Is your business international? Many
companies, especially those just entering foreign markets, must think twice when answering this question. Business
owners may overlook transactions made
across borders, whether those are as close
as Canada or far away as Japan. That is,
until a tax wake-up call costs them profit
“When a company is notified that it will
face an IRS audit in the U.S. or a foreign
country where it is doing business, this can
be a scary moment,” says Michael Heiman,
associate director of SS&G Financial
Services, Inc. in Solon.
You can face substantial penalties for
noncompliance if you fail to report overseas transactions, and you may not be
availing yourself of tax advantages,
Heiman adds. “There is a lot of money to be
saved in the international arena. The reason for that is because there is a significant
potential for double taxation if an international business does not consult with a professional and plan carefully.”
Smart Business asked Heiman to provide a checklist of compliance considerations and offers suggestions for mitigating
Who is affected by overseas tax rules?
Any company with an international transaction could be subject to some important
international tax rules. A transaction can
include importing or exporting at the simplest level. When a company ventures overseas and either establishes an office or subsidiary or even sends employees overseas to work these transactions can
introduce significant international tax
What is one of the first concerns you address
when you consult with a business that has
We take a look at their entity structure,
from the U.S. and foreign perspectives.
Then we pick the type of entity that gives
them the best tax advantages and will simplify their reporting. A company that establishes itself overseas can elect to set up a foreign corporation in that location, or it
can set up a U.S. branch. The taxation of
those two structures is different. For example, foreign corporations may defer their
U.S. taxes until their earnings are repatriated into the U.S. On the other hand, earnings of a foreign branch are taxed in the
U.S. immediately, and branch losses can be
used to offset income earned in the U.S.
Depending on your business results overseas, you may want to defer income or
accelerate losses in the U.S. Or, if you pay
a lot of taxes in a foreign location, you may
want a foreign tax credit in the U.S. so you
don’t get double taxed. There are many
complexities. It pays to review your
options with a professional.
What about compliance concerns? What
must businesses file on tax returns?
Business owners need to report foreign
bank accounts, file tax returns in all of
their foreign jurisdictions, report foreign
operations to the U.S. and claim their foreign tax credits in the U.S. They must comply with U.S. withholding requirements on
payments to foreign persons. Finally, they
may need to help their employees file tax
returns overseas if they send workers out
of the country often to conduct business.
When planning, what are the first areas you
When setting up a business overseas
and in the U.S., owners must make sure
that the transactions between controlled
parties are stated on an arms-length
basis. What that means is that intra-company prices must be fair, and taxpayers
are required to prove it. You cannot sell a
product to a foreign subsidiary for a
ridiculously low price and shift the profit
overseas where a tax rate is lower. The
taxing authorities will require proof that
prices in the U.S. and overseas are comparable to what independent parties
How can dividend planning be beneficial?
The timing of when to bring profits back
to the U.S. can greatly affect your overall
tax liability. For example, before making
decisions about dividends, you should
compute how foreign tax credits may offset income tax in the U.S.. Timing is important so that you avoid paying more taxes.
Can tax treaties help companies gain favorable tax rates on income?
Many countries have tax treaties with
the U.S., and some will allow companies
to pay dividends to the U.S. without withholding taxes, provided that the foreign
business is substantially wholly owned by
the U.S. parent company. Ordinarily, when
you set up a subsidiary in a foreign country, you pay a dividend to the U.S. and
withhold tax money so the foreign government can collect income tax. In a tax
treaty situation, you may be able to pay a
dividend with no withholding from the
MICHAEL HEIMAN is associate director of SS&G Financial
Services, Inc. in Solon. Reach him at [email protected] or