When a company begins to sell its goods and services internationally, there are so many “moving parts” that one of the most important is often overlooked: tax compliance and planning.
It’s crucial for businesses to take answer the big questions early in the process—and take appropriate measures.
Will I send any employees abroad?
Does the United States have an income tax treaty with the country where you are sending your employees? If there is an income tax treaty, it should indicate where and how the income is to be taxed. If there is not an income tax treaty with the particular country, you will need to consult the tax law in that jurisdiction to determine if the wages will be taxed in the foreign country.
When I make payments to foreign companies or people, are there any withholding or reporting requirements?
Depending on what you are paying and who the recipient is, you may have to withhold U.S. tax on the payment. Certain U.S. sourced income, such as interest, dividends, services, licenses, royalties and rent, is subject to a statutory withholding rate of 30 percent. The payments and withholding are reported to the IRS annually. If the United States has a treaty with the country you are doing business with, you may qualify for a reduced withholding rate or no withholding, depending on the provisions in that particular tax treaty.
Where am I doing business?
If your company has any operations in a boycotting country or has received a boycott request, additional reporting is required. For the purposes of this reporting requirement, “operations” is broadly defined and includes selling, purchasing, licensing, banking, leasing, financing, manufacturing, constructing, transporting or performing services related to these activities. Boycotting countries currently include Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates and the Republic of Yemen.
Will I open a foreign bank account?
The Bank Secrecy Act requires annual reporting for U.S. persons who have a financial interest in, signature authority or other authority over one or more accounts in a foreign country with greater than $10,000 in aggregate at any time during the year. Also, if you have other foreign financial assets, additional reporting may be required under the Foreign Account Tax Compliance Act.
Do I plan to have ongoing operations in a foreign country through a foreign division or subsidiary?
When you set up operations in a foreign country, you may be able to plan how the foreign operations are taxed in the United States. You may be able to choose whether taxes on your foreign earnings are deferred until repatriated to the United States or foreign earnings flow through to the U.S. parent and are currently taxed. If you have a deferral structure, foreign losses cannot offset U.S. source income. Additionally, your company should ensure that it is in compliance with transfer pricing rules. Certain exceptions could cause foreign earnings to be taxed before cash is repatriated to the U.S.
If you have a flow-through structure, foreign losses can be used to offset U.S. source income. Also, any foreign income taxes paid are eligible for a foreign tax credit on the U.S. income tax return (the use of which is subject to certain limitations enumerated in the Internal Revenue Code).
