INTERNATIONAL TAXATION Foreign company, FORco, is engaged in the business of pur

Question

INTERNATIONAL TAXATION

Foreign company, FORco, is engaged in the business of purchasing and selling of wooden tables. Customers in the US place orders of wooden tables directly with FC's home office. FC ships the wooden tables directly to US customers, with title passing in the US. FC generates $700,000 of US source income as a result of the wooden tables sales. FC has no employees or fixed place of business in the US. Will FC be subject to taxation on its US wooden table sales? Please explain your answer and any assumptions you are making.

Answer should include treaty and tax rates, effects of internet sales, section C3 and 894.

Explanation / Answer

As per the applicable rules, FC has no employees or fixed place of business in U.S. indicating that it has no "Permanent Establishment" in U.S. on in the states to which it sells wooden tables. If there is a treaty between US and the country of the foriegn corporation, the total income of $700,000 may be completely exempt or subject to lower rates of federal taxation in U.S. The normal tax rate on corporations in U.S is 35%. However, it is important to note that while the income earned by the foriegn corporation may not be subject to U.S. federal tax, the income may be taxable at the state level as many states in US don't follow the provisions established by U.S. treaties with other countries. In such a case, the foriegn corporation would be required to pay tax as per the applicable state level tax rate.

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