Tag International Issues

Avoiding International Tax Issues: Withholding, Credits & Indirect Taxes

0 comments By TRMoore Filed in International Business, Tax Tagged with , , , September 22nd, 2011 @ 9:58 am

by Richard Beutelschies, CPA, Tax Partner, TR Moore & Company, A Doeren Mayhew Firm

Careful tax planning can help you set up your international business in a manner that minimizes worldwide taxes and maximizes cash flow. Among the issues that should be considered are tax withholding, tax credits and indirect taxes.

Income Tax Withholding & Credits

It’s critical to understand a foreign country’s income tax laws, regulations and procedures, and particularly important to consider withholding taxes. If your company doesn’t have a physical presence in a country, that country may impose significant withholding taxes on gross income.

Many countries have treaties with the United States that provide for low or no withholding taxes on cross-border payments, but there may be exceptions. For example, some countries may not extend international treaty rights to certain types of entities, such as limited liability companies (LLCs).

The availability of foreign tax credits is crucial to avoiding taxation of income by both the foreign country and the United States. Withholding taxes paid to another country generally entitle your company to a dollar-for-dollar direct credit against U.S. tax liability.

But if you operate through a foreign subsidiary, it’s a bit more complicated. The subsidiary pays corporate-level taxes on foreign income, which becomes taxable in the United States when it’s distributed to the parent. The parent can claim an indirect tax credit for foreign taxes paid, subject to certain ownership requirements and limitations on the amount of the credit for certain types of income.

Indirect Taxes

Don’t overlook indirect taxes, such as customs duties and value-added tax (VAT). Duties vary substantially from country to country and even from product to product. And there may be opportunities to minimize duties by categorizing products in a certain way or by unbundling products and reassembling the components after they’re imported.

A VAT is similar to sales tax, except it’s imposed on the amount of value added at each level of the production process. Generally, the seller is responsible for collecting and remitting the tax, offset by any VAT the seller has paid to others.

More than 140 countries have VATs, and the rules vary dramatically from country to country. VAT rates generally fall between 15 percent and 25 percent. In some countries, VAT registration is required even if you don’t have a physical presence there. Where registration isn’t required, voluntary registration may provide advantages, including quicker refunds of excess tax payments.

If goods will be stored in inventory for an extended period of time, consider using a bonded warehouse to defer customs duties and VAT.

As Tax Partner, Richard Beutelschies leverages more than 30 years experience in foreign and domestic tax to lead international services at TR Moore & Company, the Houston location of top 100 CPA and consulting firm Doeren Mayhew. For more information, contact us.

Exporters: Have You Considered a Tax-Saving IC-DISC?

0 comments By TRMoore Filed in International Business, Tax Tagged with , , , , , , July 6th, 2011 @ 9:33 am

by Richard Beutelschies, CPA, Tax Partner, TR Moore & Company

According to an article in BusinessWeek, many businesses are unaware of an opportunity to reduce or defer foreign income taxes on exports of U.S.-produced goods without establishing a physical presence abroad – the interest charge-domestic international sales corporation (IC-DISC):

  • A little known incentive, with only about 6,000 businesses implemented this tax savings strategy in 2010.
  • Broader than you might think – for example, tires manufactured in the United States may qualify if they are installed on a vehicle that is later exported overseas.
  • Produces typical savings of nearly 30 percent on export income.

An IC-DISC is a tax-exempt “paper” corporation set up to receive tax-deductible commissions on export sales. The maximum commission is the greater of 4 percent of gross receipts from sales of qualified export property or 50 percent of net income on those sales. If certain requirements are met, commission payments to an IC-DISC allow an exporter to convert ordinary income (currently taxable at rates as high as 35 percent) into qualified dividend income (currently taxed at 15 percent). 

Even without the benefit of lower tax rates, however, an IC-DISC offers another significant tax advantage: It allows the exporter to defer tax on up to $10 million in commissions held by the IC-DISC (that is, not distributed to the exporter) in exchange for modest interest payments to the IRS.

Visit our website for more information and sample savings related to this tax benefit.

As Tax Partner, Richard Beutelschies, CPA, leverages more than 30 years experience in foreign and domestic tax to lead international services at TR Moore & Company, the Houston location of top 100 CPA and consulting firm Doeren Mayhew. For more information, contact us.

IRS Combats International Tax Evasion With Second Special Voluntary Disclosure Initiative

0 comments By TRMoore Filed in General, Tax Tagged with , , , , February 16th, 2011 @ 11:02 am

The Internal Revenue Service has announced a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.

The decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.

The new program–called the 2011 Offshore Voluntary Disclosure Initiative (OVDI)–includes several changes from the 2009 program. The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 program will not be rewarded for waiting. New features of the 2011 program include:

  • A new framework that requires individuals to pay a penalty of 25 percent (up from 20 percent in 2009) of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. However, taxpayers in limited situations may qualify for a 5 percent penalty.
  • A new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.
  • Participants must pay back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties.

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution, according to the IRS.

The IRS will also launch a new section on www.IRS.gov that includes the full terms and conditions on the 2011 Offshore Voluntary Disclosure Initiative and details on how to make a voluntary disclosure.

Contact us for more information.

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