ONB Webinar/Webinaire: Exporting to the US? Learn How to Avoid US Taxation Surprises

© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 1 © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 1

ONB and KPMG: Exporting to the US? Learn How to Avoid US Taxation Surprises that Hurt Your Bottom Line ONB et KPMG : Apprenez à éviter les surprises fiscales américaines qui affectent vos résultats nets.

Opportunities NB Webinar Series



Host: Heather MacLean Director of Marketing / Directrice du marketing Opportunities / Opportunités NB Guest: Candace Sears Senior Manager and leader of KPMG’s New Brunswick US Tax Practice gestionnaire principal et responsable de la pratique fiscale américaine de KPMG au Nouveau-Brunswick



Today’s Speaker

Candace Sears Senior Manager KPMG in Canada T: +1 506 453 7367 E: [email protected]

Canadian, US, and Cross Border Taxation



Client-focused, proactive, professional and accountable, Opportunities NB is the first point of contact for local and foreign businesses looking to grow, expand or locate. We are focused on performance, high growth opportunities and growing New Brunswick. Opportunities NB is poised to:

• Support business development inside New Brunswick, including business support services for small, medium-sized and large businesses;

• Proactively pursue high growth opportunities through exports and foreign investment; and

• Work with industry partners, economic development stakeholders and public sector partners to identify, build and support a portfolio of significant high growth opportunities both within and outside the province!

If growth through exporting is in your business plan, you’ve come to the right place. We specialize in providing one-on-one counseling and specialized services to export-ready companies and existing exporters.

Exporting to the US & Taxation KPMG in Canada Tax kpmg.ca/tax

March 17, 2016

© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 6

Exporting – By the Numbers

US Exports Pay Off

In 2014 Exports from NB totaled $13 billion

FAST FACTS

Local venture capitalist claims that 75% of all sales made by their portfolio companies are exports.

FAST FACTS

2014 Exports made up 47.5% of the provincial economy

FAST FACTS

92% of NB exports go to the United States

FAST FACTS


Agenda

Topic

1. The Canada & US Tax Treaty 2. Canadian Taxation 3. US Federal Tax 4. US State Tax 5. Business Travelers 6. Planning Ahead & Remediation



The Canada-US Tax Convention (Treaty)


The Canadian-US Tax Convention

Avoids Double Taxation Must be taxable in both countries first

A shield, not a sword

Taxes paid in one country will count towards total tax bill in the other “The Treaty”



Canadian Taxation


Canadian Taxation

Canadian Resident Individuals Federal Taxation based on Residency

Provincial Taxation based on Residency

Canadian Corporations Federal Taxation based on

Incorporation & Shareholders

Provincial Taxation based on salaries & revenues

Permanent Establishment required to owe provincial tax


Canadian Taxation

Provincial Permanent Establishment A fixed place of business Office Space Manufacturing Plant A construction project lasting longer than 183 days



US Federal Taxation


US Federal Taxation

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Canada-US Border – - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

CAN CO

US CO

Subsidiary

CAN CO

Branch


US Federal Taxation

US INCOME CONNECTED TO A TRADE OR BUSINESS

A Permanent Establishment Exists

No Permanent Establishment

A US Corporate Return must be filed.

No Federal Taxation.

Treaty return claims treaty protection.

Preserves the right to deductions

A US Corporate Return must be filed.

Tax Rates 15-39%

Deduct expenses related to earning US income.

Branch taxes apply

CAN CO


US Federal Taxation US Trade or Business Sale of Services For Federal purposes – sale occurs where service

Is performed

Sale of Products For Federal purposes – sale occurs where

ownership changes hands

Consider – FOB Destination, FOB Dock


US Federal Taxation – Permanent Establishment A “fixed place of business” through which your business is carried on Includes: A dependent agent (like an employee) that has

authority to habitually conclude contracts. An employee or project which is ongoing in the US

for longer than 183 days in any 12 month period

Does not include: Use of facilities for storage, display, or delivery of

inventory Purchasing goods or collecting information Advertising, supplying information, research


US Federal Taxation – Filing Requirements Permanent Establishment Form 1120

Due 2.5 months after year end

Consequences of non-filing

Double taxation Interest & penalties on unpaid tax $10,000 penalty for related party trans.

