Practical, proactive tax planning for companies operating internationally
Plante Moran’s international tax advisors and services team excel in providing practical, proactive international tax planning for middle market companies operating internationally. Our international tax advisors can support companies and their employees with international tax planning solutions and assist with compliance issues, such as value-added taxes and repatriation of earnings.
Cross-border issues such as importer of record and value-added taxes
When companies first start operating in foreign countries, an understanding of the foreign tax laws is important to ensure that unfavorable – or unexpected – tax liabilities don’t result. Most foreign countries have value-added taxes that are paid by the importer-of-record. Negotiating – and understanding - who is the importer of record is important when first selling into a new country.
Knowing when income tax returns are required to be filed to foreign governments is another important international tax planning point. If you have a permanent establishment you will be required to file income tax returns. However, even when you do not have a requirement to file income tax returns, you may wish to file to avoid informational reporting, withholding taxes, etc. Plante Moran’s international tax advisors can help you understand – and comply with – foreign tax filing and payment requirements when you start selling or operating in foreign countries.
Income tax filing for expatriates
Sending U.S. citizens to work in foreign countries will complicate their income tax filing requirements, and the filing requirements for the U.S. and foreign companies. When a worker is employed overseas they will often have to file income tax returns in the country where the services are provided. In addition, a U.S. citizen is also required to file a U.S. tax return reporting the same income. Depending on the U.S. worker’s income and tax situation, the foreign income may either be excluded if certain requirements are met or a foreign tax credit may be taken to offset the U.S. tax.
Plante Moran international tax advisors can assist in filing both U.S. and foreign income tax returns. As part of our comprehensive international tax services, they also can assist in developing and complying with an equalization policy that insures that higher or different tax regimes in foreign countries do not disadvantage the U.S. workers. In addition, our international tax advisors can help U.S. and foreign companies comply with any required intercompany billings and withholding payments to the tax authorities.
Structuring depends on investment or repatriation of earnings
When a U.S. company starts operating overseas and paying taxes to foreign governments, structuring becomes very important. Companies can be structured as corporations (that pay tax on their own earnings and then pay dividends to their shareholders) or as flow-through entities (that pass along the tax liability to its members or partners and then pay tax-free distributions to the members or partners).
In effect, when a U.S. company is a parent of a foreign company it can chose to:
(a) have a taxable event only when dividends are paid – but be subject to double taxation, or
(b) be taxed as the foreign company earns its income – but only be subject to one level of tax.
Making wise structuring choices means knowing the tax impact of the decision, having a good business plan, and having a plan for investment or repatriation of earnings plan.
Keep your worldwide effective tax rate low
Companies operating overseas and making profits in overseas markets should have a strategy to repatriate their earnings in a tax-efficient manner. Though the U.S. has double tax relief agreements with most countries, the proper timing of foreign profits can still result in additional U.S. tax due to limitations on the U.S. foreign tax credit.
Distributions from low-tax jurisdictions will normally result in additional tax when distributed to the U.S., but a proper structure will allow low-taxed profits to be used in financing activities in other countries, for example. Proper planning for the repatriation of foreign profits is essential to keeping the worldwide effective tax rate low.
IRS is watching international transactions closely
The Internal Revenue Service (IRS) has developed several tax and information forms for U.S. companies having operations – or simply bank accounts – overseas. Failure to file these forms may result in significant penalties. Forms are required for:
- payments made to foreign citizens
- foreign bank accounts
- partnership with foreign partners
Forms are also required for U.S. companies with a 10 percent or greater investment in foreign corporations, or U.S. companies that are owned 25 percent or more by a foreign company. U.S. individuals or companies in foreign partnerships or beneficiaries of foreign trusts must also file forms. The list of required tax forms is long – and growing – and becoming more of an IRS focus as they view international transactions as the largest component of the tax gap.
Plante Moran’s international tax advisors will work with you and your staff to ensure that you are properly and timely in filing all required compliance returns to the IRS.
Transfer pricing planning and documentation
As tax authorities around the world focus on international issues, the prices charged (or paid) by U.S. companies to related companies overseas will impact how much taxable income it reports to various authorities. If a company charges too low of a price (or pays too high of a price), its taxable income may be too low if audited in either jurisdiction.
To ensure that a company is charging (or paying) an arm’s length price, our transfer pricing advisors can help analyze your pricing methodology and determine if it is in compliance with the transfer pricing methods specified under relevant regulations. Transactions that must be conducted at arm's length include not only purchases or sales of tangible products, but also usage of intangible property, purchases or sales of services, and financing transactions.
Significant penalties may be assessed if prices are found not to meet the arm’s length standard and if contemporaneous documentation (i.e. a transfer pricing study) is not maintained. Our transfer pricing experts can help you understand the complex regulations to determine if transactions have a significant risk of not meeting the arm’s length standard and assist in the preparation of a transfer pricing study. Learn more about our transfer pricing practice here.