Walking through non-US taxation with Brian Schwam
Hosts & Guests
Brian Schwam, from WTP Advisors
Walking through non-US taxation with Brian Schwam
Meredith Smith [00:00:04] Welcome to SALTovation, this alteration show is a podcast series featuring the leading voices, Insult, where we talk about the issues and strategies to help you make sense of state and local tax. Hello, everyone, and welcome to another stultification discussion where we are joined by Brian Schwam of WTP Advisors. Brian has over 30 years of experience in international taxation and will walk us through some of the nuances of non U.S. taxation and how it overlaps with state tax. Brian, thank you for being here today.
Brian Schwam [00:00:42] Thank you, Meredith. My pleasure. I'm looking forward to our conversation and, of course, SALTovations.
Meredith Smith [00:00:47] Judy, lead partner of the SALTovation team at TaxOps. Hello, Judy. Brian, I want to start with you. You have carved out your career to focus on a niche area of taxation, being in the international tax arena, much like US professionals. We find that not many practices outside of large firms have an international tax resource or really know where to begin when it comes to addressing anything outside of US federal tax. So how did you come to focus on international tax and then what brought you to WP?
Brian Schwam [00:01:17] Great question and hopefully an interesting answer. I like probably most of you. I started in the big four where I did. I was a generalist and I did everything for the first two years of my career. A few years into my career, I was asked to specialize in that area. So I chose international. I have the choice of international or state, local and I chose international.
Brian Schwam [00:01:47] Yeah, I know it seems more it seemed a lot more like there was more, there was more to it is what it seemed like at the time, and the laws were different back then. And as a result there was a lot more to it. I would maybe not say the same thing today, but at the time that was definitely the case. And so for the next. Oh, let's say 15 years or more, I focus specifically on international tax and international tax can really be broken down into outbound international tax. That's US businesses that are. Expanding and doing business outside the US, and then there's also inbound, which is foreign. Headquartered businesses that are either investing in or expanding into the U.S. and within both of those categories, you've got your large companies, your middle market companies and your startup.
Brian Schwam [00:02:50] So that may be small in size and the issues may be the same in all cases, but they're. You know, the magnitude of the issues may not be the same, but the issues are there and the smaller the company gets, the more that there seems to be a lack of compliance with what needs to be going on. So when I left the big four, I decided to focus on them. A middle market and the lower on the lower end of the middle market and the mom and pop type businesses, really what I found out the day after I left the big four was that. CPA firms all over the country. Needed somebody with my skill set because they didn't have anybody in the house and they couldn't afford to introduce their client to one of the big four or one of the national firms that have the resources. So I've been acting as a bull on resource or surge resource for all these firms for the last 15 years. And as a result, I can apply what I learned and what I applied in the big four to large companies, to these smaller companies. I can help these firms service and keep their clients and not expose them to losing the clients to a larger firm that could be more full service. And as a result, the CPAs happy they get to keep their client. I'm happy. I've got a good stable of work and clients happy because they're being served by who they want to be served by.
Judy Vorndran [00:04:25] That's kind of like us, the same thing, because there's not a lot of resources at the regional firm level outside the big four, so it's very interesting. Your path is very similar to ours.
Brian Schwam [00:04:35] And my path was completely accidental because I did not. I didn't realize that that would be the case until, well, when I left. Well, after leaving Ernst Young, I was at KPMG for a couple of years. And when I left there, the individual who had been the managing partner of the office I was in, he had left in the intervening time period. And the day after I left, I just shot him an email saying, hey, here's what I'm doing now. And he's like, let's have lunch. We can use you. And that was the start of something I never even imagined would happen.
[00:05:09] And I don't even go after that, actually. So it's interesting that you and I know each other because we used to and I didn't even know we were using you as a white label resource with our international tax team at the former regional firm. I was the head of the national soccer practice, so it's kind of funny. And then we found each other a different way and then came to find out, you had actually done some projects for some clients of mine and I didn't even know it was you. I thought that was pretty fascinating, actually.
Brian Schwam [00:05:38] And the tax world is extremely small, right, as we all know. Right.
