ONLINE SELLERS AND
E-SERVICE PROVIDERS
If you recently established a US entity in order to operate your e-commerce business, such as Amazon Dealer, and there is a tax treaty between the US and your country of residence, it's important to familiarize yourself with the three basic scenarios to consider when determining your US tax filing obligation.
1. In the first scenario, your e-commerce or e-service business has no connection with US suppliers. In other words, you simply solicit, accept, and complete your orders from your foreign country of residence, and you do not have any offices, employees, or warehouses in the US and you do not use US vendors or suppliers.
In this situation, you do not have what the IRS defines as, Effectively Connected Income. If there is no Effectively Connected Income, your business is not obligated to pay income tax to the US. The income from your e-commerce business would most likely be taxable in your country of residence. The IRS would still expect a Proforma 1120 Foreign-Owned US DE.
2. In the second scenario, your e-commerce or e-service business utilized US vendors or suppliers such as Amazon FBA, or any other third party, to generate revenue BUT the business does not have warehouses, offices, or employees physically located in the US. If your business meets this scenario, the IRS deems it as the business having Effectively Connected Income.
In this case, since the business has Effectively Connected Income, but no Permanent Establishment in the US, and there’s a US tax treaty between your country of residence and the US with a Permanent Establishment clause, a tax return must be filed and income would be excluded through Form 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).
The type of tax return required would depend on the tax entity established and the required filing forms are strictly informational.
3. In the third scenario, your e-commerce business has Effectively Connected Income and physical presence in the US such as employees, warehouses, offices, etc. In other words, your business has Permanent Establishment in the US. In this case, your business would be required to file the corresponding tax return based the type of entity established, and any income generated cannot be excluded under Form 8833. In addition, depending on the State, the entity would have to file State Returns.
Please note that the income generated in the US would first be taxed in the US and then in your country of residence. You might be able to claim foreign tax credits in your country of residence to avoid double taxation.
Beware that if there’s no tax treaty between the US and your country of residence, income tax may be owed to the US once filing the applicable tax return forms.
Contact us today for a business consultation at contactus@expatworldwidetax.com