduction or elimination of the branch profits tax on profits entirely if the same is provided by a relevant treaty (subject to strict 'treaty shopping' rules). The objective of the branch profits tax is to treat USA foreign corporations' operations in a similar manner as US corporations owned by foreign persons.
With someexceptions, there shall be the imposition of a 30% (or lower treaty rate) on interest payments by the USA branch to foreign lenders. Additionally, the tax shall be applicable if the amt of interest deducted by the branch on its USA tax return exceeds the amount of interest actually paid during the year.
In the United States, the “Federal Tax” paid by the assessee is the main provider of the federal government's budget and is directly paid to the Internal Revenue Service (IRS). The revenue from the Federal Tax is utilized for various essential programs, which include education, relief efforts following natural disasters and transportation.
Alternative Minimum Tax (AMT)
AMT was previously levied on corporations other than S corporations (as defined below) and small C corporations (generally those with 3-year average annual gross receipts which do not exceed USD 7.5 million).
S Corporations are Corporations having 100 or lesser eligible shareholders, none of which may be corporations, meeting certain other requirements, and can elect to be taxed in accordance with the Subchapter S of the Internal Revenue Code (IRC or 'the Code'), hence called as S corporations. S corporations are taxed in a similar manner but aren't identical to the partnerships (i.e. all the tax items [e.g. income, deductions] flow via the entity's owners). Thus, S corporations generally don’t attract the US federal income tax.
The tax was 20% of alternative Minimum Tax Income (AMTI) if there was an excess of USD 40,000 exemption amt (subject to a phase-out). AMTI was computed by making the adjustments in the regular taxable income of the corporation by specified adjustments and 'tax preference' items. Tax preference or adjustment items can arise in cases of the corporation having percentage depletion, intangible drilling costs, substantial accelerated depreciation, or non-taxable income.
P.L. 115-97 has repealed the corporate AMT effective for tax years commencing after 31.12.17 and provided a mechanism for the refund of prior-year corporate AMT credits by the end of 2021.
The IRA, i.e. the Inflation Reduction Act 2022, enacted a new corporate AMT, effective for tax years beginning after 2022, on the basis of the financial statement income (book minimum tax or BMT). The BMT is a 15% minimum tax imposed on the adjusted financial statement income (AFSI) of C corporations. The BMT increases an assessee's tax to the extent that the tentative minimum tax is exceeding regular tax plus (BEAT), i.e. base, erosion, and anti-abuse tax.
Gross Transportation Income Taxes
Foreign corporations and non-resident alien individuals are liable for a yearly 4% tax on their US-source gross transportation income (USSGTI), having an exception for certain income treated as effectively related to a USA trade or business. Transportation income is any income being derived from, or related to, (i) the usage (leasing or hiring for use) of an aircraft or vessel or (ii) the performance of services directly connected with the use of a vessel or aircraft.
Base Erosion and Anti-Abuse Tax (BEAT)
P.L. 115-97 introduced a new US federal tax by the name of the ‘base erosion and anti-abuse tax' (BEAT). The legislation targeted US tax-base erosion through the imposition of additional corporate tax liability on corporations (other than real estate investment trusts [REITs], regulated investment companies [RICs], or S corporations) that, along with their affiliates, are having average annual gross receipts for the 3 -year period ending with the preceding tax yr of at least USD 500 million and that make some base-eroding payments to related foreigners during the tax year of 3% (2% for some securities and bank dealers) or more of all their deductible expenses apart from some exceptions.
State and Local Income Taxes
Corporate Income Tax rates may vary from state to state and, in general, range from 1% to 12% (however, some states charge no income tax). The most common taxable base is the federal taxable income, which the state provisions can modify and, in general, is apportioned to a state based on an apportionment formula consisting of 1 or more of the following aspects: sales and other receipts, tangible assets and rental expense, and payroll. Most states have moved away from a three-factor formula favouring a one-factor receipts apportionment methodology.
There are no provisions for a value-added tax (VAT) or sales tax at the federal level; however, sales and use taxes are a major revenue source for the 45 states that levy these taxes on the District of Columbia. Sales and use tax rates may differ between states and generally range from 2.9% to 7.25% at the state level. Most states also permit a 'local option' that allows the local jurisdictions, like cities and counties, to levy an additional percentage in addition to the state-level tax and for keeping the related revenues.
