Border crossing

As new offshore markets evolve, the
many intricacies of these foreign tax
jurisdictions come into play. When coupling unfamiliar offshore tax rules with
U.S. tax laws, there are certain crucial
strategies to consider before, during and
following the establishment or acquisition
of a foreign business.

“In order to maximize your inter-company relationships and minimize your global
tax, you need to keep these rules in mind
as you plan and set up your structure,” says
partner Jon Davies of Armanino McKenna
LLP.

Smart Business recently spoke with
Davies about how U.S. companies planning an offshore move can safely navigate
through foreign tax jurisdictions and minimize their overall effective tax rate in our
ever-expanding global economy.

When planning a move offshore, what are
the first steps?

The main consideration when a U.S. company expands overseas is an issue called
permanent establishment — or taxable
presence — in the foreign jurisdiction. This
is defined either by the local tax rules in
that jurisdiction or by an applicable treaty
between the U.S. and that country.

One way to create permanent establishment is when you have a salesperson operating in the foreign jurisdiction, negotiating
and concluding contracts on behalf of the
U.S. company. Another test is when a company is providing pre- or post-sale service
or support or other types of personal services in that jurisdiction that would theoretically be liable for compensation. These are
general rules that should be confirmed in
each country.

What is the process once permanent establishment is confirmed?

At this point, you need to determine the
most beneficial entity to set up to define
that presence. Generally, this will be a
branch or a subsidiary (corporation) in the
local jurisdiction. Now it becomes a decision matrix. You’ll need to determine how
to compensate this inter-company relationship — whether it’s on a cost-plus basis, a
percent of sales revenue from those activities, or one of a variety of transfer-pricing
methodologies.

What if business activities do not merit permanent establishment?

Once you’ve analyzed the activities to be
performed and determined that they are
not going to create a permanent establishment — because you’re just doing sales
solicitation or product demos, for example
— then you must decide what kind of non-taxable presence you need to register, if
any. In some jurisdictions, you need only
register as an employer for that employee
and submit the proper payroll filings. Other
jurisdictions may require the establishment of what’s called a ‘rep office’ or representative/liaison office.

Should businesses utilize a tax professional
in each foreign jurisdiction?

I always liaise with a tax expert in each
country to make sure we’re not running
afoul of some intricate rule. Accounting
firms often have networks they can tap,
and experienced consultants usually develop a large personal contact network they can call upon. Companies should contact
their U.S. tax adviser, who can provide a
proven reference.

What countries offer the most favorable tax
environments to U.S. companies?

At this time, many countries have ‘tax
holiday’ programs, where you don’t pay tax
for a specified time period. China, for
example, has certain jurisdictions and economic zones where you may pay zero tax
for a few years, then 50 percent of a
reduced tax rate for a few more years, and
then you move into the reduced tax rate.
Other countries are offering tax credits and
incentive tax rates if you’re conducting
research-and-development activities in certain jurisdictions.

Keep in mind that locating in a foreign
jurisdiction should be based on business
reasons — not because of any individual
tax benefit. Once you’ve selected the optimal country, you must also find the most
beneficial economic zone within that jurisdiction.

What factors may inhibit offshore business?

The U.S. tax is on a worldwide basis,
which is different than many other foreign
jurisdictions. The U.S. wants to tax you on
all your income everywhere.

Controlled Foreign Corporations (CFCs)
are foreign companies controlled by U.S.
shareholders. CFCs must operate under
very strict rules about how to treat the
income they receive. Even though a foreign
corporation earns it, the revenue could be
taxable in the U.S.

As CFCs develop their international
structure, they must keep in mind the type
of income that a particular jurisdiction or
subsidiary is going to receive and ensure
that it’s not going to be treated as deemed
dividends or Subpart F income under these
CFC rules.

JON DAVIES is an international tax partner with Armanino
McKenna LLP in San Jose. Reach him at (408) 200-6411 or
[email protected]. For general information, phone (925)
790-2600.