Discussion:California corporate return question

Question on the CA return; I have read the instructions on item K which gives a schedule to report the ownership but ProSeries is giving me error messages since the foreign corporation does not have an identifying number in the US nor does it have a city, state and zip being in India. Is there a way to fool this into accepting in the address line the only address I have?

As well, seems that since the year 2000, the corporation can elect to omit the 800.00 minimum franchise fee for the 1st year it does business. Does anyone know if this is correct? Without checking the box to exempt them for first year having to pay the 800.00, this comes up with zero owed on the return...first year however they have a NOL, but ProSeries defaults to the no exemption, but allows me to enter them exempt from the franchise fee.

Never had a CA return before and these two issues are not clear in the instructions. Thanks!!

Thank you about the 800.00.

As for the first question, I guess I will have to ignore the errors since the Indian company doesn't have an address that fits in the boxes per se.

Thanks Chase!!

Good catch Chase!! You are learning Intl' tax too I see :)

Thank you though Katie.  :)

I'm not sure I understand your description, but, for example, if the Indian company is a service provider (maybe call centers?), and the U.S. subsidiary performs similar services in the U.S. or solicits customers for the Indian parent, you probably have a unitary business.

The US company does not solicit any invoices for the Indian corporation. This is all based in India and the US company is more of nominee services per se...

But there is no unitary business here Katie. The two entities are separate in their roles and even though there is money transferring, both have unique business structures. NOT UNITARY!! In FL we have unitary as well, but I agree with transfer pricing over and above unitary allocations.

We have one company in CA (US) only providing invoicing services...the business is only to invoice and pay a fee for this service to the US. We structured it so that this is not the purveyor of contracts, only a US letterhead and US invoice, but the work is being done via the internet and via services performed in India.

Complicating the issues does not help. Let's just presume that this business though wholly owned by an Indian parent is not involved in work in other countries....

Florida does apply the unitary business principle, but on a separate company basis. It was a worldwide combiner briefly in the 1980's; I think that lasted about six months before the political roof fell in <G>. But California defaults to worldwide combination unless a water's edge election is made. Of course, whether combination would result in more or less California tax depends on how the numbers fall. It could be to your client's advantage, though perhaps not enough so to be worth the compliance cost. It could be a perfectly rational decision to file on a separate company basis even though the CA company is unitary with the Indian parent, because WWCR would result in a lower tax liability.

Congratulations on the twins!

It does collect a fee for the invoicing services from the customer based in the US. The US company will invoice the customer for the cost of the invoicing service and then the Indian company invoices them for the services performed in India. There may come a time that the US company does more, but at the present this is the structure.

I still don't think this amounts to enough to call this unitary as the two companies do not act on behalf of the other and neither company is in the same type of business. Transfer pricing (arms length on the due/to from) is another thing entirely and that is what I most concerned about making sure that any related party transactions are handled in an arms length fashion.

Thank you again for the input. Thanks too for the congrats on the twins!! They are quite beautiful!!

I am also considering having the US company change the state of incorporation since it is an LLC with only one member and that member is moving out of CA. CA has very high taxation and it seems to want to convolute anything it can....Since the only nexus they have in CA is the member's presence in the state doing the invoicing, they can provide this in any state that the member is a resident, correct?

Thanks again!!

So, the US company provides invoicing services to unrelated third parties in the US. The customers pay a fee for this service. The Indian parent provides some kind of services (what?) in India. The Indian company invoices its US customers for the services it performs in India. Are the customers the same? You don't have to have intercompany transactions, necessarily, to have a unitary business. Remember _Container_: flow of value, not flow of goods. They don't have to be in the same line of business, although in this case it sounds as though both are service providers -- how different are the services? Where does the US company get its customers?

I take it the US company is an LLC that has elected to be taxed as a C corporation in the US -- otherwise you have a totally different can of worms here <G>. But I don't get the single member -- if the US company is a SMLLC and the single member is a US individual, how is the Indian company its parent? Or is there a tiered structure here -- e.g., InCorp owns USCorp which contracts with SMLLC to actually perform the service .... I'm confused <G>.

If the US operation is going to be performed somewhere other than California, you would be wise to organize it somewhere else. Wherever the US resident who actually does the work sits to do it is the place where you would want the corporation or LLC, whatever it is, to be organized. You certainly wouldn't want to continue volunteering for the $800 minimum tax (and LLC fee, if applicable) if the business is outside California. The presence of customers in California wouldn't bring a non-California corporation or LLC under California's taxing jurisdiction, as long as none of the services are actually performed in California. (Do watch out for Ohio if there are Ohio customers -- that new gross receipts tax purports to have a really long arm.)

US Corp (SMLLC taxed as a Corporation) is not related to the Indian company except that the Indian company holds all the shares of the US corp. The individual in the US is moving from CA to FL by the way....he is only the manager of the Corporation; not an owner...

The Indian corporation provides services via internet.

The US company gets paid a fee from customers to provide invoicing ONLY. More nominee services as I said before, they are not involved in any technology. The "list" of customers is then given to India and they invoice from India the US customers. Much like selling of a client list but they get no funds from India for this list.

The work is going to be performed in FL when the manager gets here. He is a green card holder and is working for a computer based company which is transferring him to FL for his job. He however is only a US manager of the LLC formed in CA. The ownership is from India.

The only customers are internet customers in a data base. Whether in Ohio or New York, wherever they find this US company and the US company provides minimal services such as giving the lists to the Indian company and other companies NOT related at all. It provides almost like a google site where these people can find various businesses to contract with for their needs.

I know it is confusing but of course I don't want to divulge any marketing ideas they have, etc. I just know they are not in the same line of work, not unitary by my understanding of it as it pertains in FL and is only a US company providing services in the US and they owe taxes in the US on those services...totally different from the Indian parent company services.

Thank you again!!

Actually, I think it's likely that you have a worldwide unitary business here. The fact that the US sub transfers the customer lists to the parent would seem to be a significant unitary tie. One would also want to know how much the Indian parent tells the sub what to do and how to do it, whether there is intercompany financing, etc. You can't use Florida as a comparison because Florida (except for that hiccup back in the 1980's) is not a combining state and has no rules for that. However, if you can get the business out of a worldwide combined reporting state, you solve your problem.

The way you describe the US company's operations, it doesn't sound as if it would establish nexus in any other state. Ohio does assert nexus for purposes of its gross receipts tax if the taxpayer has at least $500,000 of Ohio gross receipts in a calendar quarter, or if at least 25% of its property, payroll, or sales are in Ohio. Sales of services are attributed to the place where the benefit of the service is enjoyed, i.e., the location of the customer, not the place where the services are performed. So your client could possibly have some exposure to the Ohio CAT, but if there is only one guy doing all this, it doesn't seem likely it would ever get near the $500K/quarter threshold. And even if there happens to be a big customer so 25% of the sales are in Ohio, I wouldn't march in and volunteer <G>.