Posted by Tiffany Gaskin

Important Concept in International Tax Matters

Important Concept in International Tax Matters

Many businesses (even small and medium-sized businesses) are spreading their tentacles, entering the global market. With such expansion into a promising market, the business will relate with foreign entities in other countries. 

Once a business enters the international scale, they need to understand some fundamental tax issues when having a business on foreign soil. When you don’t have a good idea of some tax implications, you might be left with a considerable amount of tax debt to the U.S. government and foreign country tax bodies. 

As a result, this article will explore various tax concepts applicable when conducting business on an international scale with foreign countries. If you need precise legal and tax advice, make sure to talk to an experienced tax attorney with experience in international tax matters.

 

Permanent Establishment 

The United States, alongside other countries, subjects international businesses to tax based on the permanent establishment. The idea of permanent establishment does not mean your business needs to have a physical presence (lease or own) in a foreign country. However, the United States has a tax treaty with many countries where you operate that specifies your operating conditions to have a permanent establishment in a foreign country. 

When you understand such requirements, you can stay away from the permanent establishment. 


Transfer Pricing 

This is one of the vital issues one needs to address when it comes to international tax laws. The concept of transfer pricing comes in when two firms with the same umbrella trade with one another across borders. 

Uncle Sam might audit companies if it suspects transfer mispricing. As a result, businesses need to understand the difference between U.S. income tax and the European value-added tax as an example.

 

Foreign Earnings 

Whatever you earn abroad, it may or may not be taxed in America. 

Suppose the business entity you are conducting the operation with is a foreign one. In that case, U.S. tax will only come in when the income is distributed via dividends or given to U.S. shareholders. 

In response to many U.S. firms that delayed many impressive tax benefits, Congress came up with Subpart F. As a result, tax deferrals will not exist on some part of foreign income. 

Also, don’t forget that the IRS generally does not bother firms that neither get their income in the U.S. nor conducts any business on U.S. soil. This, however, does not apply to U.S. citizens, as they must pay income tax, no matter the source of such income.

 

FBAR and FATCA 

To ensure that U.S. citizens pay taxes on earnings from outside the country, Congress came up with FBAR and FATCA, which means Foreign Bank and Financial Accounts; and Foreign Account Tax Compliance Act, respectively. 

The details of these acts are not in the scope of this article. However, all U.S. citizens need to know that Uncle Sam does not joke with getting its share of all foreign earned income of U.S. citizens.

 

Social Security and Withholding Taxes 

Payment of withholding taxes for employees not on U.S. soil might be a little complex. The bright side is that the United States has an agreement with 21 other countries regarding withholding taxes like Medicare and Social Security. This helps avoid double taxation for social welfare programs.

 

For any Issue, work with an experienced tax attorney 

This article aims to guide businesses with branches in other countries or that get income from foreign bodies. Make sure to talk to a tax professional for advice on managing tax obligations, avoiding permanent establishment, and others. 


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Tiffany Gaskin
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