Withholding Taxes (WHT)
Under the domestic tax laws of the USA, a foreign person generally is subject to a 30% tax on the gross amt of certain USA-source income. All persons ('withholding agents') making USA-source fixed, determinable, annual, or periodical (FDAP) payments to foreign persons must generally report and withhold 30% of the gross US-source FDAP payments, such as interest, royalties, dividends, etc. Withholding agents are allowed to withhold at a lower rate provided the beneficial owner properly certifies their eligibility for a lower rate, either based on the operation of the US tax code or based on a tax treaty. Information reporting of the US-source payments is always required, even if no withholding applies.
Customs Duties and Import Tariffs
All goods imported into the USA are subject to entry and are dutiable or duty-free as per their classification according to the applicable items in the Harmonized Tariff Schedule of theUSA. The classification also recognizes eligibility for special programs and free trade agreement preferential duty rates. The President is authorized under US law for increasing tariffs in some cases (e.g., to address national security concerns).
Excise taxes (inclusive of retail excise taxes) are generally levied by the federal and state governments on a wide variety of goods and activities, like kerosene, gasoline and diesel fuel used for transportation, air transportation, wagering, foreign insurance, ozone-depleting chemicals (or products manufactured using ozone-depleting chemicals), manufacturing/importing of specified goods (e.g., tires, certain sporting goods firearms and ammunition, tobacco and alcohol ), and selling certain goods at retail (e.g. trailers, heavy vehicles, bodies, and chassis). The excise tax rates differ depending on the goods and activities upon which they are charged.
Most states and local governments levy various property taxes on real property. Most states also levy a tax on business personal property.
Stamp taxes aren’t generally relevant at the federal level, except for the federal stamp tax levied on the transfer of National Firearms Act (NFA) firearms. State and local governments levy stamp taxes in a frequent manner at the time of officially recording a transaction which involves real property (commonly known as transfer taxes). Such taxes generally are on the basis of the real property's value that is being transferred. The tax generally is levied on the direct sale of real property, but some of the state and local governments also levy such a tax on selling a controlling interest of the real property, which is the selling of direct or indirect ownership of the real property. Most state and local governments also levy stamp taxes on some goods, the availability of which is made for sale in the respective jurisdiction, like cigarettes and other tobacco products.
Accumulated Earnings Tax
Corporations (except for domestic and foreign personal holding companies, S corporations, corporations exempt from tax according to Subchapter F of the Code, and passive foreign investment companies) which accumulate earnings and profits for avoiding shareholder personal income tax (PIT) are liable for a penalty tax in addition to any other tax which might apply. The accumulated earnings tax is equivalent to 20% of 'accumulated taxable income'. In general, accumulated taxable income is the excess of taxable income with some adjustments, including a deduction for regular income taxes, over the dividends paid deduction and the accumulated earnings credit. It must be noted that a corporation can provide justification for the accumulation of income, and avoid tax, based upon its reasonable business needs.
Personal Holding Company Tax
The corporations of the USA and certain foreign corporations receiving substantial 'passive income' and are 'closely held' may attract personal holding company tax. This tax is 20% of undistributed personal holding company income and is imposed in addition to the regular tax.
Employers generally attract a federal unemployment tax (FUTA) of 6% on the USD 7,000 of wages paid to employees meeting certain criteria, with a potential reduction of upto 5.4% for state unemployment taxes.
Sellers, manufacturers, and importers of ozone-depleting chemicals (ODCs) or imported products manufactured using ODCs attract environmental taxes computed per weight of the ODC. Such taxes are reported on Forms 6627 and 720. The ODC tax on imported taxable products is ascertained under an exact method by weight or through the table method on the basis of the listed product. If the weight can’t be ascertained, the tax is 1% of the entry value of the product. There also is a tax on crude oil and a petroleum product (the oil spill liability tax) that was reinstated beginning 01.01.21 and currently be expiring on 31.12.25. The tax is levied on operators of refineries receiving crude oil; petroleum products entered into the USA for consumption, usage, or warehousing; and users or exporters of crude oil before a prior levy of oil spill tax.
