As a business owner, it is quite easy for you to find yourself on the wrong side of the IRS, if you do not effectively plan your tax affairs. If you find yourself in international tax controversy, the money you will require to rectify the situation will far surpass the tax liability itself.
Although commonly misunderstood, you do not need to have a physical overseas business location to face international tax issues. In the current business era, your business is probably operating in the global economy. How is this possible? Your business may be:
- Shipping commodities overseas.
- You may have a non-US citizen under your employment.
- Receiving partnership funds from overseas.
This means that even as a small local business owner, you may be liable for international taxation reporting requirements!
You must identify any potential international tax issues that may be associated with your business. The United States government has placed a greater emphasis on proper treatment and reporting on international deals and assets.
What are some of the international activities that will subject your business to international tax issues?
- The involvement of foreign investors,
- Hiring non-resident alien employees.
- Selling to foreign clients.
- Having ownership of overseas accounts.
The involvement of foreign investors/owners
Do you have an investor and/or owner who is a non-resident alien (NRA)? If yes, then your business is likely to face income tax withholding requirements. These requirements are for the NRA investor. Of course, this requirement will vary depending on what type of organization you have.
Partnerships and LLCs that operate as a partnership must retain and remit income taxes that are associated with the income of their overseas investors. If a partnership fails to follow this process, then they will be liable to penalties – including the under-withheld tax.
If you operate a C corporation, then tax retention must be done to any NRA shareholder in your corporation.
Note: S corporations are by law, not allowed to have NRA investors/owners. If you own a business whose foreign shareholder was once a US citizen, they should have revoked their ownership of the business before the loss of their residency status. Failure to do this will result in your business being revoked as an S corporation, leading to unwanted tax consequences.
Hiring alien employees
If you have ever hired a foreign employee, then you must be at par with the documentation requirements that have to be filled before their hire.
Your alien employee may or may not be subject to Federal Insurance Contributions Act (FICA) tax retention, depending on their visa status. They may also have tax benefits depending on the treaty the United States government has with their country of origin. You will have to cater to all these issues before your employee’s first payment.
Note: In case your employee is a non-resident whose work is partly done outside the US borders, then some of their income may not be US taxable income.
Selling to foreign clients
Is your business involved in the selling or buying of products from a foreign client? If so, then the price of these products will be eligible for transfer pricing rules (set in place to make sure that organizations do not shift to tax-favorable countries through product pricing.)
Making sales to a foreign client could subject you to:
- Foreign sales taxes,
- Foreign value-added taxes (VAT).
- Foreign income tax withholding.
To determine your foreign tax situation, you must find out the taxing of the foreign country your client is in, as well as, those of the US. In some foreign countries, the tax may be refundable after the remission of certain forms to the country’s government or even reduced if the US and the foreign state have a tax treaty with benefits.
The rules governing foreign tax credits are deceptively complicated. For foreign taxes paid, a credit is allowed against a company’s US tax liability. Taxes must be paid to the foreign country (not refundable). These taxes are considered by the United States as “foreign-sourced income.”
Having ownership of overseas accounts
In a bid to simplify payment transactions from foreign clients, some businesses have set up overseas accounts. Although this might be effective for payment transactions, there are very severe penalties (some of the highest) in case of improper disclosure of these accounts to the IRS. The US tax laws are so strict on this that you not only need to file a disclosure requirement of the foreign account, but also that of the business owner and anyone else who has signature authority over the overseas account.
The global economy provides exciting opportunities for businesses and organizations of all sizes. One aspect of ensuring a smooth ride is navigating tax implications as the business expands and changes. Don’t worry, a qualified international tax professional can assist you in resolving your international tax issues as well as managing your finances to avoid getting into trouble in the first place.