Taxes are usually the last thing on your mind when you find your life crossing borders, but they’re a critical consideration.
Every year, it seems like more families and businesses face international tax issues. Some recognize this ahead of time and plan properly, while others find out after the fact and suffer the consequences. Here are four international tax issues that we think more individuals and businesses need to understand and address.
Estate planning considerations
As more individuals and families grow across national boundaries, we’ve seen an increase in the need for cross-border estate and inheritance tax planning. Failure to plan before the occurrence of an event (like a relocation) can lead to increased costs and reduced planning options. Persons with interests in foreign estates and trusts also face complex compliance requirements. Failure to meet those requirements in a timely manner can result in severe penalties.
Strengthening U.S. dollar
The U.S. dollar strengthened significantly in the last year.
A stronger dollar can cause issues that individuals and businesses need to consider when planning for taxes.
Fluctuations in exchange rates may create taxable gains or losses on transactions conducted in foreign currencies. Those fluctuations impact how you calculate your current taxable income if you’re doing business in a different currency.
Foreign tax credits
Anytime a U.S. business, its subsidiary, or an individual is subject to foreign tax, they may also be subject to tax in the United States on the same income that was subjected to foreign tax. To mitigate this double taxation, U.S. taxpayers receive a credit for taxes paid to foreign jurisdictions. The calculation of this foreign tax credit can be very complex. Factors such as the sourcing of transactions (especially transactions between related parties or disregarded entities), the required allocation of expenses between foreign and domestic sources, and carry-forwards of overall foreign losses and overall domestic losses can add multiple layers of complexity to foreign tax credit calculations.
When U.S. businesses use controlled foreign corporation (CFC) subsidiaries to operate in other countries, earnings from those CFCs are generally subject to U.S. tax when profits are repatriated to the United States. In some cases where multinational businesses use offshore earnings for purposes such as funding non-U.S. acquisitions or supporting “cash poor” CFCs, inefficient structures may not allow for this to happen without triggering repatriation of those earnings to the U.S. When faced with this problem, an offshore holding company may provide a solution. With an offshore global holding company structure, CFCs can be owned by a holding company located in a tax-favorable jurisdiction. Earnings can then be moved between various CFCs through the holding company without triggering repatriation treatment in the United States.
Awareness and planning are critical
Taxes are usually the last thing on your mind when you find your life crossing borders, but they’re a critical consideration. This is an excellent time to take stock of the previous year and look at the one ahead to determine if your planning should include a discussion with an international tax professional.