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Taxes and Borders

By Karen E. Klein Q: What tax laws would apply if I hire a Canadian consulting company?

---- L.R., Detroit

A: Foreign companies are not subject to U.S. taxes -- unless, as with many offshore outfits doing business here, they are registered as "U.S.-based foreign corporations." In that case, any consulting fees you pay to a Canada-headquartered corporation (but not an individual consultant) are subject to a 30% "branch profit tax." You must withhold this amount and send it to the Internal Revenue Service.

The Canadian company is liable for regular corporate income tax (at a rate between 15% and 35%) on its income from the U.S. The Canadian company must file Form 1120F before Apr. 15 in the year following the transaction if it maintains an office in the U.S., or before July 15 if it does not maintain an office in the U.S., says James Yang, a CPA and professor at Montclair State University in New Jersey.

But you don't need to worry about that. What you do need to know is that "necessary and reasonable" consulting fees are generally tax-deductible -- so long as they are not paid to a company owned more than 50% by your firm, says Thomas R. Chiavetta, a Rochester (N.Y.)-based CPA and partner at Mengel, Metzger, Barr & Co. IRS rules governing payments to foreign companies can also be found in tax-code sections 881, 882, and 1442, Chiavetta says. For more information on international tax questions, he recommends: Have a question about running your business? Ask our small-business experts. Send us an e-mail at, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

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