Discussion:Third party "nominee" or "management"

Due to our global economy, it is an effective way to outsource work in other jurisdictions without having issues such as transfer pricing, unitary taxation, etc.

IF a management or nominee company were to say procure contracts and then outsource them to offshore LLC's or other corporations, do you agree that the foreign income would not be taxed in the US if the US management company were not involved directly or indirectly to the foreign institution?

I have been researching this extensively and this is my conclusion, but if I am missing something, please do let me know :)

Let's leave the LLCs out for the moment (for simplicity) and just talk in terms of corporations. U.S. Corporation A, let's say, enters into a contract with unrelated corporation (or other entity) B to provide certain services for consideration. The services are of a kind that can be performed anywhere in the modern world -- maybe billing and collection services, for example, or running a call center. A then contracts with (outsources to) unrelated service provider C in a foreign country to provide the services. A and C are not under common ownership or control. A pays C for the services provided, and B pays A. A's net income is the difference between what A receives from B and what A pays C, which is essentially a fee or commission or whatever you want to call it. In that scenario, there is no common ownership among any of the entities, everything is automatically at arm's length because all the parties are unrelated, and only A is a U.S. taxpayer. (Well, B probably is too, but B is just the customer.) If A and C were LLCs, you would get the same result as long as there is no common ownership of the interests in the LLCs.

On the other hand, if A and C are corporations under the same (more than 50%) ownership, then A and C are engaged in a unitary business. They would be required either to file a worldwide combined report or make a water's edge election in any worldwide combined reporting state (i.e., California, Idaho, Montana, Utah, or New Hampshire). No other state would allow or require a worldwide combined report, with the possible exception of Minnesota, which had a bill introduced this year that would allow it. I haven't heard what became of the bill.

Also, if A and C are under the same ownership, then they would be related parties and the IRS and any state with a statute similar to IRC Sec 482 could make adjustments to clearly reflect the income of the U.S. entity.

Do any of these examples describe the transaction you are considering? If not, how is it different?

Yes, the first scenario is the most similar to what I am thinking:

"US" Corporation is related to "Country X Corporation" by ownership standards. To prevent the US Corporation from having issues related to visas and RA issues, it hires an INDEPENDENT management company unrelated to itself or the foreign corporation to do the work that otherwise the US Corporation would do. This makes the members of the US Corporation (LLC) be passive I would say as they are not active in the day to day operations of the company but are agents of the foreign corporation where unitary taxation (if applicable) or transfer pricing methodology needs to be applied.

But, they hire the services of an independent management company to be the manager on record for the LLC. This management company maintains the registered agent office, services, does the invoicing, bank accounts and day to day management. This then I would think is not subject to any foreign activities and will not violate the INS requirements and will allow the members to be foreign passive investors.

The management company of course would register in a State that is friendly with reporting and taxation and one in which the management company has nexus in by virtue of where they are physically located doing the management work.

This after my research is a viable alternative for the global economy structure that is becoming so prevalent.

So...if I am correct in my assumptions...let's assume

3rd party management company-taxed in the US and State taxation on income from being a manager of a company

US Corporation-members are taxed as RA or NR on US source income which would be the passive income from the procurement of the contracts in the US. The RA is taxed on worldwide income, so the passive income from the foreign country is also taxed to them in the US as well as their own country. The NR is only taxed in his/her own country on the active income from doing the outsourced work but will be taxed in the US only on the US income with a FTC for the taxes paid to the foreign country.

Foreign Corporation-reporting requirements in the US if they are engaged in a TB in the US and all the other reporting requirements (if applicable) for a FTC if the member is considered part of this controlled group.

What do you all think?