[00:05:43] You mentioned that you've worked with the giant companies that have issues even kind of down to the small mom and pop.
Judy Vorndran [00:05:51] So what factors?
Judy Vorndran [00:05:54] Cause, you know, on this and kind of in this question, I'll talk about the kind of inbound stuff that causes a foreign corporation to have a taxable presence in the US.
Brian Schwam [00:06:06] Great question and one that has many different answers, depending upon the location of the foreign corporation that's beginning to do business in the US. So we have to distinguish between whether that corporation is in a country that has a tax treaty with the United States or whether it's in a non treaty country. So an example of a non treaty country would be just about any country in South America, for example. So if a Brazilian company is carrying on business in the US under the definition found in our tax code. Then they become subject to US tax on some portion of their income.
Brian Schwam [00:06:53] And it doesn't take a lot to carry on business. And some of those non-trading countries are probably more akin to the state rules because the other set of companies would be from treaty countries where we have a tax treaty and the tax treaty has pretty standard language describing what's called a permanent establishment. And the permanent establishment is a higher threshold than carrying on business, and if a company ends up having a permanent establishment, then they become subject to new federal US federal tax on their other source income. That's related to that trade or business that's got effectively.
Meredith Smith [00:07:41] So then how would you say that? A lot of non US businesses are generating income from the state. Is it online sales? Is there a distribution channel there?
Meredith Smith [00:07:57] A manufacturer like where like how does that kind of revenue happen?
Brian Schwam [00:08:03] So it's kind of across the board. Obviously, there's more and more online e-commerce activity going on where foreign companies could be selling directly to US consumers and individuals, or they could be selling to US based companies who might be reselling the product or using the product in their own business. And again, that's one channel. You know, most of the time, if a foreign manufacturing company is, they may end up setting up a subsidiary in the US to act as a distributor of their product. They don't have to do that. Sometimes they do it directly from their own foreign entity and they know they don't have to store inventory. They're just shipping in. They don't think they really have anything here. They don't need anything here. That's all. That's one way that they generate revenue in the US. Like I said, the other way is to have their own wholly owned subsidiary. They could sell through independent dealers and distributors. Think we have some clients in common that have been doing that, selling through dealers. That's pretty common. Then there's the business to consumer fine, which may go through a dealer or it may not. It may go just right off the Internet directly.
Judy Vorndran [00:09:22] The customer's rights of half a ship at the port or into the. So, you know, I think about years ago when our Toyota had to put plants here and Honda put plants here because there are foreign car manufacturers. And we were by America, right where Detroit was blowing up, like, can you speak to that kind of those issues? Like there was a choice by some foreign entities to choose to build in America too. Was it a political thing so they would not lose traction of getting customers in the US market? And that's why they put plants here.
Brian Schwam [00:09:56] I think there was an element of politics associated with that because there was a time and I don't remember. I don't recall exactly the point in time, but it's like, oh, we're sending these dollars to Germany or to Japan or these other auto manufacturers. And so if they had a plan, like if there was a Honda Motor Company of America. Now, you're not, you're not buying a car from Honda, Japan, you're buying it from Honda US, and so people could feel better about buying something that was really made in America. What was it really made in the US? Parts of it were parts may have been shipped in and it was assembled in the US, but it wasn't necessarily fully engineered and manufactured in the US. But enough of it where and where people, I think, felt better about it than they did when it was just being imported as a final car from Japan. Tariffs may have had something to do with that as well, I'm not sure. But sometimes when you import parts, the customs duty on those parts is completely different than when you import a finished automobile.
Judy Vorndran [00:11:09] And the import export system kind of covers some of the duties similar to a sales tax. It's a duty on the item being the value of the item coming in, and we have to incorporate that into the cost of the goods sold right when we end up buying it as an end user. So it's sort of like a sales tax or a VAT, a duty. Right. That's right.
Brian Schwam [00:11:30] But a duty is also kind of like a trade theory. Yes. Where they're trying to protect US business. So, you know, you can't bring in a can't buy a car from Japan because it's going to have a 20 percent duty added on to it. So it makes it noncompetitive in the market in terms of price.
