As years pass by, the global market has expanded even more due to small and mid-size businesses and other business transactions to foreign countries. Along with this significant expansion is the complexity of understanding international tax law and tax planning. If you’re new to this or haven’t done your own research, it can be difficult to go through all the regulations and tax issues imposed by different kinds of taxing authorities.
It’s important to at least have the basic understanding of International Tax Matters when doing business to foreign countries to avoid paying a large amount of taxes or penalties from the IRS, both in the U.S and abroad. Although it is always best to consult an experienced Accountant or Tax Preparer to take care of these matters, you also have to be aware of the foreign tax filing requirements or taxation to prevent underpaid taxes such us for your international business, working outside the country, marrying a nonresident alien, or receiving gifts from outside the U.S.
International Businesses
If you are running a business abroad, one thing you should know is that taxes are given by the U.S and many other countries based on a permanent establishment. The U.S, under its tax treaties with most countries around the world, will allow you to operate your business in the foreign country in what will be considered as a permanent establishment if you follow a set of conditions. Therefore, you do not necessarily have to own, lease or be physically present in the foreign country to be taxed because you already have a permanent establishment set in place. There will also be cases where you can avoid permanent establishment if you only study the conditions given to you by the tax authorities.
Another factor that international business owners must be aware of with regards to tax obligation is transfer pricing. It happens once two companies owned by the same people trade with each other across the borders. The IRS can quickly spot companies who do transfer mispricing through their up to date audit. A good example is the European Value Added Tax versus U.S income tax. For international business owners, it is important to understand the difference between the two.
Foreign Income
Income earned abroad by U.S citizens and residents is taxed by the IRS but most of the time can also have to be taxed twice due to the taxation laws in the foreign country. However, it can be minimized by taking advantage of foreign tax credits which you entitled to receive. You may also exclude yourself from paying these taxes following the United States tax law. As for income earned by business abroad, it may or may not be taxed by the U.S depending on the following factors:
• Income has to be distributed first through dividends or renewed by U.S shareholders if the business operated is a foreign corporation. After which, U.S tax deferrals will be eliminated.
• Some categories of foreign income will not have tax deferrals due to Subpart F. Under Subpart F enacted by the Congress. Many U.S corporations have enjoyed the benefits of deferred tax in the past until it was eliminated.
• Corporations that does not receive income in the U.S or conducts any business in the U.S will generally be safe from tax obligations. However, U.S citizens will not be exempted to pay income tax regardless of the source of their income.
FATCA and FBAR Tax Forms
FATCA and FBAR are among the many informational filing requirements by IRS to inform them of your foreign assets. It is not used to calculate tax, rather it is used to ensure that U.S Citizens abroad report their earnings to the IRS. Failure to fill out these forms will result in a significant amount of penalties. If you have a financial account of more than $10, 000.00 in a foreign country, you are required to file for FBAR. Taxpayers are now allowed to voluntarily come forward to file forms if they are filed late thanks to the voluntary compliance programs implemented by the IRS. However, not everyone can do this and expiration dates shall be monitored as well.
To fully understand FBAR and FATCA, as well other factors mentioned above, it is always best to consult a trusted Tax Preparer to assist you. They will offer international tax services for you including taking advantage of foreign tax opportunities and tax treaties to certain countries.
