This article was updated on April 28, 2023, to reflect a recent US Tax Court ruling.
Global opportunities continue to abound for businesses. Expansion into new international markets can prove immensely profitable, but present additional tax considerations. Navigating these successfully is central to the success of any global business.
Like businesses, tax regulations continue to evolve and change, both in the US and in nations around the world. The consequences of non-compliance can often be severe, so maintaining a working understanding of these regulations is crucial. Besides the financial penalties imposed by governments, businesses may have to amend their financial filings or revise their tax provision calculations.
In recent months, there have been significant developments in a variety of international tax regulations. In this briefing, we provide a brief overview of four of the most salient:
Let’s take a closer look at each of these developments and explore the impact they may have on the US business community.
To explore how these developments affect your business, contact Smith + Howard’s International Tax team.
When an entity holds a foreign bank and financial account, they must report these annually to the IRS by filing a Report of Foreign Bank and Financial Accounts, more commonly known as the FBAR.
Failure to disclose the existence of such accounts is punishable with a $10,000 penalty. In this Supreme Court Case, Bittner v. United States, the IRS had attempted to levy these penalties at a rate of $10,000 per unreported account, for each year of a five-year period, leaving the plaintiff with an original assessed penalty of $2.72 million.
However, the Supreme Court held that the FBAR penalty applies on a per-report basis, not a per-account basis as the IRS had argued. This reduced the taxpayer’s penalty to $50,000: $10,000 for each tax year an FBAR report was not filed.
This precedent dramatically limits the potential penalties that apply to taxpayers that fail to meet FBAR filing requirements, although making annual FBAR filings ensures that taxpayers avoid any penalties at all.
In December 2021, the IRS released new foreign tax credit regulations, replacing existing regulations that had been in place since the 1980s. These changes apply to the 2022 tax year and were recently clarified by additional proposed regulations released in November 2022.
These new regulations will likely limit the ability of many taxpayers to credit foreign taxes paid around the world, particularly compared to previous versions of these regulations. Foreign taxes which were previously creditable may no longer be, and as part of their 2022 tax return preparation, businesses must evaluate the creditability of these taxes.
To be considered creditable, foreign taxes must now pass one of two tests under Section 901:
Determining which of a business’s foreign tax payments are creditable in this scenario is a complex undertaking. The guidance of an experienced international tax team ensures that businesses remain in compliance and claim the maximum foreign tax credits they are owed.
Transfer pricing is a key component of international tax strategy, governing the tax implications businesses face when transferring goods and services between different divisions of the same business.
In February 2023, the US Tax Court handed down a ruling in a major transfer pricing case involving 3M. The case focused on the relationship between 3M and its Brazilian subsidiary. 3M Brazil licensed trademarks, technology, and patents from 3M in the US, paying a royalty fee of 1% under restrictions put in place by the Brazilian government.
The IRS argued that this royalty fee was significantly lower than a royalty fee that would have been paid in an arms-length relationship, resulting in a lower amount of taxable income in the US, a higher tax jurisdiction.
The Tax Court narrowly ruled in favor of the IRS, although it is worth noting that 3M may appeal. The decision has an impact on both transfer pricing allocations and on uncertain tax positions taken in relation to ASC 7410-10.
In late 2022, the Organization for Economic Co-operation and Development (OECD) issued an approach to address Base Erosion and Profit Shifting (BEPS): a practice multinational corporations use to minimize taxation by exploiting differences between national tax systems.
The BEPS 2.0 tax framework includes a global minimum tax rate of 15% that aims to ensure multinational corporations pay a minimum tax on income derived from low-tax jurisdictions. The framework contains two key pillars, known as Pillar One and Pillar Two.
Pillar One applies to large multinational corporations with consolidated global revenues of €20 billion or more.
Pillar Two applies to multinational businesses with consolidated global revenues above €750 million and below €20 billion. It specifies these corporations must pay a 15% global minimum tax on profits in all countries around the world.
As of this writing, South Korea has taken steps to enact these rules and it is expected that other global tax jurisdictions will follow. The FASB has stated that the incremental effects of these minimum taxes would increase payable taxes and would not be reflected in deferred taxes.
A recent decision made by the US Tax Court indicates that the IRS cannot impose penalties for the omission of information regarding foreign-owned businesses. As a result, this ruling could potentially lead to more challenges against penalties in similar cases.
Businesses that operate globally face a complex, ever-evolving tax landscape. Ensuring compliance with all relevant regulations while pursuing an efficient tax strategy is a real challenge. To be successful, business leaders must have exceptionally knowledgeable tax advisors.
At Smith + Howard, our international tax team is part of a global network of tax experts with connections in 164 countries. We work daily with businesses that operate internationally and provide guidance on a variety of international tax issues, from outbound planning to transfer pricing planning.
To learn more about how we can support your business in its international growth, contact an advisor today.
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