Judy Vorndran [00:11:49] And then you'll normally be handled like at the border. It's not like I'm paying the duties as I don't. How does that work in terms of how?
Brian Schwam [00:12:00] Well, when the importer imports the goods in the US, whoever that is, it's not going to be a person that's buying the car. It's going to be probably either a Honda Motor Company of Japan or some dealer in the US. One of them is probably going to be the former. They have to pay the duty to the government to bring it into the country.
Judy Vorndran [00:12:22] And it's interesting because you don't have a resale exemption in that instance, even though the end users me, I'm going to ultimately buy the car, but that it's the dealer that pays the duty and then that and then it ultimately gets wrapped into the purchase price that I pay. And then I have to pay a sales tax on that.
Judy Vorndran [00:12:37] So it really does ratchet up.
Brian Schwam [00:12:39] It's basically tax on tax write and it's to protect US business. And most of these companies that have set up US facilities, they're not in Detroit, they're not in the north, they're not in the Rust Belt. They're down and down south where there's no unions and labor is cheaper and they were able to do it. You know, there's a large Mercedes plant in Alabama. There's a number of large auto investments around the Atlanta area. So it's all in that part of the country. And so there may have been labor savings labor, there's a lot of labor related taxes and a lot of foreign countries that we don't have here at will.
Judy Vorndran [00:13:26] And then I'm just thinking as well, like if you think about all this, I mean, business is business, but business gets affected by taxes.
Judy Vorndran [00:13:32] And the taxes cause business very purpose itself or whatever, restructure, revise in order to streamline operations or cut costs in order to minimize the tax impact. So there's a lot of things to think about if you're a multinational business.
Judy Vorndran [00:13:48] Exactly right. And that's the excise taxes and all that. They're high. I mean, they could be 20 percent or 30 percent. Right. So you're not talking like eight percent, one percent. It's a significant cost to manage.
Brian Schwam [00:14:03] But I will guess this is a guess because I don't know for a fact that these auto companies set up these plants in the US to avoid cost. Yeah, I bet, because, you know, years ago I had a client that made small engines and outboard motors for boats. And if they imported those engines, the duty was relatively high. If they imported the parts and assembled the parts and then sold the engine, they avoided the duties completely. So it's a bit of a rate arbitrage, interesting animals, protectionism, we're all familiar with Harley Davidson bikes. Well, the ones that they sell in Brazil are made in Brazil. Because if they try to import a finished motorcycle into Brazil, it'd be some ridiculous duty added on to the top of it. The value makes it completely non salable to a customer. But if they import the parts into Brazil and assemble them in Brazil, thus creating jobs in Brazil for people that need work, then the duties don't exist. So they work on a lot of different ways to either promote local business or to protect other existing businesses. That's kind of the nature of double duty and trade war.
Judy Vorndran [00:15:30] And then this whole concept of who we have treaties with and who we don't have treaties with. Right where we play nice in the sandbox with some other countries and we don't play so nice with others. So that is a very interesting issue that you brought up at the very beginning, which is do we have a treaty or not? First question to look at, because then there's beneficial tax treatment if there is a trade relationship with another country. And I think that that kind of perception with countries that have treaties kind of stands down all the way to federal tax and state local tax. They misapprehend that the treaties are not universal. Right. They're just the federal government, not state governments and so forth. I think there's some misnomer about, oh, we have a treaty, therefore everything's exempt or the Fed the US federal government doesn't care about it. And of course, that ends up being an issue for me as our state governments do, because we don't always follow the treaty.
Judy Vorndran [00:16:22] Right. So, you know, it's interesting because in non treaty countries, I think the federal and state treatment is going to be the same. Yes. Yes. So what's bad for the federal government is kind of easier for the state. Yeah. Federal and state are married up. Yes, it is. And if there's a treaty which is good for federal and allows the foreign company to avoid potentially paying US tax, federal tax, now you've got a mismatch between federal and state act, which creates probably what I would call a nightmare scenario for for what I think it's mis known, especially in the small or medium business market, in the regional firm level especially, they have no idea that those trading exemptions exist or don't exist and they automatically.
