International expansion can present various tax-related challenges, such as double taxation, indirect taxes, exchange rate volatility, and confusing tax codes. Organizations with overseas operations also have to juggle tax compliance and tax planning. While the former helps your company conform to relevant tax laws, the latter utilizes legal strategies to maximize tax savings. We’ve compiled some key tax planning and compliance topics that most multinational businesses must take into account.
Common International Tax Planning Considerations
Your organization’s business structure plays a significant role in determining how much tax you will pay. A multinational company might be exposed to additional layers of taxation in addition to U.S. corporate tax. Apart from existing regulations, it’s crucial to understand intended tax code changes in overseas jurisdictions.
Tax considerations can influence decisions on whether to launch international operations as a separate corporation or branch. This decision also determines how efficiently you can transfer earnings to the parent company. A typical tax planning strategy is to create holding companies, subsidiaries, foundations, joint ventures, or trusts in various tax-friendly countries.
Other international tax planning considerations include:
1. Inbound Tax Compliance
This aspect of tax planning applies to foreign companies looking to set up operations in the U.S. It ensures proper business registration with relevant state and federal authorities, compliance with filing requirements, and assessment of potential taxes on foreign investment income.
2. International Reporting
Accurate financial reporting is essential to tax compliance and planning. However, the requirements vary depending on the countries involved and the type of transactions. Your tax planning strategies must comply with The Foreign Account Tax Compliance Act (FATCA) and Bank Secrecy Act’s reporting guidelines.
3. Passive Foreign Investment
Some foreign companies specialize in generating royalties, rent, dividends, interest, and other types of passive income. The IRS has special rules for Passive Foreign Investment Companies (PFICs) designed to discourage deferring taxes on these earnings. In addition to high marginal tax rates, non-compliance attracts punitive penalties.
4. Cash Repatriation
Successful international investments usually translate to cash buildups in foreign jurisdictions, which must eventually be returned to the parent company in U.S. dollars. Your company can make significant tax savings depending on the time and method of repatriation. Popular options include repatriation via dividends, loans, royalties, and management fees charged to foreign subsidiaries.
5. Transfer Pricing
Transfer pricing refers to fees charged for services between affiliates or subsidiaries of a multinational. The IRS requires companies to charge market rates for transactions between divisions of the same entity. Transfer pricing can result in tax savings depending on its execution. One tax planning strategy involves divisions in high-tax jurisdictions paying higher rates for intercompany transactions and vice versa.
6. International Tax Treaties
Effective international business tax planning tax advantage of friendly clauses in international treaties to minimize a corporation’s overall tax burden. Favorable tax agreements between nations can help eliminate double taxation, implement efficient financing, and maximize information exchange between tax authorities in participating countries.
International business tax planning is vital to the success of any company’s overseas expansion. This complex accounting area requires a deep understanding of international tax laws, financial reporting standards, employment contracts, and tax treaties. Before opening an overseas branch, it’s advisable to consult an accountant who specializes in international taxation.