No Permanent Establishment Form 1120F

Due 5.5 months after year end

Consequences of non-filing

$10,000 penalty Tax on gross income



US State Taxation


US State Taxation

Three primary types of state taxes Income/Franchise

Non-income based taxes Gross Receipts tax (e.g. OH, KY, NJ, WA)

Sales and use tax

Also property taxes, licensing taxes, etc.

Each state has their own tax regime, And their own threshold of Nexus


US State Taxation US Trade or Business Sale of Services For Federal purposes – sale occurs where service

Is performed

For State purposes – sale occurs where service is enjoyed (location of customer)

Sale of Products For Federal purposes – sale occurs where

ownership changes hands

For State purposes – sale occurs where product is delivered (location of customer)


US State Taxation

What is “Nexus”? The minimum contact/connection with the state that allows it to impose tax

Different standards in different states and for different taxes

Solicitation of sales of products does not create income tax nexus, but it DOES create Franchise/sales tax nexus

Solicitation of sales of services generally DOES create nexus


US State Taxation

What is “Nexus”? The minimum contact/connection with the state that allows it to impose tax

Common nexus creating activities

Storage of inventory in warehouses

Delivery of goods in company-owned vehicles

Employees in the state

Independent Agents


US State Taxation

If a Foreign Person (Canadian company) is doing business in the US, then they probably have nexus in one or more states even if no US federal PE

Half of the states do not follow the treaty.

When federal income tax is zero, states will still impose tax. Consider whether US federal tax treatment is different at state level

Materiality of exposure needs to be evaluated

Where available, consider voluntary disclosure programs for known material exposures

Various state tax returns – typically due 2.5 months after year end



Business Travelers


Business Travelers

A Canadian company

Employing Canadian resident employees

Employees travel to the US for:

Tradeshows

To make sales

To perform installations

To train customers

Employees may be required to file a US non-resident tax return.

To report income earned from you.


Business Travelers Employee Earning Greater than $3,000 USD

• We assume 240 working days per year

• If your employee earns $60,000, it will take roughly 12 days.

• Must file a US tax return to claim treaty exemption

Employee Present for more than 120 Days (4 months)

• Formula to meet the threshold is 100% of current year days + 1/3 of days in the prior year + 1/6 of days in the second preceding year.

• If total is more than 183 – Must File a Closer Connection Election

Employee Present for more than 183 Days

• Employee may be taxable in the US

• Depends on the company’s presence in the US and % of US sales.


Business Travelers

Employee Consequences

• $1,000 Penalty per year, per employee

• No Statute of Limitations

• Back Taxes Owing

• Border Restriction

Employer Consequences

• Border Restriction

• Penalties for Failure to Withhold

• Unhappy or Disengaged Employees



Planning Ahead and Remediation


Remediation Voluntary Disclosure

File 6 years of overdue corporate returns

Must be submitted before any notice is received from the IRS

Waiver of Penalties 1st time non-compliant

Acting in good faith

State Amnesty Agreements Number required is based on state

Not all offer amnesty agreements


Planning Ahead

If the Goal is to minimize taxation Consider whether the states you

plan to enter are treaty or non-treaty states

Significant presence, such as warehouses, should be placed in treaty states

Review contracts to ensure employees don’t have the ability to conclude contracts


Planning Ahead

If the Goal is to expand aggressively Consider using a US subsidiary instead

of a branch to segregate US exposure

Separate US PE assets & employees into the subsidiary

Consider where to incorporate: Delaware, Nevada & North Dakota are popular states


A Nut Worth Cracking

“Firms that export tend to have higher productivity and they grow faster. The more export-oriented firms can become, the stronger their productivity will be.” “With an export growth increase of 300% in the past four years, there is great potential for NB companies in exporting.” – Opportunities NB



Questions



Opportunities NB Webinar Series Tel: 1.506.453.5471 Toll free: 1.855.746.4662 Email: [email protected]

Upcoming: Leveraging New Brunswick’s Atlantic Gateway Transportation Assets Featuring Leading Experts from New Brunswick’s largest transportation hubs – Scheduled for May 19th at 3:00 p.m. AST

Thank you

© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks of KPMG International.

Any Tax advice in this communication written by KPMG LLP is not intended or to be used, and cannot be used, by any person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (iii) promoting, marketing or recommending to another party any matters addressed herein. This presentation may contain a discussion or analysis of decided tax cases. Any discussion or description of the facts of the case or the positions argued by the parties is based solely on publicly available information. For greater certainty no confidential client or taxpayer information is disclosed. This information is current to February 21, 2016. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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