Judy Vorndran [00:17:14] Put them towards the states and there's a misrepresentation by the practitioner who just doesn't understand the state tax consequences at the care level.
Meredith Smith [00:17:23] Well, and much too like public law. Eighty six to seventy to a treaty is only going to apply to income tax.
Meredith Smith [00:17:30] So we still have Yucel in and especially now with a waiver having gone in over two years ago. If you are a non US company, you sell more than one hundred thousand or two hundred things into a certain state you now have.
Meredith Smith [00:17:45] The state doesn't care where you sold from Wayfair, you have a sales tax and treaties just don't exist regardless.
Brian Schwam [00:17:53] Good point, though.
Judy Vorndran [00:17:54] They only extend the income tax and we're just such a great market with three hundred and thirty five million Americans. I mean, we buy a lot of stuff, and we like to buy reasonably priced or should I say cheaper, which is why you have a lot of import issues where there's some confusion among what the compliance duties are when you're importing out of country into country.
Meredith Smith [00:18:18] One, it's funny, there's like a boutique in Denver that I really like going to. And I was you know, I buy like a certain brand. And I decided to go directly to this website once just to see what else they had. So I bought some stuff. And they didn't have sales tax, my invoice, though, of course, like I reached out to them, I was like, oh, hey, by the way, you should be charging me sales tax, blah, blah.
Meredith Smith [00:18:39] The law went into this diatribe because let's be honest, I'm going to be like a customer service rep. She's like, oh, well, thank you. That's really that's really helpful. Let me see what I can find out. And she's like, oh, we're Canadian company, so it doesn't matter.
Meredith Smith [00:18:53] Was like, well, and she's like, oh, OK, I'll pass that on. And then they're just hoping that I will figure it out. Right.
Meredith Smith [00:19:06] But coincidentally enough, I bought from them recently again and there was still no sales tax. I should be like, hey, by the way, maybe you're their only US customer who made me in the boutique that I buy it from.
Judy Vorndran [00:19:19] Yeah, that's a huge issue that I find to be a lot of Canadians do perceive like we don't the states are going to catch them. And I think that's going to really change next year. I think a lot of Americans perceive that the states aren't going to catch them. Yes.
Judy Vorndran [00:19:34] That yeah. Let's just not isolate that too, like non US based business. And that's a good car.
Judy Vorndran [00:19:41] We don't want to, we want to make our friends to the north mad.
Brian Schwam [00:19:44] But yes, I think that's very good but I think that's something that we share in common, because like I just said, a lot of people that live in this country don't think the states are going to touch them. Well, in the international section of the Internal Revenue Code CPA, so they often deal with. They don't think of those as rules, but rather as guidelines. Because they don't think the IRS is going to catch anybody. So now we kind of fight the same battle, the uphill battle like, oh, this isn't real transfer pricing or we don't have to transfer pricing, but we don't have to let the IRS catch us also.
Meredith Smith [00:20:26] Then what happens? What are the penalties if you get caught and what do you have to do that you're going to get caught on? So like, what are the rules you have to follow? And if you don't follow the rules, what are the consequences if you get caught?
Brian Schwam [00:20:37] Well, there are thousands of pages of regulations on what the rules are. So I won't go into that. But the penalties can be either 20 percent of the tax that you didn't pay that you should have paid. If it's a certain level, it goes up to 40 percent of the underpayment at another level. And the way you avoid all that penalty exposure is to simply have a transfer pricing study. When you file your return, you have the if you have that study done. The IRS can still come in and adjust your transfer pricing, but there will be no penalties because you did attempt to look at it. So we had a client that said, look, we did a transfer pricing study like six years ago. We were never audited and they stopped. And then they got audited. And so instead of, like, paying us a fee of, let's say, ten thousand dollars to study, they paid us ninety thousand dollars to fight with the IRS and get the IRS adjustments away.
