Foreign Corporation Reimbursements
By Vernon K. Jacobs, CPA 
& J. Richard Duke, J.D., LLM		 Offshore Tax Strategies

 
Tax Myth: Non-Reportable Employee Benefits From A Foreign Corporation

Some U.S. people seem to believe that if a foreign corporation pays their foreign travel, lodging and other expenses, they are not required to pay any taxes on that income.

Admittedly, if these expenses are paid directly by a bone fide foreign company, there would be no reporting obligations from the foreign company to the IRS. Hence, it might be difficult for the IRS to discover the unreported reimbursements.

However, if the facts should become known in the course of an audit (or because some angry former employee, partner or jilted lover blows the whistle to the IRS),  the U.S. person who gets these expenses paid by a foreign corporation would have to show that the expenses would have been a tax free reimbursement had they been made by a domestic corporation. That would require being able to show that there was a business purpose for the travel that was related to the business of the corporation providing the reimbursement.

And, if the person whose expenses had been reimbursed was not an employee, sub-contractor, officer or director of the company, what business reason would the company have for paying these expenses? Furthermore, if the foreign company pays the travel costs of a spouse, that would be taxable income in most cases.

It appears that most people don't realize (or conveniently forget) that the U.S. imposes its taxes on its citizens on a world-wide basis. Barring any specific exception because of a foreign transaction, the tax treatment of any transaction outside of the U.S. is the same as any identical transaction in the U.S. If you want to know if some arrangement like a reimbursement of expenses would be taxable or not, just check the U.S. tax laws. If it's legal in the U.S., it's probably legal overseas. Otherwise, you are gambling on the audit lottery.
 


The preceding comments are a very brief and non-technical summary of the key tax rules that apply to a person who is a citizen of another country and is not a permanent resident of the U.S.  Vernon Jacobs and Richard Duke are co-authors of  Offshore Tax Strategies.
  About the authors:

Vernon Jacobs is a CPA who provides tax accounting and consulting services for clients with international interests.   J. Richard Duke, JD, LLM is an attorney who specializes in international tax law and is an Adjunct Professor of international tax law.  

Sponsored by Offshore Press, Inc., Copyright,  2006, all rights reserved. Offshore Press, Inc., Box 8194, Prairie Village, KS 66208. Phone  (913) 362-9667. Email to Offshore Press  Vernon K. Jacobs, Webauthor.