Challenges abound for companies when they acquire businesses in foreign countries or expand their existing businesses internationally. In this three-part series, our professionals from Forvis Mazars highlight issues that such companies should consider, starting with tax compliance.
Tax Compliance
As many readers know, when starting new businesses in different U.S. states, there are often additional filings and taxes related to the new states of operations. This is no exception for international expansion. With acquisitions of international entities or expansion of existing business lines internationally, the complexity of tax structuring and filings can increase significantly. Understanding the tax laws of that country is crucial for maintaining smooth operations and avoiding penalties. This article will examine some of the primary tax issues that U.S. companies face when expanding internationally:
- Value-Added Tax (VAT) – For U.S. companies, VAT is a tax on goods and services sold outside the U.S. and each country has its own rates and rules. U.S. companies need to register for VAT in each country where they do business. They also need to collect VAT on sales so that they can then pay it to tax authorities.
- Customs Duties – When U.S. companies import goods and services into other countries, customs duties and taxes may be due. These vary based on the types of goods and services, and their origin. U.S. companies need to make sure of the following:
- Goods and services are correctly classified for the right duty rates.
- Goods and services for customs are accurately valued to avoid paying too much or too little in duties.
- Income Tax – U.S. companies are subject to income tax in both the U.S. and abroad, leading to complex tax planning. Issues to watch for include:
- Entity Choice and Selection: If conducting business outside of the U.S. through a foreign entity, consider whether the foreign limited liability company (LLC) equivalent or foreign corporation equivalent is used and how that entity is taxed for U.S. purposes. This has significant implications in the U.S. and abroad.
- Basis Step-Up: Beneficial depreciation and amortization deductions may be recognized when acquiring the stock of a foreign corporation with a special election under Internal Revenue Code Section 338.
- Permanent Establishment: Determining if a U.S. company directly has a permanent establishment, i.e., nexus, in another country.
- Transfer Pricing: Making sure transactions between U.S. and other countries meet the arm’s-length transfer pricing standards. Documentation is required.
- Tax Treaties: Bilateral income treaties can help mitigate double taxation. Only qualified companies are eligible for benefits.
- Expatriates: When sending U.S. employees abroad, both employers and employees have foreign income tax, payroll, and social tax consequences.
- Specific Tax Laws and Common Issues
- U.S. Passive Foreign Investment Company: These rules can be a trap for the unaware, particularly startup companies outside of the United States. Even with knowledge of these rules, the testing must be reviewed annually.
- Organization for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) Initiatives aim to prevent tax avoidance by large multinational companies.
- U.S. Global Intangible Low-Taxed Income (GILTI) Rules: These rules affect how U.S. companies are taxed on undistributed foreign earnings.
- U.S. Foreign-Derived Intangible Income (FDII): This is a tax benefit that U.S. corporations may achieve when exporting goods and services to non-U.S. customers.
- Foreign Financial Assets: U.S. Treasury requires special reporting where U.S. persons have interests in foreign bank and financial accounts, with potential missed filing penalties of $10,000 or more.
- EU Anti-Tax Avoidance Directive (ATAD): Common measures are interest limitation rules and controlled foreign company rules, affecting U.S. companies in the European Union.
Additional Costs
International expansion plans should be considered in the annual budget process. Costs can increase significantly due to the additional complexity in tax compliance with new regulations, new audits, and other expenses. It is not uncommon for fees related to tax due diligence to increase significantly when entering a new country and become incrementally higher as expansion includes more countries.
For additional issues to consider, stay tuned for the second part of our series focusing on ESG and financial reporting requirements. If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.
References
- U.S. Tax Code: Internal Revenue Code (IRC), Title 26 of the United States Code (26 USC).
- European Tax Code: European Taxpayer’s Code, Taxpayer Identification Number (TIN) regulations.