Judy Vorndran [00:21:38] And it was a huge amount of money, I'm sure I'm assuming, because if it's they're going to disallow those deductions for the costs.
Brian Schwam [00:21:45] If you don't have a valid they're going to attribute or they were going to attribute income to the US by imputing a royalty on the foreign sob, that it should have paid us all these things, that if they would have done a study, the IRS wouldn't have that chalkboard draw up and do whatever it wants.
Meredith Smith [00:22:02] Right. One of the first things Judy and I kind of did together, we wrote an article that was like, it's expensive to be non-compliant like that. Like if you can get ahead of it. I know you don't want to pay us 20 grand now, but you're going to pay us 80 grand later. Plus you're going to pay someone else one hundred grand.
Judy Vorndran [00:22:19] So but then I think that's what works honestly. Like nobody wants to pay to get in front of it. I find sometimes, like, it's expensive. They're starting up. They don't want to think about it. They got business to run. And I think that's nothing compared to what you could pay if you get it wrong. And I find it interesting, I make more money on the people who did it wrong because I got to be remediated everywhere.
Judy Vorndran [00:22:40] Right. And I've got to kind of put a plan in place and it costs a lot of money to remediate. And it sort of feels like the culture. And my husband, we have a new puppy and the dog trainer, which we started before covid and haven't continued because it got canceled, said you have to reinforce an animal with positive reinforcement, not negative reinforcement. You want to make them. But we have the system. A punitive reinforcement as opposed to you should just file your taxes and that's the law. But there is a culture in America and maybe elsewhere as well that is not about voluntary compliance. And I think that's a fascinating cultural difference. I have seen, although some countries like the UK are known to be very compliant.
Judy Vorndran [00:23:24] What do you make of it?
Judy Vorndran [00:23:26] Is that while you don't have treaties with some of them because they're not very compliant versus others that are more willing to be compliant?
Brian Schwam [00:23:33] No, I don't believe that's the reason why. And I'll give you an example. Most Latin countries, including Mexico, have a treaty with the tax advisors, who are almost like agents of the tax, OK? Like, they have to sign like there's a box on a Mexican tax and they have to check a box that says there's a transfer pricing study been done, checked, yes or no. And I've reviewed it. Check. Yes, rule. So we don't have any, we're not agents of the tax authorities here at all, but that's often and certainly in Latin America, that's often the case. Like they like, oh, I can't take that position because, you know, the hacienda, which is the Mexican tax authority, they'll be upset. Can't do that, so. No relation to whether we have a treaty or not, it's just it's just the culture. And I think the other thing that I've seen over the last 10 years is, well, I'm dating myself. When I started in public accounting, if you were the auditor, you did the tax. And, you know, after Sarbanes-Oxley, whenever that was like two thousand four, I believe now that's often split from the auditor. I don't do any tax where somebody else does the tax work. And then the auditor says, oh, I have to review what they did because I have to sign your audit report. And so clients pay extra fees to have it done by some departments.
Judy Vorndran [00:25:06] That's fine. That's kind of how our firm got started, was provision work. So we were we because of Sarbanes-Oxley, we were really good at provisions and we were that intermediary between the Big Four and our clients because they couldn't do both. So they needed us to do that part and we still do.
Brian Schwam [00:25:22] Now, I was going to just say back to that example about pay me now or pay me later. And I'm a little bit older maybe, but when I was a kid, there was a there was a Fram oil filter commercial and I remember friends, either of you and the guy, the mechanic has got his head in the you know, in the engine and the and the guy whose car it is is like, oh, well, you know, is there a problem? And he holds up the oil filter and says, you know, you can pay me now and buy this from the oil filter or pay me later.
[00:25:55] This is a man-bearing job, about two hundred dollars. And this is a frame oil field, about four dollars. That's the guy who owns this car and put four bucks into one of these when he had his oil change that I wouldn't be putting 200 bucks into one of these.
[00:26:14] Well, the choice is yours. You can pay me now or maybe later.
Brian Schwam [00:26:23] But sometimes people would rather pay for the new engine down the road because they didn't want to worry about it.
