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Maximize Profits: Tax Planning for Companies Operating Outside the U.S.
- 1. Maximize Profits- Tax Considerations for Companies Operating Outside the U.S. CalCPA San Francisco Chapter ITAX February 20, 2014 Harry-Todd Astrov Astrov P.C. ©2014. Astrov P.C. All Rights Reserved.
- 2. Introduction • Conventional wisdom- when should “international” tax planning begin? • In context of planning for international expansion, non-U.S. taxes are much more than income tax and preparing tax returns. 2
- 3. Introduction (cont’d) • Businesses need to plan for taxes well before they decide to set up new entity in foreign country (FC). • Unlike U.S., most of the world has a national sales tax– VAT. 3
- 4. Introduction (cont’d) • To plan properly, must look at proposed (ongoing?) activities. –What types of transactions are occurring? –Look at this from revenue and cost perspectives. • Understanding direct (income) and indirect (e.g., VAT) are key to projecting cash flow and avoiding surprises. 4
- 5. Key Questions 1. When customer pays me, will I receive whole amount? In other words, will there be withholding? Example: $100,000 contract to provide services to Chilean company. Business receives $65,000. Why? Chile imposes 35% withholding on services rendered abroad. Treaty or non-treaty country? What is character of the income? Labels not necessarily controlling. Royalty vs. service? What is optimum outcome? Can we support that? 5
- 6. Key Questions 1A. When I pay non-U.S. vendor (or other party), do I need to withhold? Do I have the correct documentation (e.g., W-8BEN, W-9) to be excused from 30% withholding? As withholding agent, payor is responsible. Treaty or non-treaty country? What is character of the income? Labels not necessarily controlling. Royalty vs. service? What is optimum outcome? Can we support that? 6
- 7. Key Questions 2. How will I operate in FC and do my operations require me to file income tax returns? • Treaty or non-treaty. If non-treaty, local law controls. • Have I opened an office or established a fixed place of business? Tests and exceptions for “permanent establishment” • Can an agent sign contracts in my name? Does agent habitually exercise that authority? • How much time are my U.S.-based employees spending in FC and what are they doing? 7
- 8. Key Questions 3. Will I have to pay or be liable for indirect taxes such as VAT? – VAT is tax on consumption; imposed based on place where goods and services are supplied. – Imposed on seller (or importer); passed on to buyer. – Exports are typically zero-rated (i.e., zero VAT). • But who is exporter? Watch out for supply-chain changes. – VAT and the cloud?? 8
- 9. Key Questions 3A. Will I have to pay or be liable for indirect taxes such as customs duties? – Imposed on importer of record. Where does title transfer? – Principal liable for actions- and decisions- of customs broker. – Free Trade Agreements (FTA’s) come with conditions. • Need to certify origin of goods. • Need to maintain records. 9
- 10. Key Questions 4. Do my activities qualify me for any tax incentives? If so, what are the conditions? 5. Do my written contracts with customers, suppliers and other non-U.S. counterparties support the specific tax position I want to take and protect me from tax surprises? » For example, does a contract with a customer provide that they will “gross up” payments to cover any withholding? 10
- 11. Key Questions 6. Do I regularly review my activities to make sure that original tax planning remains relevant? • Have facts evolved or changed? • Have laws changed? 11
- 12. Thoughts on establishing a FC entity • Learn local recordkeeping and (tax) reporting requirements. These may be expensive. • Special rules for invoicing. • Global Mobility. Will U.S. based employees be transferred to FC? Make sure these are documented properly (e.g., secondment agreement) • Plan ahead for related-party transactions (“transfer pricing”). Will likely need TP report with tax return, signed off by accountant • Audits (and administrative appeals) take significantly longer than in the U.S. 12
- 13. Thoughts on establishing a FC entity • Local executives and managers can be held “personally accountable” for routine understatements. • They can face criminal charges. These typically get favorably resolved. 13
- 14. Conclusion • Every country and fact pattern is unique. Don’t assume that model used in [France] will work in [China]. • Avoid “smallness”– Don’t assume that business is too small to worry about these types of issues questions • When considering the costs of non-compliance, early and regular tax planning adds value to business activity. This presentation is intended for general information only. Talk to a tax advisor for specific questions. 14
- 15. If questions . . . Harry-Todd Astrov Astrov P.C. 505 Montgomery Street, Ste. 1100 San Francisco, CA 94111 Tel: 415-580-2415 4695 Chabot Drive, Ste 200 Pleasanton, CA 94588 Tel: 925-828-2415 Web site: www.astrovlaw.com Email: htod@astrovlaw.com Fax: 866-633-9292 Twitter: @astrovlaw 15