International Tax Compliance: 3 Things To Know When Going Global

Expanding a business across borders is one of the most exciting milestones a company can reach. It’s also one of the most complicated things a company can do from a tax perspective.

Whether you lead a U.S. business planning an international expansion, a foreign company entering the U.S. market, or engage in complex cross-border transactions, here’s what you need to know when going global.

1. Noncompliance Is Costlier Than You May Expect

With every new country you enter, you add to the number of governments that can impose a tax on your business. But the risks of noncompliance begin much closer to home: The IRS is far less forgiving of international tax missteps than you may expect.

Failing to file, filing late, or providing incomplete or wrong data on U.S. tax forms tied to foreign entities, accounts, and transactions can saddle you with penalties starting at $10,000 per form. Penalties climb even higher for continued noncompliance.

Unlike penalties for domestic filings, penalties on U.S. international tax filings can apply even when no additional tax is owed or when the failure was unintentional. That means a missed filing can turn into a costly problem.

That’s to say nothing of the penalties imposed by foreign tax authorities. As a global or soon-to-be-global taxpayer, you can avoid the threat of harsh penalties by undergoing an international tax health check: a proactive review of your entity structure, filings, and cross-border transactions to confirm reporting requirements are met. An international tax health check typically looks at these items:

• Your U.S. tax filing obligations
• Foreign bank and financial account reporting obligations
• Your prior-year filings to ensure their completeness
• Withholding and reporting compliance (for cross-border payments)
• Contemporaneous documentation supporting related-party transactions and transfer pricing agreements

Finding it during an IRS audit is a penalty-reduction conversation, but finding an issue during an international tax health check is merely a planning conversation. Given how quickly international reporting failures can compound, a regular checkup is one of the most cost-effective moves a growing global business can make.

2. Tax Optimization Is Key

Once you know you’re meeting your compliance obligations, the next step is to make sure you’re as tax efficient as you can be.

Tax optimization is about minimizing the amount of tax owed under current law. The process involves determining how income is taxed in each country where you do business and how those rules interact with U.S. tax rules.

Here’s what a U.S. international tax advisor will look at when optimizing your tax structure: 

• Eligibility for foreign tax credits: To avoid being taxed by two jurisdictions on the same income, the United States provides a credit for a portion of foreign taxes paid. However, not all foreign taxes qualify for a foreign tax credit (they must be an income tax based on U.S. tax rules). Your U.S. international tax advisor will recommend ways to maximize your foreign tax credits to minimize your U.S. tax bill. 
• Applicability of anti-deferral regimes: The United States uses so-called anti-deferral regimes to force U.S. taxpayers to recognize income before it would be otherwise received. Your U.S. international tax advisor can ensure you have accurately classified your income to avoid recognizing taxable income before you need to.
• Withholding tax rate reductions: Certain types of cross-border payments—including royalties, interest, dividends, and service fees—are subject to a 30% withholding tax at the source. However, many countries have negotiated tax treaties with the United States that reduce the withholding rate substantially, but only if the payments and paperwork are structured correctly. Your U.S. international tax advisor will conduct a withholding analysis to ensure you aren’t overpaying on your withholding taxes.
• Organizational restructuring opportunities: How you set up foreign operations, whether as a branch, a subsidiary, a partnership, or something else, directly affects how income is taxed, how losses can be used, and how easily tax benefits can move where you need them. Unfortunately, structures that work well on a small scale often become inefficient as a business expands. Periodic meetings with your U.S. international tax advisor can help confirm your structure still reflects how the business operates today rather than how it used to.

These factors, as well as others, work together to help you minimize your global tax obligations and repatriate more cash. 

3. Your Global Workforce Can Create Tax Exposure

Compliance and structure aren’t the only things that change when you go global. Your workforce does, too.

Sending employees abroad, hiring internationally, and bringing foreign talent into the United States all trigger a separate set of tax questions. Each time you consider any of these actions, it’s worth a conversation with your U.S. international tax advisor to understand the tax implications.

Even small employment-related actions can have an outsized tax effect. For example, sending an employee to work abroad may inadvertently cause the company to have a taxable presence in that country due to permanent establishment rules.

Businesses that consider international tax strategy as part of their global mobility plans are in the best position to move people across borders without triggering unexpected tax and reporting obligations for the company or the employee.

Smith + Howard: Your Partner for Global Expansion 

Going global presents tremendous opportunity, but a new layer of tax complexity must be considered. Smith + Howard’s U.S. international tax team helps businesses and individuals navigate inbound and outbound planning, tax treaty analysis, withholding tax, transfer pricing, global mobility, and international compliance, all so you can expand with confidence rather than uncertainty.

Reach out to Matt Halpern to talk through your organization’s international tax health and identify opportunities to grow in a tax-efficient way.