Judy Vorndran [00:26:28] Yeah, no. And that's what happens. I like that example, though, because that's real and you know, the differential in those costs. So we can use that. That's a good one to put that feather in my cap and use that on my next argument for people to do it now.
Meredith Smith [00:26:43] I was like, I'm sure if you spend some time on the Internet searching, you can probably find that. Find the commercial.
Brian Schwam [00:26:51] I can see it running in my head. That's really funny. I remember, though, that brand well.
Meredith Smith [00:27:00] So then on the flip side, like as an and kind of roping back in, like the penalty stuff as an American, as like a US based business with foreign operations, there are certain things that you have to do as a US business with your foreign staff to like make sure you're telling the government that you're doing things correctly.
Meredith Smith [00:27:22] And then also there are what I know there's oftentimes people have here heard like this ten thousand dollar penalty for just not filing. Yes. And it's performed per year. So what's kind of the outbound.
Brian Schwam [00:27:39] Yeah. So there are a number of forms that whether it's a corporation with a foreign subsidiary, a corporation with a foreign disregarded entity or an individual that's a beneficiary of a foreign trust or bank account bank accounts, there's many different things.
Brian Schwam [00:27:59] It's all about transparency. The IRS wants to know everything that you have everywhere, regardless. And the forms are getting worse and more complex all the time. I just noticed the other day that there is now something called a Katou and a K three that's going to be effective starting in twenty twelve four, twenty twenty one tax years. Combined, their forty two pages, their attachment, their attachments to the Schedule K one for all the international stuff that has to be reported to a partner, like a partner, like you.
Brian Schwam [00:28:34] Like us, like a foreign partner. Oh, you underneath the US for.
Brian Schwam [00:28:39] Yes. Oh good lord. Yeah. So I mean it's getting out of control but the information necessary. Like for example, all the guilty information that relates to that partner would be listed on that schedule too, so that their tax advisor can do what they need to do.
Brian Schwam [00:29:01] There's a lot of there's a lack of uniformity as to how partnerships and s corporations are reporting all that stuff to their or my perception of that, as it's sloppy and it's done a lot by the regional firms where they don't have a strong multistate from my perspective. So you don't even know what the apportionment factors should be when you get a partnership. Kiwan, I mean, you don't really know what to do with it, so then you don't do anything with it, which means partnership income is not being properly reported across the nation where it's earned.
Meredith Smith [00:29:29] It's not that you don't know what to do with it. It's like when we because we have some clients that are investors in partnerships and we'll get ones. It's like and we'll push back and ask for apportionment. They're like, well, we're a partner in another partnership. And we didn't get there apart. We didn't get their apportionment, so we didn't flow it through. And so it's like, well, I'm going to file a return. I'm going to do the best I can. But I'm kind of backing into this so that I can at least be the most compliant I can be. But it's kind of like garbage in, garbage out, but so that's good to know, though, for twenty twenty one.
Meredith Smith [00:30:02] What you're telling me is we need to start charging our partnerships more money.
Meredith Smith [00:30:06] More work is going to be needed because there's going to be all of this reporting stuff similar to what like the one ninety nine that came out of tax reform. And like I mean I play a Fed person on TV and not very well, but. Yeah. So just there's burdens on us. And did any of that come out like tax reform or is that just an evolution of just businesses in general?
Brian Schwam [00:30:31] It's mostly due to the tax reform and the regulations that followed that basically said if a partnership or an S corp owns or CFC. They're treated as aggregates and you look through them to the people or whoever owns those partnerships and escorts, they are considered the shareholders of the CFC. And so you have to follow all that information through to them so they can do what they need to do with what the subpart F or the guilty or the foreign tax information that they might need to claim a foreign tax credit or something. So it's mean. Yes, it's a lot of pages, but I think the information is necessary. And right now it's going in white paper statements. They're different depending on who you get it from. And it may be incomplete. And I just talked to somebody the other day. It's like, here's what we got from the partnership. I said, well, did you get this, this, this and this not we didn't get that. So September 12th, and you're not going to do so right now, and he and his partner in the partnership announced a plan to put all that on the desk for return or key ones for the press corp shareholders. And then there's confusion about, oh, does this stuff flow through the actual partnership or escort return? And the answer is it doesn't like hopscotches around that return and goes directly to the people who are the shareholders and the partners. So there's no basis adjustments for any of that foreign income or anything that's flowing through, unless, of course, the foreign staff checks the box. And it's a whole different regime altogether. But the penalties and I'll get back to the penalties, the penalties can be severe. They can add up in a hurry. I had a client last year that was looking at two point four million dollars of penalties.
