The United States and Canada recently announced an initiative to track individuals crossing the border for both work and for personal reasons. The initiative will track the number of days a resident of one country works or stays in the other country during a calendar year. The foreign individual will have their days in Canada or the U.S. tracked beginning when they cross the border. Once they cross the border back into their resident country, the tracking of their days will complete. The goal of the initiative is to track what foreign companies should be remitting withholding and payroll taxes to the Internal Revenue Service (IRS) or Canadian Revenue Authority (CRA) and to track the tax implications on individuals.

The general rule in the U.S. and Canada is that if an individual is in either country for 183 days or more, the person will be taxed as a resident of that country. Residency determines how and where certain portions of income can be taxed. For example, the United States taxes residents on a worldwide basis and requires residents to file certain informational reporting returns. If a Canadian citizen were found to be spending 183 days or more in the U.S., that person may be subject to the U.S. taxation of their worldwide income and would also be subject to the filing of certain informational returns. As the initiative will track the days spent in a country, the IRS and CRA will now have data available to them on where an individual should be considered a resident for tax purposes. The U.S./Canada tax treaty also provides certain “tie breaker” rules to resolve residency issues where an individual may be considered a resident of both countries under their respective domestic provisions.

Canada also generally requires a 15 percent withholding tax on payments (or wages sourced to Canada) to employees of foreign firms who work temporarily in Canada. The burden is on the foreign firm to file the necessary forms and withhold the necessary tax to remit to the CRA. This is done on an individual by individual basis. An individual may not ultimately be subject to Canadian tax, but it is the foreign firm’s responsibility to remit the necessary withholding tax on any wages or payments that result from services in Canada, unless an advance payroll tax waiver is obtained from the CRA prior to the individual performing work in Canada.

If you or your company is currently sending individuals into the U.S. or Canada, please contact us for more information.

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The Chinese tax authorities have enhanced their efforts to monitor intra-group outbound service payments and royalty charges. In July 2014, the highest tax authority in China, the State Administration of Taxation (SAT), released the “Notice of Anti-Avoidance Examination on Significant Outbound Payments.” In this notice, the SAT instructs the local tax bureaus to launch comprehensive tax examinations on all significant outbound service fees and royalty fee payments of multinational companies (MNC), with an aim on intra-group charges and profit shifting avoidance.

The SAT Notice indicates that all significant outbound service and royalty charges deserve special attention in these tax examinations. The definition of “significant” outbound service and royalty charge values may vary by region or SAT bureau. It appears that these examinations will target enterprises paying service fees or royalties to overseas related parties during the period 2004 – 2013, especially on those payments made to tax havens, low tax rate countries/regions, etc.

MNC’s that currently have outbound intra-group service or royalty charges are encouraged to review their outbound intra-group charges to ensure they do not fall within the scope of the SAT examination. Please contact us for more information.

Leave your comments below! For further questions, please contact Michelle Wang at (312) 602-3624.

 

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Straight Talk on Inversions

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