Important Tax Considerations Before Expanding Overseas
Are you thinking of expanding your operations overseas? You’ll want to pay close attention to significant tax issues if you want to mitigate multiple layers of taxation. Going global requires a well-planned international tax strategy. For example, are you planning to bring profits back to the U.S. right away, or will you seek a deferral strategy that will leave profits overseas for now? Will your expansion outside of the U.S. constitute a taxable presence in a local country (and thereby potentially trigger additional filing requirements and unexpected tax liabilities)?
International tax regulations can seem daunting at first, but they can be strategically managed if careful planning is done before you take your business overseas. Business structure and local presence, or permanent establishment, are two key factors to your strategy.
Business Structure
The U.S. has one of the highest corporate tax rates in the world and when you become a multinational business, you may encounter additional layers of taxation. For example:
- Foreign income tax in the local country where the income is earned
- Withholding taxes associated with the payment of a dividend or other income stream from the foreign subsidiary to the U.S. parent company
- U.S. income tax on foreign-sourced income when it is repatriated to the U.S
Careful international tax planning is required in order to repatriate overseas profits to the U.S. to avoid paying the disparity between the U.S. and foreign tax rates, or even more. Two key questions you’ll want to answer are:
- Should your company be a corporation or a branch (income or loss is subject to immediate U.S. taxation) of the U.S. parent?
- How can profits be transferred tax efficiently to the U.S. parent?
Taxable Presence in a Foreign Country
The creation of a permanent company in the foreign country can be problematic because it exposes your company to taxation there. Even when you don’t think you have established a permanent establishment there, other activities may be construed as such, and you will be open to the jurisdiction of that government’s authorities. Even having a few employees in a foreign country may require the company to file tax returns and possibly pay tax. Establishing a subsidiary comes with additional requirements, such as transfer pricing agreements.
While the Internal Revenue Service (IRS) does not define “permanent establishment” in a foreign country, there may be relevant tax treaties between the U.S. and the local country. Depending on the location, the allocation of income between the U.S. and that country may be skewed in favor of the local jurisdiction.
One last word, the statute of limitations in many countries does not begin until the time a taxpayer files a tax return. If a return is not filed in a country and it should be, such a country would have a full year to assess the taxpayer with income tax. The last thing you want is to incur unnecessary taxes and fines from both the U.S. government and foreign governments.
The tax ramifications of operating in a foreign country are an important aspect of the overall business decision. Businesses should consider what level of activity would cause them to come under the laws of another country, and what they’ll need to do to ensure compliance. Getting it right is critical to protect a business from multiple layers of taxes and fines as both the federal government and foreign governments focus on enforcing complex international tax laws.
Because of the many complexities involved in doing business internationally, you will need to consult with experts in planning a strategy to minimize your company’s overall effective tax rate. Seeking competent advice is crucial to avoid the many pitfalls that you may encounter when venturing overseas.
If you have any questions about the content in the article, or would like to learn how your business can succeed overseas, contact Michael Milazzo, CPA, at [email protected].
