[elai]

If I'm a Canadian who lives outside of america but wants to have an office in the bay area so I can hire local bay area people and have people be close to the area for meetings and what not. The head office isn't in america and the bay area office just pays developers to make software and hold business meetings. I and other staff possibly are in the head office in singapore, labuan, panama or wherever else. Will there US be taxation of the corporations profits then?

[philiphodgen]

My default starting point for something like this would be to suggest a California corporation. Put your local people in it. Engineer the net profit of the California company. :-) That keeps your U.S. and California tax bill low.

How is that done? Google alert: "Transfer Pricing" is the game. Control the way in which sales are made so whatever you earn in California is offset almost entirely by operating expenses.

This is a point of obvious contention between the tax people and businesses. The tax people don't want you to artificially manipulate your business affairs to eliminate tax. There has to be an arm's length approach to how you do this.

It gets worse. Assume you have operations in the USA and Canada and India. Each country's tax collector would (logically) like to have you earn maximum profit in that country, and bugger the other places. So they'll pull out the local transfer pricing rules and say that you are artificially understating profit in that country. Now you're at risk of having the same $1 of profit taxed in two or three countries.

Yes there are ways to prevent this, and ways to fight back. But this gets expensive in lawyer and accountant fees. And buying expert opinions from economists about the esoteric meaning of "arm's length" in your particular business, etc.