Accounting and Consulting

International tax planning

By Arthur G. Sharp

Doug Wright
Partner, International Tax Practice
Burr Pilger Mayer LLP

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The closest thing to a minefield in today’s global business environment may be the myriad U.S. and foreign tax rules affecting cross-border business. Companies involved in international business need an effective global tax strategy, or risk incurring highly unfavorable tax consequences. Worse, uninformed companies can miss the opportunities to take advantage of U.S. and foreign incentives available to companies engaged in cross-border business transactions. International tax pitfalls and opportunities exist even for relatively small U.S. companies that merely sell goods destined for U.S. export or engage in foreign R&D.

Smart Business spoke with Doug Wright of Burr Pilger Mayer LLP to gain insights into the complexities of global tax planning, how companies can simplify them, and how international tax consultants can help.

How do companies benefit from partnering with international tax consultants?

International tax specialists can help companies convert tax traps for the unwary into opportunities. Effective upfront international tax planning can reduce a company’s global tax costs by minimizing the potential for paying double taxes to a foreign jurisdiction and the U.S. An effective global tax strategy will balance U.S. and foreign tax considerations in the context of a company’s broader business and financial objectives. This translates into increased after-tax cash flow, increased after-tax earnings and financial statement benefits, and ultimately increased shareholder value.

Why is international taxation so complex?

The various U.S. and foreign taxing jurisdictions are all seeking a bite of the same cross-border revenue apple. They have become increasingly proactive and diligent in pursuing collection of what they consider to be their ‘fair share’ of a company’s cross border revenues. A good example of this is the development during the last decade or so of widespread and complex international transfer pricing rules, which require companies to document their annual compliance with strict ‘arm’s length’ standards for pricing intercompany transfers of goods and services. These and other international tax rules are constantly changing, which becomes a major minefield for uninformed companies that are engaged in cross-border business.

International tax consultants can meld the U.S. and the foreign tax sides of a company’s business into a coherent tax and business strategy. They are well-versed with the issues, trends and changes involved in international tax planning, and track them continually.

What is the key to an effective international tax strategy?

To do international tax planning properly, a company has to develop a global tax strategy that facilitates its global business objectives. The starting point is developing a solid understanding of a company’s business and financial position, its international operating strategy, and where and how it intends to operate outside the U.S. With this knowledge, an international tax consultant can help a company develop an overall global tax strategy that makes good business sense and is practicable. International tax planning for specific situations can then be approached in a coherent manner, taking into account the company’s broader global tax and operating strategies.

Do international tax rules provide incentives for companies?

Yes, there are significant cross-border tax incentives available in the U.S. and abroad. A key U.S. incentive for exporters is the IC-DISC (Interest Charge Domestic International Sales Corporation). Although this incentive has existed for more than 35 years, many U.S. companies aren’t aware of it or may not realize that they qualify. It can significantly reduce the U.S. tax by 50 percent or more on income from sales of certain export products and from certain international services. The IC-DISC rules are highly complex, however, so an experienced international tax consultant can help a company identify and capture the maximum IC-DISC export tax benefits.

What risks exist for companies that do not develop effective international tax strategies?

Companies that are not familiar with international tax rules, cross-border transfer pricing requirements and double tax treaties are much more likely to suffer unnecessarily high global tax costs, including increased tax compliance burdens and tax penalties. For example, many less-developed countries don’t have a good international tax treaty network, so it takes careful cross-border tax planning to minimize tax burdens, including high foreign corporate tax rates and high withholding taxes applied to a wide spectrum of ‘outbound’ payments from such countries. The same holds true with transfer pricing. The U.S. has had fairly well-developed transfer pricing rules for many years, including potential transfer pricing adjustment penalties and interest charges, but developed and developing foreign countries also now have their own sets of transfer price rules. So, it’s no longer just a matter of being focused on the IRS side of the transfer pricing equation, but also making sure that foreign transfer pricing problems are not created. An experienced international tax adviser can assist a company in establishing a tax-effective cross-border transfer pricing strategy that helps ensure that U.S. and foreign tax and transfer pricing landmines are not inadvertently stumbled upon.

DOUG WRIGHT is a partner in Burr Pilger Mayer LLP’s International Tax Practice. Reach him at (925) 296-1044 or dwright@bpmllp.com.