Proper planning prevents global business tax headaches
As the world gets flatter and competition emerges from all parts of the globe, many mid-sized companies are exploring ways to establish or expand their international foothold. The global marketplace can hold many tantalizing opportunities for growth, expansion and increased competitiveness. However, failing to properly understand the tax requirements of even the smallest international venture could result in big financial headaches for your mid-sized company.
Tax laws and procedures vary greatly from country to country, and they are constantly in flux. While tax issues rarely drive a company's decision to go global, those issues can dictate how you go about establishing your international business. Whether you plan to export a single product to Canada or build a major manufacturing facility in the Czech Republic, experts urge you to address tax issues before they take you by surprise.
The following tips may help keep your international ventures from becoming too taxing for your mid-sized business.
Examine your corporate structure
Your company's corporate structure can help determine what taxes you pay internationally. S corporations carry the highest risk for running afoul of international tax laws. If your S corp is not appropriately set up, you could find yourself in double tax jeopardy--owing taxes both in the foreign country where you are doing business and in the United States, where you may be ineligible to claim available tax credits on incoming funds.
Beware of indirect taxes
Just as companies doing business in the United States must collect and report sales tax, make sure you know what indirect taxes each company you do business with is required to collect. Some common indirect taxes include:
Value-added tax (VAT): Companies doing business in European countries must contend with VAT requirements, and most other countries have their own equivalent as well. Unlike a sales tax, value-added taxes are levied at every level of production, from sourcing to manufacturing to selling.
Customs duties: These can vary both by country and by product. Make sure you are set up to pay the required duty and file any requisite paperwork.
Environmental taxes: Environmental taxes and other local taxes may vary by region or jurisdiction as well as by country. Be careful to investigate all local taxes that may apply.
Consider an IC-DISC
Is your business a closely held corporation and primarily owned by individual taxpayers, and does it produce more than 50 percent of a product in the United States? If so, you could be eligible for a permanent 20 percent tax savings by creating an interest charge-domestic international sales corporation (IC-DISC). Qualifying for an IC-DISC requires little in the way of infrastructure in a foreign country to obtain the associated tax benefits.
Understand withholding taxes
Many companies venturing into foreign markets for the first time are unpleasantly surprised when hit by local withholding taxes. Virtually every country has a withholding-tax regime. If your company does not have a physical presence in a country, and you are not protected by international treaty or another means, you could easily find yourself owing significant withholding taxes on your gross income.
Evaluate transfer pricing
A transfer price is the amount of money that one unit of an organization charges for goods and services to another unit within that organization. When the two units are located in different countries, most industrialized nations require businesses to produce a comprehensive transfer-pricing report to prove they are charging a fair, or "arm's-length," price for those goods and services.
Beware of know-it-alls
Because of the complex, ever-changing nature of international tax issues, be sure to seek out expert support in the country where you do business. Some advisors may specialize in international trade with one or two countries, but nobody can keep track of all applicable laws in every country. Be sure your international tax advisor will work closely with local resources in the country where you do business to ensure you can reap the greatest tax advantages at the least risk.
Tim Stewart is an international tax director with RSM McGladrey. He can be reached at (217) 398-9400 or firstname.lastname@example.org.