Other State and Municipal Taxes
Other taxes which can be levied by the state, in furtherance of or in addition to taxes based on income, includes taxes on the capital of a corporation and franchise taxes. State and municipal taxes are deductible expenses for the purpose of federal income tax.
FATCA- Foreign Account Tax Compliance Act
The act is implemented to ensure the identification and collection of the requisite tax from the US person holding assets outside the territory of the USA by the Internal Revenue Service (IRS). FATCA legislation is applicable to any company or entity with US clients or asset(s) which provide USA source income. The provisions impose a 30% withholding tax on certain USAsource payments made to ''non-financial foreign entities (NFFEs) and foreign financial institutions (FFIs) that fail in the identification of certain USA investors, despite the USA persons directly or indirectly holding only non-US assets.
GIIN Number: Meaning
A GIIN refers to a Global Intermediary Identification Number that contains 19 characters. (GIINs are assigned by the registration system of FATCA to direct-reporting non-financial entities and financial institutions. The list of the various reporting entities includes:
- Financial institution (FI) branches.
- Foreign financial institutions (FFIs).
- Sponsored entities sponsoring entities, and sponsored subsidiary branches.
- Direct reporting non-financial foreign entities (NFFEs).
These registered entities can make use of their official GIIN to identifing themselves to withholding agents and tax administrators for the purpose of FATCA reporting
Form 8966 is filed for reporting information with regards to:
- Certain U.S. accounts,
- Substantial U.S. Owners Of Passive Non-Financial Foreign Entities (Nffes),
- Specified U.S. persons owning certain debt or equity interests in owner-Documented Foreign Financial Institutions (Odffis), And
- Certain other accounts as applicable on the basis of the filer’s chapter 4 status.
Tax Administration in the USA
The tax administration in the USA can be better understood through the following aspects.
US corporate assessees are taxed annually. They can make a choice of a tax year other than the calendar year. New corporations can use a short tax year for their 1st tax period, and corporations can also use a short tax year while changing the tax yrs.
The tax system in the USA is on the basis of the principle of voluntary reporting and self-assessment. A corporate assessee must be filing an annual tax return ( Form 1120 ) by the 15th day of the 4th month after the closure of the tax year. An assessee can get an additional 6-month extension of time for filing the tax return. To timely file the return can attract penalties. Additional penalties can be imposed for a late return for some information returns that are required to be filed with a timely return.
Payment of Tax
An assessee's tax liability generally is needed to be prepaid throughout the year in4 equal estimated payments and fully be paid by the original due date of the tax return. However, a corporation that is expecting its tax liability for that tax year to exceed the small sum of USD 500 must make estimated tax payments. Almost all corporations must make the payment of their full estimated tax liability for the yr in 4 estimated tax payments. For calendar year corporations, the 4 estimated payments become due by the 15th day of April, June, September, and December. For fiscal year corporations, the 4 estimated payments must be made by the 15th day of the 4th, 6th, 9th, and 12th month of the tax yr. Generally, no extensions for the tax payments are permitted. Failure to make payment of the tax by the due dates can lead to the imposition of late payment penalties, estimated tax and interest charges.
Penalties for Non-Compliance -
Civil and criminal penalties may be imposed in the event of failure with regard to adherence to the Code while reporting and paying US taxes. The civil penalty provisions may be further divided into four categories:
- delinquency penalties;
- information reporting penalties;
- accuracy-related penalties; and
- preparer, promoter, and frivolous-filing penalties.
Most, but not all, have exception provisions that permit potential abatement based on reasonable cause. In addition, many have provisions directing the ways of interaction of such penalties with other penalties.
- Delinquency Penalties
The Delinquency penalties can be divided into failure to file, failure of payment, and failure to make timely deposits of tax. Failure to make timely deposits of tax is applicable to assessees required to make instalment payments and WHT payments.
- Information Reporting Penalties
These penalties may be imposed upon those having an obligation to report certain information to the IRS. Although if not a penalty, another result of failure in reporting certain information on international operations is a potential extension of the period of limitation for assessment of tax for failing to report certain information in the proper manner.