Meredith Smith [00:32:25] We're just filing a form.
Brian Schwam [00:32:29] That he was a dual citizen in another country. He left the US five years previously and was advised he did not file a US return anymore. And so he had three synapses, foreign bank accounts galore, and the sum of the penalties are a percentage of the value of those accounts. He didn't file certain forms, so we added up like two point four million dollars. And so we had to go into one of the programs that are available to abate penalties. So one of them is the streamlined compliance filing. If you go back and file three years and pay interest and tax the labor penalties, or if you have a situation where you don't have any unreported income, but you didn't file these forms for whatever reason, as long as it wasn't willful, then you can go back six years and all the penalties will be waived forever if you don't do anything, which is always one of the options. The statutes never run, the penalties never go away, and they just keep adding up, and then one day you start being compliant as soon as you're compliant, once kind of alerts the IRS that you should have been compliant all along. So that's why these programs are important and we like to have our clients use them to kind of get clean, if you will.
Meredith Smith [00:33:55] So they're kind of the IRS equivalent of a voluntary disclosure agreement with states where you come forward and say, hey, whoopsies, my bad, can I fix this? And there's some benefit to doing it, then?
Brian Schwam [00:34:08] Yeah, it's similar to that. Only it's not an agreement per say. It's sort of like, yeah, if you do it we'll accept and then no penalties.
Judy Vorndran [00:34:17] No penalties if they accept it, though, and is it anonymous or is it full disclosure?
Brian Schwam [00:34:23] Not an honor. It's not anonymous.
Brian Schwam [00:34:25] OK, so you do whatever you want whatever you didn't file that you should have filed, you attach a reasonable clause as to why you didn't file it, attach that to an amended federal tax return and you send it to a particular location. I think it's Austin, Texas, and I've never heard a client even get a response from doing that.
Brian Schwam [00:34:49] But they don't, they don't have to worry about the like no, no, like no responses, your response that you're good kind of sort of means nothing. Nothing like that. Nothing happens.
Judy Vorndran [00:35:00] You just do it so that you're in and you can comply. And then the penalty.
Brian Schwam [00:35:06] Right, but if you're contacted by the IRS for an audit, you can't do that program. So it's important to do it before you get all right.
Judy Vorndran [00:35:15] Yes, we have that same situation on voluntary disclosure, although a couple states do allow you to be caught. Miss Michigan taking what they get you? They'll automatically let you participate in the visa program, which is kind of nice of them, actually. But that's not common.
Meredith Smith [00:35:28] At least they haven't. They have in the past. We've found very you know, the states are constantly going to say it's their ministry of role.
Judy Vorndran [00:35:36] They can do whatever the heck they want so they can change their mind next week for all we know. So. Yeah, right.
Brian Schwam [00:35:41] So the other area where companies I find aren't necessarily compliant is if they're in a treaty country, they have some activity going on in the US. It doesn't rise to the level of a permanent establishment, the treaty. Maybe they don't have a fixed office or place of business. They don't have any people on the ground that are signing contracts on a regular, habitual basis to find the company. And they're not involved in an installation project of any length of time. And that would pretty much say, unless you're from Canada, those are the factors that you would look at to determine if you have a permanent establishment. But even if you don't have one, you still have to file a return and claim the treaty benefits, right? And that, I'm sure, is not going on, the vast majority of them, correct?
