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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22704
Experience:  Taxes, Immigration, Labor Relations
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I am a South African national that moved to the USA about 3

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I am a South African national that moved to the USA about 3 years ago.

I have set up a business in the USA.

1. I have used my existing South African business to do the accounting and administration. I argue that the SA business can bill the USA business for those services.
2. For a large part of the past years I have also not drawn a salary, and argue that the SA business can bill the USA business for that also.

What do I need to do not to make this appear like the standard scam for fake offshore expenses when I make payment to the SA entities? I can see how this can raise suspicion, but in my case it is true.
Submitted: 3 years ago.
Category: Tax
Expert:  Lev replied 3 years ago.

LEV :

Hi and welcome to Just Answer!
1. I have used my existing South African business to do the accounting and administration. I argue that the SA business can bill the USA business for those services.
Because you are US resident - you need to report all your worldwide income. If you have two separate businesses - you may have financial transactions between businesses - there is no issues - but income from both businesses should be reported on your personal tax return,
In additional - you might be a subject of FBAR reporting on foreign accounts.
If you receive income from SA business - that income should be included into your own tax return.
2. For a large part of the past years I have also not drawn a salary, and argue that the SA business can bill the USA business for that also. What do I need to do not to make this appear like the standard scam for fake offshore expenses when I make payment to the SA entities?
If the business is required or not to pay you wages - depends on how the business is organized. If that is a LLC - all taxable income is reported on your tax return; if that is S-corporation - it is required to pay reasonable wages but not more that net profit; A C-corporation is a separate legal entity - and should pay its own income tax.

Customer:

1. The South African business that performed the administration is the equivalent of a c-corporation, 100% owned by me. It has revenues and expenses, and due to holdings in real estate and a small aircraft it actually lost money due to market value depreciation of assets. Do I just include the c-corp’s income like it is an s-corp to my own, resulting in a negative revenue then?

LEV :

1. The South African business that performed the administration is the equivalent of a c-corporation, 100% owned by me.
If your SA business is a legal equivalent of C-corporation - it should file its own tax return in SA.
It has revenues and expenses, and due to holdings in real estate and a small aircraft it actually lost money due to market value depreciation of assets.
If your SA corporation does the accounting and administration for US corporation - and that work is assumable done by you - that means SA corporation does business in the US, should be registered as a foreign corporation and file an US tax return.
Do I just include the c-corp’s income like it is an s-corp to my own, resulting in a negative revenue then?
The C-corporation is a separate legal entity and should file its own tax return. You need to include into your own income only dividends paid by the C-corporation to you. You may not report a loss from the C-corporation on your individual tax return.

Customer:

1. the accounting and administrative work was done by my administrative accountant and not by my

Customer:

the management work was in fact done by my

Customer:

so if you consider that information you believe that the SA business, essentially through outsourcing, is doing business in the USA? and you say that business should then register for tax here and file here?

Customer:

i.e. do these Indian outsourcing companies register in the USA and file i the USA?

Expert:  Lev replied 3 years ago.
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Expert:  Lev replied 3 years ago.

1. the accounting and administrative work was done by my administrative accountant and not by my.. so if you consider that information you believe that the SA business, essentially through outsourcing, is doing business in the USA? and you say that business should then register for tax here and file here?

Because you are 100% owner and you are in the US - it is possible but hard to believe that you do not do any work for your SA company. However if that is correct - and ALL work is physically done outside the US - your SA corporation doesn't need any US registration.

i.e. do these Indian outsourcing companies register in the USA and file i the USA?

Some probably have US registration. Some Indian companies are owned by US corporations.

Customer: replied 3 years ago.
I do not believe I or the corporation has FBAR issues as the bank accounts have been in the red, offset by assets in the form of a house and a light airplane, which I understand does not have to be registered.

As I said there are two components to the SA Company providing services to the USA Company. The one service is not done by me, but I also provide services and then my understanding is that it has to be registered for tax in the USA. As it is making a loss due to asset based losses, this is actually to my advantage.

Assuming then that the SA business has to register for tax here, it started here with a certain equity value, which has been much reduced over the last three years due to the financial collapses.

1. What if any penalties will I be subject to if I now register the SA businesses for tax effective June 2008?
2. Can I then freely charge service fees from one business to the other without the 30% withholding tax?

Thanks
Customer: replied 3 years ago.
I am not getting feedback. Can I expect and answqer to my last questions?
Expert:  Lev replied 3 years ago.

 

Sorry for delay.

1. What if any penalties will I be subject to if I now register the SA businesses for tax effective June 2008?

If a foreign SA corporation has a nexus in the US - it is required to file US tax return (and state tax return).

Interest. Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction understatements from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Late filing of return. A cooperative that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $135. The penalty will not be imposed if the cooperative can show that the failure to file on time was due to reasonable cause. Cooperatives that file late should attach a statement explaining the reasonable cause.

Late payment of tax. A cooperative that does not pay the tax when due generally may be penalized 1/2% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the cooperative can show that the failure to pay on time was due to reasonable cause. .
2. Can I then freely charge service fees from one business to the other without the 30% withholding tax?
The US business may pay for services to the business abroad - as long as both businesses agree on the amount of service provided and on charge. There is no withholding for from payments to corporations. Withholding is required if payments are for services provided in the US.
Please also see page 51 for tax treaty withholding exemptions from payments made to So. Africa residents - http://www.irs.gov/pub/irs-pdf/p515.pdf
As I mentioned above - because you are 100% owner of SA corporation - in case of audit - you might need to proof that you do not make any managerial decisions - and the SA corporation is fully managed by SA personal.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22704
Experience: Taxes, Immigration, Labor Relations
Lev and 2 other Tax Specialists are ready to help you
Customer: replied 3 years ago.
I was with you until the last paragraph.

1. It seems that because my SA entity sells services (performed in the South Africa) to my USA entity, it has a nexus here, and thus need to file taxes. Due to property devaluation is made a loss so that will not incur taxes or penalties. Right?
2. This SA based entity is often managed from here (in the USA) by myself. Looking at your last paragraph; How does this fact affect my ability to have it charge the USA entity for services rendered by my admin staff in SA?
Expert:  Lev replied 3 years ago.

1. It seems that because my SA entity sells services (performed in the South Africa) to my USA entity, it has a nexus here, and thus need to file taxes. Your SA corporation might have a nexus in the US not because the customer is located in the US, but because you as an employee or manager of the SA corporation perform working activities physically in the US.

The location of the customer generally has no effect on the nexus.

Due to property devaluation is made a loss so that will not incur taxes or penalties. Right?

The corporation doesn't realize neither a loss nor a gain because the property value is changed. The loss or gain is realized only if the property is sold.

To determine if there was a gain or loss - the tax return should be prepared.

If the tax return was required and was not timely filled - the minimum penalty for a return that is over 60 days late is the smaller of the tax due or $135.

This SA based entity is often managed from here (in the USA) by myself.

That fact actually constitutes the nexus.

Looking at your last paragraph; How does this fact affect my ability to have it charge the USA entity for services rendered by my admin staff in SA?

That fact doesn't affect the ability of the SA corporation to charge for services.

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