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Specifically I'm thinking of living in UAE. They don't have a tax treaty with the USA, but if the service is an online service, owned only by me and not incorporated, am I liable for anything? (I am not a US citizen.)

My service is online advertising.

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If you're not a US citizen, why do you care about US taxes? – littleadv Oct 26 '12 at 17:16
@littleadv selling to US citizens – Tom Oct 26 '12 at 17:22
so? Who cares?? – littleadv Oct 26 '12 at 17:23
@littleadv the answer to whether anyone, e.g. the US government, cares is the purpose of the question – Tom Oct 26 '12 at 17:25
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@littleadv I don't know the legal situation, that's why I'm asking: imagine if I owed tax in the US, hadn't paid, and then went to the US for some reason, and then they arrested me. Also depending on what the rules are it might be better for me to be in a country with a tax treaty. – Tom Oct 26 '12 at 17:36
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Usually you pay taxes in the country in which you earn them. If you work and live in Germany you pay taxes here, even when you deal with an US customer. There might be a difference on VAT. US customers do not need to pay VAT in Germany, they seem to either pay VAT themselves in the US or the service provider needs to pay the VAT. I am unsure of that, because all of my customers are from my country.

Anyway I would recommend you to ask a tax consultant for the exact regulations. As a business man you should have one - I really recommend that to you.

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Germany, unlike UAE, will have a tax treaty so that's probably why you only pay tax where you earn. I'm asking here because I thought someone might know quickly. When I find the answer, I might post an answer. – Tom Oct 28 '12 at 22:33
I think it would be of interest. – Christian Oct 28 '12 at 23:13
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This is my second, and probably-final version of what I've learned.

I called the UK tax department, and was told that they use the location of the individual (not the server, or customer) to decide whether to tax. So given what I've written above, I wouldn't be taxed for earnings from UK customers.

For the US, I've had no answer from the IRS help desk, but I have read parts of several papers, and the US Code.

First, US has Withholding tax of 30% on all profits sent outside the country. (See the US Code) I expect the practicalities of this is very important, because the emphasis is on the US resident to apply the tax.

Then there's the state of the US tax system. From what I've read of 'Taxing International Income: Inadequate Principles, Outdated Concepts, and Unsatisfactory Policies' (NYU paper), I think the US is quite happy with the performance of relatively old taxing policies (pre-Internet), and considering the necessity of deep justifications for any change, and perceived general unimportance to politicians, I expect the US won't change any time soon to tax Internet companies more aggressively.

While reading, I heard anecdotes that most companies can't avoid taxes by relocating because they tend to have interest in having physical presence in the US.

And from one lawyer I spoke to (informally), physical business/property in the US seems to be essential to the US claiming tax, even though I think I've read broader definitions of what can be taxed on the IRS website.

So actually it's not as clear-cut as I first imagined it might be, but that seems to be historically caused.

I then read the non-speculative part of the OECD's report 'Are the current treaty rules for taxing business profits appropriate for e-commerce?'. (The OECD provides model treaties for member countries, including Japan, France, and USA.)

The report explained various things, including the idea of 'separate accounting', which is quite interesting relating generally to international taxation.

Importantly for my question, they describe the practical aspects of the law, and define 'permanent establishment', and specifically mention their suggestions for specific cases.

I won't try to summarise the report, but if you're looking for the answer to the question I asked, and even want to know more, I suggest you read that OECD paper.

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Withholding tax is not relevant in your situation - you will have invoices crossing the border, not profits. Typically what you need to avoid are two things: 1) Physical presence, and 2) Significant revenues from the US. If you earn more than XXX whatever in a country, that country might compel you to file paperwork, and when you find yourself in that situation, physical presence is often easier, because then you do not have to have your UAE company file paperwork in the US, rather you have a subsidiary do that, which can result in overall less paperwork. – user239558 Oct 29 '12 at 18:43
Can you explain how profits aren't moving across the border, and/or how you define invoices and profits? – Tom Oct 29 '12 at 20:09

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