How to avoid costly tax mistakes when taking your business overseas

If you’re considering doing business overseas, make sure you’ve done the proper planning before you jump in, or the result could be disaster.

No matter the size of your company, if you fail to get everything in order, you could find yourself in very deep trouble both with the IRS and with the local tax authorities in the country in which you are doing business, says Barry Wen, tax senior manager at Burr Pilger Mayer.

“Too many companies think that unless they are a large, multinational company, they don’t need to worry about the international tax issues, but any company with a presence in a foreign country needs to be aware of the tax planning opportunities and compliance requirements,” Wen says. “The IRS has become more aggressive in seeking revenue, and targeting foreign operations is an easy way to do that because many taxpayers are not aware of all federal requirements.”

Smart Business spoke with Wen about what you need to consider before expanding internationally.

What does a business owner need to think about before making the jump into another country?

The first thing to consider is what kind of entity you want to have overseas. Do you want to have a corporation, a partnership or a disregarded entity? You really need to determine what your long-term plan is, have proper projections and budgets and identify both the U.S. and foreign tax issues and compliance requirements. Other questions you want to ask yourself are: How should I report foreign income or losses? Is there any relief from the foreign tax withholding? Should I make the check-the-box election?

What should companies be aware of regarding the income anti-deferral rules?

Generally speaking, a foreign corporation is not subject to U.S. tax on its foreign earnings until it is repatriated to the U.S. However, the anti-deferral rules restrict the deferral of tax on certain foreign income for certain U.S. owners of certain foreign corporations. For example, there are no deferrals if the foreign income could have easily been earned in the U.S. or there are hidden distributions such as investment in U.S. property. Therefore, you have to very closely watch your related parties’ transactions in different countries.