- Accuracy of Tax Returns
The penalties with regard to the accuracy of tax returns are categorised into the negligence penalty, substantial overstatement of pension liabilities, the substantial understatement of penalty, substantial gift tax or estate valuation underestimation, and the valuation penalties. These penalties are coordinated with the fraud penalty to eliminate any stacking of the penalties. Again, like other provisions, the fraud penalty isn’t intended to be levied as a stacked penalty.
- Preparer, Promoter, And Frivolous-Filing Penalties
Presently, the most prominent of these penalties is the return preparer penalty, where the penalty is for a position on a return regarding which the preparer didn't have substantial authority, and there was a failure with regard to the disclosure of the transaction on the return. A penalty for a wilful or reckless attempt of understating the tax liability of another person is also included in this provision. Additionally, return preparer penalties may be imposed in the event of a failure to furnish a copy of a claim for refund or a return or to the assessee signing the return or claim for refund, furnishing one's identifying number, or filing a correct information return.
Services Offered by Enterslice
Enterslice’s taxationteam is perfectly structured for providing our clients with tailor-made solutions. We combine in-depth taxation knowledge and practical experience to help them meet their industry-specific taxation challenges.Our taxation professionals work together with experts from our global, multidisciplinary network. We offer the following Tax Compliance Services in the USA.
Corporate Tax Advisory
Our team of experienced CA, CFA and CS can assist clients with all their regular corporate tax compliance requirements. Our services in this area are detailed below:
- Corporate Tax Return
- Estimated Taxes
- Tax Return Extensions
- Permanent Establishment issues
- Withholding Taxes
Federal Tax Services
Our experienced team of experts can provide guidance to businesses regarding the complexities of new federal tax legislation, regulatory guidance and changing tax rate environments for realising tax savings and mitigating risk through the following services.
- Identification of Accounting methods and periods
- Inventory rules and calculations, including UNICAP and LIFO
- Timing of income and deductions
- Long term contracts
- Planning to mitigate BEAT and the Sec- 163(j) disallowance
- Tangible and intangible property capitalization and cost recovery, including bonus depreciation
- Revenue recognition and leasing, including GAAP change
- Accounting method issues in mergers and acquisitions
State and Local Tax Advisory
Our team can help clients in discovering strategies for tackling state and local tax burdens and realization of opportunities through the below-mentioned services.
- Abandoned and unclaimed Property
- Asset and Wealth Management
- Credits and Incentives
- Indirect Tax
- Payroll and Employment Tax
- State and Local Tax Insights
- State Annual Reports
- State Franchise Tax Returns
- State Tax Nexus
M&A Tax Services
Our services can facilitateincreasing shareholder value, reduction in transaction risk and achieving optimal outcomes. The M&A tax services provided by our team are as follows -
- Global Structuring
- Private Equity
- Bankruptcy and Business Recovery
Private Equity/Venture Capital Fund Services
Our experts in private equity/venture capital Fund group guide clients regarding compliance with all the necessary returns and reporting obligations. We offer the following services -
- Tax Structuring Advisory for Funds
- Preparation of Schedule K-1′s
- Controlled Foreign Company (CFC) testing & reporting assistance
- Passive Foreign Investment Company (PFIC) testing & reporting assistance
Adherence with FATCA- Foreign Account Tax Compliance Act
Our team can help in complying with FATCA requirements. The act is implemented to ensure the identification and collection of the requisite tax from the US person holding assets outside the territory of the USA by the Internal Revenue Service (IRS). FATCA legislation is applicable to any company or entity with US clients or asset(s) which provide USA source income. The provisions impose a 30% withholding tax on certain USAsource payments made to ''non-financial foreign entities (NFFEs) and foreign financial institutions (FFIs) that fail in the identification of certain USA investors, despite the USA persons directly or indirectly holding only non-US assets.
We offer the following services regarding the same
- Obtainment of Global Intermediary Identification Number (GIIN).
- Reporting any accounts held by a US person with the respective countries revenue authority
- Filing form 8966 with IRS