Different tax systems: France and U.S.A
- Worldwide vs. Territorial system
The US adopted a worldwide taxation system whereas most of the other countries have a territorial system, including France.
The worldwide system means that a corporation which has its headquarters in the US, or an individual residing in the US, will be taxed on its incomes whether they be earned in the US or abroad. Taxes will be paid when the foreign incomes are repatriated to the US. However, a credit system is allowed by the law. If the earnings are taxed abroad, the US will only require the company to pay the difference between the foreign percentage and the American one. For example, if the foreign percentage is 20% and the US one is 35%, the American government will only charge 15%.
France, which adopted a territorial system, only taxes French incomes of corporations and exempts most of the foreign incomes. The government will only tax the profits generated in France and not abroad. For individuals, France taxes incomes worldwide.
- Who is taxable?
The U.S classifies persons and entities distinguishing U.S persons and Foreign persons. U.S persons include citizens, residents, domestic partnerships, domestic corporations, any estate other than a foreign estate and any trust over which a U.S court can exercise supervision and U.S persons control the decisions taken. Foreign persons include nonresident aliens, foreign corporations, foreign partnerships, foreign trust and foreign estate.
Within those large categories, the U.S has different percentages of taxes for employees, students, professors…
- How are you taxed?
The U.S has two main levels of taxation, Federal and State. Within the Federal taxes, an individual or a corporation is taxable on income, social insurance, corporate, excise and estate. To these must be added the State taxes, which include sales, property, income, corporate, excise and others. If the Federal level applies the same percentage to each taxable person or entity, every State define its own percentage. In France, only the French government has the power of imposing taxes on its individuals and entities. The European Union was not given any authority in this field.
The U.S taxes income and social security separately. The taxable income is the gross income of an individual or a corporation less any allowable tax deductions. This income includes capital gains which the income earned from the sale of an asset. Regarding social security, following the Federal Contribution Act, employers must subtract payroll taxes of 7.65 percent from their workers’ paychecks. 6.2 percent go to fund the national social security system and 1.45 percent goes to medicare. In France, the charge of social security is on both the employee and the employer, with the employer paying a greater percentage.
The U.S, just like France, taxes the estate, which the property a person leaves behind after his/her death. In the event you leave more than the standard amount or you give away property while you are alive, your heirs will have to pay taxes on this inheritance and gift.
The U.S system includes a taxation on local property and estate but not on other assets such as corporate stocks, bonds or personal property. In other words, the wealth tax imposed by the French government does not exist in the U.S.
- When to file a return?
In terms of frequency of declarations to make, France and the USA have the same system. Taxable individuals and entities have to file a return every year for the year n-1. The return corresponding to the year 2017 must be filed in early 2018.
- FIRPTA
The Foreign Investment in Real Property Tax Act of 1980 covers the hypothesis of a foreigner who disposes of U.S real property interest. This includes sale, exchange, liquidation, redemption, gifts, transfers, etc.
If the transferor is a foreigner, the transferee must withhold 15% of the price. The withhold is intended to insure U.S taxation of gains realized on disposition of U.S interests. If the transferor is a foreigner and the transferee fails to withhold, he may be held liable for the tax himself.
There are some exceptions to this withholding rule, the most common one being the purchase of real estate for use as home and at a price equal or lower to $300,000.
- FATCA
The Foreign Account Tax Compliance Act is the way the USA deals with tax evasion. Under this act, U.S taxpayers must report to the IRS financial assets they hold abroad. Only individuals are required to make this declaration. This comes in addition to the Foreign Bank and Financial Accounts (FBAR) which requires U.S taxpayers to report foreign financial accounts. The threshold to be obligated to report the financial assets is of $50,000. This threshold varies depending on the filing status – single, married filing separately or married filing jointly – and whether you live in the U.S or abroad.
Assets are reported on Form 8938 which is attached to the annual tax return. However, it should be noted that there are some exceptions to this obligation to report depending on the nature of the asset and if assets are reported on other forms.
- Form 1040NR
This form must be completed and filed by nonresident aliens. An individual is considered a resident alien if he holds a green card or meets the substantial presence test. Under this last test, you are considered a resident if you are present in the U.S 31 days during the tax year considered and 183 days during the 3-year period including the tax year considered and the two previous ones.
You must file such a form if
- you are a nonresident alien engaged in a business or trade in the U.S;
- you received income from U.S sources that are reportable on schedule NEC;
- you are the representative of a deceased person who must file a 1040NR;
- you represent an estate or trust that must file a 1040NR.
There are three types of income that may need to be reported through a 1040NR:
- incomes connected with U.S business;
- income not connected with U.S business;
- income which is exempt from U.S tax.