Judy Vorndran [00:36:31] Well, we have that same issue with public land: 60, 70 to, 50 states, 40 something have income tax, base tax. And what we find is a lot of people think, oh, yeah, it is 60, 70, too, because you have a you sell a thing. Therefore you're exempt under this federal law. But you have to affirmatively file something in some states to assert that position. Otherwise you don't have it. So you don't tell your statute. So there is a lot I think there's a lot of this perception out there that you don't have to file anything when nothing is done. But something is due to assert that you don't owe anybody basically is my employer. I argue it. But there is a misperception out there about the complexities of that. And a lot of people just don't do it. Their advisors tell them they don't have to do it. So then the poor business owner is counting on their adviser and they didn't know that particular proclivity.
Meredith Smith [00:37:25] Well, right. And because circling back, if we take this full circle, why, Judy, you and I have a job and have been successful outside of the big four.
Meredith Smith [00:37:35] Same with Brian, is that smaller firms outside the large firms don't have resources and experts like us. And so kind of enclosed with that.
Meredith Smith [00:37:49] Brian, what is there maybe one thing that we didn't talk about that you think is the most important thing for people to know about what you do?
Brian Schwam [00:38:00] That's a really interesting question. I hadn't thought about it, but I think I did. What's most important is. It's to their benefit, is that. If someone is utilizing advisers for international tax services, they're going to get. Big for quality international tax advice and transfer pricing advice at a fraction of the cost, but it's going to keep them out of trouble and staying out of trouble is invaluable. In my opinion, and so we're in the business of keeping people out of trouble, we also are in the business of helping people optimize and maximize their opportunities.
Brian Schwam [00:38:47] And I think if you're just someone if a business isn't getting the proper advice, it's like walking through a mine. You know, we try to help people avoid it.
Meredith Smith [00:39:00] Right. That's awesome. Well, Brian, thank you today for your time and enlightening us and kind of being in a weird mess with us when it comes to tax. And so we really appreciate it. And Judy, again, thank you for being here. And I think that's it. So we will, you know, catch you next time. So thank you again for joining this automation podcast and we'll talk to you later. Fantastic. Thanks for having. This podcast is for educational purposes only and is not intended, nor should it be relied upon as legal tax, accounting or investment advice, you should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented.
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Questions asked and answered in this Episode:
- How did Brian come to focus on international tax?
- What brought him to WTP?
- What factors cause a foreign corporation to have a tax presence in the US?
- How are non-US businesses generating income from the states?
- What are the penalties for non-US businesses that are not paying sales tax?
- What is the outbound for a US-based business with foreign operations?
- What is the one most important thing Brian wants people to know about what he does?
What You Will Discover:
- [00:51] How Brian carved out his career in a niche area of taxation
- [05:44] What factors subject a foreign corporation to US tax
- [07:40] How non-US businesses bring in revenue from the states
- [09:26] Why foreign manufacturers have plants in America
- [15:33] How treaties play into taxation
- [20:25] What are the consequences if a business doesn’t pay its sales tax
- [27:00] What forms a US-based business with foreign operations need to complete
- [37:49] What is the one thing Brian wants people to know about what he does
- [39:16] Outro
- “There’s a lot of labor-related taxes in a lot of foreign countries that we don’t have here.” – Brian Schwam [13:20]
- “And this whole concept on who we have treaties and who we don’t have treaties with, right? Where we play nice in the sandbox with some other countries and we don’t play so nice with others.” – Judy Vorndran [15:30]
- “One of them is the streamlined compliance filing. If you go back and file three years and pay interest in tax, they waive the penalties. Or if you have a situation where you don’t have any reported income, but you didn’t file these forms for whatever reason, as long as it wasn’t willful, then you can go back six years and all the penalties will be waived forever. If you don’t do anything, which is always one of the options, the statues never run, the penalties never go away and they just keep adding up. As soon as you’re compliant once, it kind of alerts the IRS that you should have been compliant all along, so that’s why these programs are important. We like to have our clients use them to get clean, if you will.” – Brian Schwam [33:03
- “We’re also in the business of helping people optimize and maximize their opportunities, and I think if a business isn’t getting the proper advice, it’s like walking through a minefield. We try to help people avoid the landmines.” – Brian Schwam [38:41]