Remember the days when we conducted business in close proximity to where we lived? The world is a different place now. The Internet has enabled businesses to have employees located in foreign countries and to find customers in very remote locations throughout the world. The challenging U.S. tax system makes doing business in the United States difficult. However, when a business goes offshore, the confusion grows geometrically.
Tax planning is critical for an international business. While a decision about which form of business organization to use might be right in the United States, the decision may generate terrible tax ramifications because of the differences in another country’s tax system. For example, setting up an S corporation, one of the most prevalent forms of business organization in the United States, to operate in another country could devastate the business due to the its inability to claim foreign tax credits. The limited liability company, which is hot and often promoted by attorneys, is still not understood by many governmental authorities in the U.S., but worse yet this form of business organization is not even recognized in foreign countries.
For many years the Internal Revenue Service did not pay attention to taxpayers doing business offshore. Now the IRS is increasing its staff of specialists in the area of international business.
There is nothing wrong with tax avoidance and nothing wrong with trying to save money legally through tax planning. Because of the inconsistencies among tax systems in foreign countries, tax planning poses great challenges. Brazil has very high tax rates; Poland and Hungary have very low tax rates. The U.S. tax rate is one of the highest in the world. Legal ways exist to shelter income from tax in the United States, but it must be planned so that, when the money is brought back to the U.S., the repatriated income will be taxed. Planning requires the realization that while the U.S. government is not taxing the income when it is initially earned, the foreign countries are taxing it. Therefore it is critical to understand the tax systems in the countries where business is conducted.
Other issues apply to the employees of a U.S. business who are located in a foreign country. Planning is essential to help these employees obtain the maximum benefits of income tax exclusion for their foreign-based income.
The major need of any business that is planning to or operating in another country is a plan to do it right.
By guest blogger and CPE Link instructor Stuart P. Sobel, EA