International Tax Planning and Compliance
It's a small world after all....
By James M. Taylor, CPA, CFP, Partner
Today doing business in multiple countries has become commonplace for many small and medium sized companies. Technology has expanded access to foreign markets and provided opportunities on a global scale. Whether your business is considering global expansion, collaborating with a foreign partner or exporting products produced in the U.S. there are a host of tax planning and compliance to consider.
Disclosure, Disclosure, Disclosure – Are you reporting Foreign Assets correctly?
U.S. tax law contains broad disclosure requirements for foreign assets and investments. Penalties for not disclosing assets can be severe, so if you have ownership in a foreign asset it is highly recommended that this be reviewed by a tax professional to determine if a disclosure requirement may exist. Even having signature authority over another person’s account (i.e. an employer) can trigger a disclosure requirement.
Do you export?
The government likes exporters and there are still great incentives available for companies that export a good portion of their product that is grown, produced or manufactured in the U.S. with the majority of the product content domestically sourced. If exporting is an important part of the business, an Interest Charge Domestic International Sales Corporation (IC-DISC) may be an option to provide tax savings.
Global Business Structuring – What should be considered?
Operating globally requires the alignment of many variables to create a tax efficient structure. Jurisdiction, entity type, tax treaties, transfer pricing and repatriation strategies are just some of the areas to coordinate. Each component of an international plan contains certain financial and political risks. It is critical to begin with a plan that assesses these risks at each step of the process.
Does another country have the right to tax your company?
On-going review of your international activities is important to assess your exposure to foreign tax. Often the amount of time and substance of your activity in a foreign country are considerations. The concept of “permanent establishment” (PE) is used by many jurisdictions to define the “presence” that might give rise to a tax assessment. Treaties can play a big role as well, the key is to review your activities and determine if a tax filing should be made in the foreign jurisdiction. It is always better to know the rules and be in compliance than to be surprised with an assessment of tax.
Are you planning to work overseas?
U.S. Citizens working outside of the U.S. need to consider the applicability of the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE). Your work in a foreign jurisdiction may subject you to foreign tax depending on tax treaties and other factors. The U.S. taxes worldwide income, but allows a credit to offset foreign taxes paid. Expatriates may also be able to exclude a portion of earnings from U.S. taxation by applying the Foreign Earned Income Exclusion (FEIE). The tests to qualify for the exclusion primarily focus on your time in the foreign country compared to the U.S., so planning to meet the exclusion guidelines can help provide a good tax result.
Not a U.S. Citizen – How does the U.S. tax you?
The taxation of non-citizens often depends on their classification as either a resident alien or non-resident alien. Generally resident aliens are taxed like citizens on worldwide income and non-resident aliens are taxed on U.S. source income. Substantial presence in the U.S., residency status through a “green card” and tax treaties are the main factors to consider. Resident aliens may also be subject to foreign asset disclosure requirements.