Operating globally increases both the growth opportunities and the potential tax implications to assess. Businesses and individuals with international operations and investments face significant complexities in navigating international tax regulations. This is a complicated, fast-moving field, with regulations constantly evolving both in the US and abroad.
Remaining in compliance is no easy undertaking. Without the support of experienced international tax professionals, businesses and individuals may fail to correctly characterize international activities, potentially leading to filing penalties and costly tax audits.
In the US, the Foreign Account Tax Compliance Act, more commonly known as FATCA, imposes requirements for the reporting of foreign assets and withholding on certain foreign payments. Globally, there are countless tax regulations to be aware of, in addition to more comprehensive frameworks. The most notable of these is the Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Sharing (BEPS) framework, a unified global effort to reform international tax rules for multinational corporations.
In such a complex area of tax, it’s important to understand the filings required and the complex rules for computing tax liabilities. In this guide, we outline several key tax forms to be aware of and explore some considerations that influence international tax strategy.
Key Tax Forms for International Tax Compliance
Frequently, organizations and individuals fail to recognize that certain activities trigger reporting requirements or can impact taxable income. This is particularly true in the early stages of expansion outside the US or for international businesses first entering the US market.
Below is a brief overview of key tax forms that may be required to be filed each year:
- FinCEN Form 114: this serves as a report of foreign bank and financial accounts and is also known as an FBAR
- Form 8938: reports certain foreign assets that exceed specified values
- Form 3520: reports transactions with foreign trusts and receipts of foreign gifts
- Form 5471: reports ownership and activity of foreign corporations
- Form 8865: reports ownership and activity of foreign partnerships
- Form 8858: reports ownership and activity of foreign disregarded entities
- Form 1118 – reports a corporation’s foreign-sourced income and available foreign tax credits. Form 1116 is used for an individual taxpayer’s foreign tax credits
- Form 1042 & Form 1042-S: reports certain U.S. sourced income that is subject to withholding and related withholding tax
- Form 5472: informational return that reports related party transactions of foreign-owned US corporations
- Form 8990: determines the disallowed interest expense and may be required to be included with Form 5471
- Schedule K-2 & K-3: summarize financial information of S-Corps and Partnerships for entities and their shareholders/partners
Depending on the nature of their activities, businesses and individuals may have to file some of these forms. To determine which filings apply, we encourage you to contact our international tax compliance team.
Key Considerations for International Tax Compliance
Operating as a multinational adds complexity for both businesses and individuals, with many considerations when doing business across borders. Some of the key considerations to bear in mind when considering operating as a multinational include:
- Global Intangible Low-Taxed Income (GILTI): this is income a US taxpayer derives from a controlled foreign corporation (CFC). The GILTI rules require the computation of taxable income for CFCs using US tax rules, then the inclusion of an amount over what is considered a typical return on investment in US taxable income. In practice, this ensures US taxpayers pay a minimum tax on foreign earnings.
- Subpart F Inclusions: certain income at the CFC level may be required to be included in income in the US tax return of the direct or indirect owners of that CFC.
- Foreign Derived Intangible Income (FDII): corporations can take an FDII deduction on income derived from export activities, electing to be taxed on these activities at a lower rate of 13.125%, compared to the 21% standard rate. This rate is set to increase in 2026.
- Entity Structure: the legal structure of international entities can have a major impact on their international tax expense and reporting obligations, affecting everything from withholding taxes to GILTI inclusions. It is important to consider the entity type and where an entity is included in the overall structure to make sure that there aren’t unexpected consequences.
- Transfer Pricing Studies: these studies evaluate a wide variety of factors to determine the appropriate profit that should be made between related parties across borders. This analysis may need to be shared with taxing authorities when requested. Organizations should consider commissioning these studies on a proactive basis: if a taxing authority requests transfer pricing documentation, your organization will only be given a short time to respond.
- Cash Repatriation: if cash is repatriated across borders, this can create withholding tax obligations. Income tax treaties between countries may impact these obligations.
- Foreign Tax Credits: these credits are vital to mitigate double taxation, but calculating the credits can be extremely complex. Taxpayers have to consider a wide variety of factors to appropriately allocate income and expenses. Additionally, taxpayers must retain receipts and documentation for all foreign taxes that have been paid in order to support the tax credits.
- Base Erosion and Anti-Abuse Tax (BEAT): this punitive tax regulation typically only applies to larger corporations. It enforces a minimum tax on corporations that make base erosion payments to foreign related parties.
- Section 163(j) Interest Limitations: these rules determine how the level of interest expense foreign corporations owned by US shareholders can deduct.
Penalties may be imposed for failing to file or not substantially completing a filing. These are typically assessed on a per filing, per year basis. For large businesses with complex entity structures, this can result in significant penalties, underscoring the importance of working with experienced international tax professionals. Of equal importance to meeting the compliance requirements is ensuring the tax planning opportunities are identified.
Smith + Howard: Experienced International Tax Advisors
Global markets present many opportunities but organizations that operate as multinationals also face significant complexities. Determining tax liabilities and ensuring compliance with tax regulations around the world can be daunting without trusted support.
At Smith + Howard, our international tax team understands the nuances of international tax strategy and compliance. With experienced professionals that bring real depth and expertise to international tax reporting and compliance, we are well-equipped to help global businesses minimize their worldwide tax burdens while remaining in compliance with both domestic and international regulations.
To learn more about how Smith + Howard can support your international tax compliance and planning needs, contact an advisor today.