Key tax issues for businesses going globalBusinesses exploring global opportunities should be mindful of international tax issues.
The internet and other technological developments have made it easier than ever for companies of all sizes to sell their products and services overseas. But that doesn’t mean international tax issues are any less complex.
Are you paying more tax than necessary?
In the US, manufacturers and others that export American-made goods overseas can enjoy substantial tax benefits by setting up an interest-charge domestic international sales corporation (IC-DISC). These benefits are also available for architecture and engineering services related to foreign construction projects and for certain software exports.
An IC-DISC is designed to receive commissions on export sales on a tax-advantaged basis. A corporation on paper only, does not need to have offices or employees and it’s not required to provide any services, so it’s relatively inexpensive to set up and operate. If an IC-DISC is structured properly and meets certain requirements, it can reduce taxes on export profits by 40% or more and defer tax payments on those profits.
Despite these benefits, this tax break is under-utilised. One reason for this is that many companies don’t realise they are eligible. For example, companies that manufacture component parts that are ultimately incorporated into exported products may qualify, even though they don’t export their products directly.
Is the price right?
Transfer pricing is one of the top issues for revenue-strapped tax authorities around the world. It concerns the prices for which related parties, such as a corporation and its foreign subsidiary, exchange goods, services or intangible assets in cross-border transactions.
Governments are concerned that companies manipulate these prices in order to shift profits to lower-tax jurisdictions. Contrary to popular belief, transfer-pricing restrictions aren’t limited to international transactions. In the US for example, they also apply to domestic companies that do business with related parties across state lines.
To deter tax avoidance, transfer-pricing rules require related parties to set prices that are comparable to those charged in arm’s length transactions, using one of several accepted methods. It’s also a good idea to document intercompany pricing decisions contemporaneously (in some countries documentation is required) to ensure compliance with the rules. The consequences of non-compliance are severe. In the US, for example, penalties range from 20-40% of the underpaid tax.
Companies concerned about transfer-pricing liability should consider negotiating an advance pricing agreement with the tax authorities to avoid any tax surprises further down the road.
Are your foreign accounts in order?
Individuals and entities in the US with a financial interest in, or signature authority over, certain foreign accounts are required to report these accounts to the US authorities annually on the Financial Crimes Enforcement Network Form 114 – Report of Foreign Bank and Financial Accounts (FBAR). The form is required if the aggregate value of foreign accounts, such as bank accounts, brokerage accounts, mutual funds or trusts exceeds US$10,000 at any time during a calendar year.
Failure to file required FBARs could result in substantial monetary penalties and, in extreme cases, imprisonment. In some cases, these penalties will apply to a company’s officers or employees with signature authority over foreign accounts.
Individuals or companies that have missed FBAR filings in previous years should consider participating in the IRS’s Offshore Voluntary Disclosure Initiative. In most cases, coming forward voluntarily allows monetary penalties to be minimised and avoids criminal prosecution.
Are you ready for FATCA?
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 in an effort to prevent US taxpayers from hiding assets overseas. The act requires foreign financial institutions and other foreign entities to file reports with the IRS identifying their US account holders or major investors.
The act encourages compliance by imposing a 30% withholding tax on certain US-source payments including interest, dividends, rents, royalties and compensation. From 1 July 2014, US entities and others in control of these payments must begin withholding 30% of payments to non-compliant foreign entities. Companies making payments to foreign entities should verify and document their FATCA status and determine their withholding obligations.
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