It's no surprise that increasing economic globalization has meant that many businesses are becoming engaged in cross-border transactions. This has resulted in international tax issues becoming a commonplace, even for smaller practitioners, since any transaction that goes across an international border has tax implications.
As a consequence, many CPAs will face the decision as to whether to develop their own expertise in international tax, or to develop a partnership with a firm that can advise them on such matters.
"As they grow, it is inevitable that most companies will expand or have some type of presence outside the U.S.," observed Kathi Mettler, director of learning and education at WTP Advisors. "They will be forced to deal with international tax rules at some point. Smaller companies will use consultant advisors to help them navigate international tax rules, and as they expand and become more sophisticated, they will bring some of that expertise in-house."
"Typically a small or midsized accounting firm will develop someone to get expertise in international tax so they can teach the others," said Mettler. "One of the first hurdles in developing your expertise is becoming familiar with the language. This goes to issue identification, and knowing the facts of how business is transacted across borders."
"Buying items overseas from unrelated parties and selling to unrelated parties would not have significant tax issues," said Rocco Femia, a member at Miller & Chevalier. "But once you begin to expand your operations outside the U.S., so the company itself or an affiliate is manufacturing outside the U.S. and dealing with sales and distributions outside the U.S., and conducting other activities outside the country such as R&D, then that raises commercial issues that lead to tax issues."
Questions can arise in situations where, for example, a company is manufacturing in one jurisdiction, selling to a second jurisdiction, and providing intellectual property from a third jurisdiction. "How are those transactions priced to ensure that the taxable income of each jurisdiction is correct?" said Femia.
DISAPPEARING TAXES
One current focus is on ways of financing operations that produce a deduction in the countries of operations. "There is a concern among policymakers around the world that interest income is picked up and taxed somewhere else," Femia noted.
The Organization for Economic Cooperation and Development has a a project on this that "refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits 'disappear' for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax being paid," he explained.
He distinguished efforts to hide accounts overseas from the activity that the OECD is concerned about. "Hiding accounts overseas is about cheating by high-net-worth individuals that are hiding funds and not complying with the law. FATCA [the Foreign Account Tax Compliance Act] is intended to give the IRS the tools to better enforce the existing law.'
International issues are not just about globalization, noted Christine Ballard, an international tax partner at Top 100 Firm Moss Adams and chair of the American Institute of CPAs' International Taxation Technical Resource Panel. "With FATCA implementation and the IRS voluntary disclosure program, more taxpayers are starting to surface that need to make a disclosure. Accountants that didn't know about this in the past are beginning to be faced with the situation."
The voluntary disclosure program allows taxpayers with undisclosed income from foreign accounts to come forward, pay a set penalty and avoid criminal prosecution.
"FATCA is just the tip of the iceberg," said Ballard. "The EU countries are beginning to pass their own versions of FATCA. It's the new normal, and it will become as ubiquitous as transfer pricing."
INTERNATIONAL TAX AT HOME
For many practitioners, their first taste of international tax involves inbound planning, according to Miguel Farra, principal-in-charge of the Tax and Accounting Department at Top 100 Firm Morrison, Brown, Argiz & Farra LLP. "We see a lot of inbound planning involving clients from other countries," he said. "Clients come to us to set up businesses or make substantial investments in real estate. The tax practitioner should be aware of the various ways to structure their investment in U.S. real estate."
"Practitioners should be aware that there are various ways of structuring investment in U.S. real estate, including the two-tier partnership structure, which will allow for long-term capital gain treatment and one level of taxation, which is not available in the C corporation structure," Farra said. "The practitioner should also be acquainted with pre-immigration planning techniques for the non-resident that decides to become a U.S. tax resident."
A PERENNIAL ISSUE
"It is becoming more and more important to get transfer pricing right," warned Ramon Camacho, Washington National Office tax lead for international tax matters at Top 100 Firm McGladrey LLP. "It's not an exact science, but it is very important for folks to have some sort of documentation around the pricing they are actually using. We are seeing enhanced audit activity and focus on transfer pricing between related companies from foreign governments as well as the IRS."
"As companies lend money to affiliates or receive loans, there should be some thought to getting comparables from the marketplace," he said. "Very often they won't bother to find a comparable transaction, and when there's an audit, they've got no documentation."
"Another thing to consider, if you are selling products, is to take advantage of whatever export incentives exist," Camacho said. "In the U.S., the interest charge DISC [Domestic International Sales Corporation, or IC DISC] is a tax regime designed to allow you to sell U.S.-manufactured goods or services or U.S.-provided services to foreign customers. It allows you to take a portion of profit and defer U.S. tax. ... The amount can be significant."
"As practitioners begin to engage in international transactions, they should pay special attention to the withholding rules," said Camacho. "When you start doing transactions with foreign customers, may times the payments to foreign vendors are subject to U.S. withholding tax. It can be as high as 30 percent. The only way to get out of it is to document from the vendor or customer showing that you're entitled to a treaty exception. If you're a U.S. company that is making payment subject to withholding tax and you fail to collect the right document, you're on the hook for the tax. It can be a huge burden."
Beth Van Leeuwen, tax manager at Missouri-based accounting firm MarksNelson, said that it's important for businesses considering going international to take appropriate tax planning measures. "In a lot of these transactions, the business owners don't realize what some of the tax issues are until they run into problems," she said.
To aid in identifying the issues her clients might face in going international, Van Leeuwen has come up with six questions to ask.
1. Will I send my employee abroad? "If you're sending employees abroad, you have to know if there is an income tax treaty with the country involved," she said. "Then you look to the terms of the treaty to see where and how the income is taxed."
2. When I make payments to foreign companies or people, are there any withholding and/or reporting requirements? "A lot of people don't think about this," she said. "There's a default withholding rate of 30 percent on 'Fixed, Determinable, Annual, or Periodical' income, including interest, unless a lower treaty rate applies. Even if there's no withholding because a treaty provision applies, you have to have Form W-8BEN [Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding] available."
3. Where am I doing business? "It's surprising how many companies this can impact," she said. "What the U.S. is looking for is which U.S. companies are doing business with countries that boycott Israel. If you are, there is a calculation involved and you will lose a portion of tax benefits."
4. Will I open a bank account in a foreign country? If so, annual reporting is required through the Bank Secrecy Act for U.S. persons, Van Leeuwen indicated.
5. Do I plan on having ongoing operations in a foreign country through a foreign division or subsidiary? "A lot of times you have the ability to choose how you will be taxed in the U.S.," she explained. "A lot of people don't realize there is a choice. Depending on the tax rate in the other country, you can do some nice planning to see which entity is best for your client."
6. Have I considered other types of taxes, such as value-added or duties? "Businesses should know the different types of taxes countries have, as they all come with certain requirements," she said. "If you don't consider it and don't file a return, you haven't started the statute of limitations, so the liabilities add up."
