Taking your business into a new country allows you to embark on a potentially massive expansion, but along with it, you get a whole net of tax regulations and reporting requirements that can be tricky to work out. As a U.S.-based company that is expanding to other countries or an international business entering the U.S. market, you need to know that tax laws vary by country. An effective tax planning can save you the penalty, reduce your tax liability in general, and remain fully compliant in all the jurisdictions you may be doing business in.

Design Your Entity to be Tax Efficient

The key to a successful international tax plan is the proper selection of entity structure. It dictates how you are going to be taxed, your compliance requirements, and even exposure to liabilities. The common structures are:

• Corporation
• Limited Liability Company (LLC)
• Unincorporated Branch
• Disregarded Entity
• Foreign Partnership
• Controlled Foreign Corporation (CFC)

Every structure has a list of its federal, state and local tax considerations. As an illustration, the LLCs do not pay taxes to the federal government, whereas corporations are usually subject to the income and franchise taxes in the states where they are located in the United States. Also, as a branch may make reporting easier, it may raise the taxes or make the parent company subject to foreign tax jurisdiction.

The careful structuring also influences whether you can enjoy the tax treaty benefits and the way you will be addressing the repatriation of income, transfer pricing and reporting.

Be Aware of Your Tax Residency and Local Presence Requirements

Every country has different tax residency and permanent establishment regulations that can have a significant impact on your tax liability. Even without an office in a particular country, you may have to pay taxes in that nation in case your business has employees, contractors or short-term assets in that country. You should know what causes local tax liabilities to be imposed to plan and not be caught unawares.

In the U.S., nexus may be established on the federal and state level and the states are getting more active in pursuing their tax collection rights. The laws governing state income tax vary tremendously, and therefore companies with different states of operation will need to evaluate the rules of each state separately.

Learn the difference between Direct and Indirect Taxes

When going global there are two kinds of taxes that are of importance:

Direct Taxes: These are the corporate income tax and the capital gains tax which has a direct impact on your profits.

Indirect Taxes: These are taxes that are passed to the consumers like VAT, GST and the U.S. sales taxes, but the businesses have to collect and remit the taxes.

In the case of U.S. operations, non-U.S. based companies must be aware of sales tax requirements in the states in which they have sales, inventory, or use fulfillment services, such as Amazon FBA, even when they have no physical presence.

Take advantage of Tax Treaties to escape double taxation.

The U.S. and most of the other countries have tax treaties which are meant to eliminate the problem of double taxation and encourage trade across borders. Such treaties may minimize or do away with withholding taxes imposed on payments such as dividends, interest and royalties.

Nevertheless, the treatment of the treaty does not come automatically. Companies are required to be highly-documented and reported. W-8BEN, 8233, and 8833 forms are commonly needed to get treaty benefits and prevent penalties.

Furthermore, your U.S. inbound investment set up should be strategized in ways that would enable it to be treated as falling within the provisions of these treaties. This can be done to avoid further taxation and to experience any other unpredicted compliance.

Observation of Transfer Pricing and OECD Guidelines

One of the most reviewed and challenging fields of international tax is transfer pricing. It entails determining prices of cross border transactions between related parties. Such transactions should be made in accordance with the arm length principle to meet the international standards that is, as though the parties in the transaction are third parties.

The governments of the world including the U.S. demand elaborate records to back intercompany pricing. Failure to comply may lead to duplication of tax, tax audit, and high penalties.

The OECD guidelines should be observed and an effective transfer pricing policy should be invested in to minimize risk, particularly as the authorities around the world are increasingly becoming tougher in enforcement.

Keep ahead of the Global Tax Reform (Pillar Two & GILTI)

The tax system at the international level is changing. Among the largest developments is the so-called two-pillar structure, spearheaded by the OECD:

• Pillar One: It is aimed at re-allocation of taxing rights.
• Pillar Two: It proposes a global minimum corporate tax of 15 percent on large multinational corporations no matter where they are based.

Although most nations such as the UK, EU, and Canada have adopted such reforms, the U.S. is yet to embrace Pillar Two. Nevertheless, the U.S. companies and the foreign affiliates thereof are still subject to tax regimes such as:

• GILTI (Global intangible low-taxed income): A minimum tax will be levied on some of the profits made by CFCs (controlled foreign corporations).
• FDII (Foreign-Derived Intangible Income): Gives lower tax rates to encourage exporting and sales to overseas buyers.
• IRC Section 367: Is an exit tax on transfer of assets out of the U.S.

It is important to learn about the interaction of these rules in order to prevent duplication of taxes and other surprise liabilities.

Utilize All U.S. Tax Credits and Incentives

The U.S. tax code has quite a number of credits and deductions, which could help you lower your tax. Such incentives are meant to promote innovation, employment and exports. The following are some of the main opportunities:

• R&D Tax Credit
• Investment Tax Credit (ITC)
• Export Incentives
• Qualified Business Expense Writedowns
• Job Creation and Retention Programs

There are eligibility rules and documentation requirements that are associated with each of these incentives, so it is prudent to consult a tax advisor to discuss your options in detail.

Compliance and Reporting in Real-Time

It is such a complicated operation that staying in compliance across borders requires more than the annual tax returns. Companies are supposed to adopt:

• Tax and accounting software
• Local jurisdiction contacts in finance Dedicated finance contacts in each jurisdiction
• Training of staff on changes in compliance regularly
• Local tax advisors involvement

The use of one compliance point in the world usually results in time wastage or neglect. The delegation of contacts in the region will contribute to the accountability and the quicker response to the changes in the regulation.

Professional Services to Cross-Border Success

Coming into the U.S. or going global for the first time, or expanding internationally, it is important to have the appropriate tax strategy. The environment is complicated, whether it is the proper entity structure, foreign tax credits and treaty requirements, as well as transfer pricing.

Engaging tax professionals with knowledge in the international taxation, multi-jurisdictional challenges, local laws and international reform trends will keep you compliant and competitive. Speak to Finance Focus international tax advisors now to develop a plan that will help your business achieve its objectives, and stay compliant in any country.

Conclusion

Complying with international tax is not only a matter of complying with the law, but also a matter of establishing a solid basis of cross-border expansion. Whether selecting the appropriate structure and utilizing tax treaties, transfer pricing or even keeping up with international reforms, it all needs to be thought of and carefully planned. The knowledge of both the U.S. and global taxation systems can help businesses not only prevent the occurrence of costly errors but also help them unleash strategic benefits. When planned correctly, equipped and with the help of the experts, the idea of expanding globally is not only achievable, but also lucrative.