There are many questions when it comes to the world of international tax, but the following three questions in particular are ones businesses with international activities may want to discuss with their tax team sooner rather than later.
1. How can my export business save me money in taxes?
Companies that export U.S. manufactured product have the opportunity to take advantage of a powerful tax incentive you may (or may not) have heard of — the IC-DISC. Forming an IC-DISC company allows taxpayers to convert a portion of their export income (taxed at potentially the highest marginal income tax rate) into qualified dividend income, which is taxed at significantly lower rates.
The way it works is that exporters of U.S.-manufactured goods are permitted to calculate and deduct a commission amount paid to an IC-DISC company. When paid back to the shareholders, the commission amount is treated as qualified dividend income. The related benefit is a “permanent” tax benefit, meaning that dollars saved today never need to be paid back to the IRS.
The commission amount can be the higher of the following amounts:
- 4% of qualified gross export sales (limited to taxable income from those sales), or
- 50% of the taxable income from qualified export sales.
There are also a number of additional methods available to help increase the benefits even more. Generally, when export levels reach $1 million the IC-DISC may be worthwhile. However, in certain cases, a much smaller amount in exports also could yield a benefit.
2. How will my foreign bank account or other foreign assets complicate my tax filings?
Generally, any U.S. person with a financial interest in, or signature or other authority over, any foreign financial accounts with an aggregate value exceeding $10,000 at any time during the year must file a Foreign Bank Account Report (FinCEN Form 114) with the U.S. Department of Treasury. For the 2015 tax year, these forms will be due June 30, 2016. For taxable years beginning 2016 or later, the due date will be April 15 of the following year.
A U.S. person who non-willfully fails to report information on foreign accounts can be subject to civil penalties up to $10,000 per violation. Willful failures to report can result in penalties of up to the greater of $100,000 or 50% of the highest balance in the account at the time of violation. Willful violators could also be subject to criminal penalties.
Taxpayers owning foreign financial accounts also may be required to file a number of informational forms with their income tax returns. For example, taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 must report certain information about those assets on Statement of Specified Foreign Financial Assets (Form 8938). This form must be attached to the taxpayer’s personal income tax return. Failure to do so will result in a penalty of $10,000 (and penalties up to $50,000 for continued failures). Currently this requirement applies only to individual taxpayers.
It is important to remember that U.S. taxpayers are required to pay tax on worldwide income, regardless of where the assets are held.
3. Will my company’s foreign sales create a foreign income tax liability or filing requirement in the foreign country?
The answer is, it depends. Each country has its own set of income tax rules, including when a taxpayer becomes subject to the country’s income tax system. Many countries take the position that doing business within its borders will subject taxpayers to income tax. However, countries with whom the U.S. maintains a tax treaty will often have a much higher threshold of activity before taxpayers will be required to pay income tax.
Usually taxpayers must have a permanent establishment (PE) in a foreign country before becoming subject to income taxes. A PE is a fixed place of business in a foreign country. In the traditional sense, it exists if an actual office exists. However, various activities also may qualify as a PE, such as services being provided or sales people having authority to conclude contracts. Even if a taxpayer can claim that a PE does not exist, the company may be required to file a foreign income tax return to assert this position.
There are many complexities in the international tax landscape. Start by asking yourself, and your tax adviser, the questions above to at least begin addressing the basics.
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