The closest thing to a minefield in today’s
global business environment may be the
myriad U.S. and foreign tax rules affecting cross-border business. Companies involved in international business need an
effective global tax strategy, or risk incurring
highly unfavorable tax consequences. Worse,
uninformed companies can miss the opportunities to take advantage of U.S. and foreign
incentives available to companies engaged in
cross-border business transactions. International tax pitfalls and opportunities exist
even for relatively small U.S. companies that
merely sell goods destined for U.S. export or
engage in foreign R&D.
Smart Business spoke with Doug Wright of
Burr Pilger Mayer LLP to gain insights into
the complexities of global tax planning, how
companies can simplify them, and how international tax consultants can help.
How do companies benefit from partnering
with international tax consultants?
International tax specialists can help companies convert tax traps for the unwary into
opportunities. Effective upfront international tax planning can reduce a company’s global tax costs by minimizing the potential for
paying double taxes to a foreign jurisdiction
and the U.S. An effective global tax strategy
will balance U.S. and foreign tax considerations in the context of a company’s broader
business and financial objectives. This translates into increased after-tax cash flow,
increased after-tax earnings and financial
statement benefits, and ultimately increased
shareholder value.
Why is international taxation so complex?
The various U.S. and foreign taxing jurisdictions are all seeking a bite of the same
cross-border revenue apple. They have
become increasingly proactive and diligent
in pursuing collection of what they consider
to be their ‘fair share’ of a company’s cross
border revenues. A good example of this is
the development during the last decade or so
of widespread and complex international
transfer pricing rules, which require companies to document their annual compliance
with strict ‘arm’s length’ standards for
pricing intercompany transfers of goods
and services. These and other international
tax rules are constantly changing, which
becomes a major minefield for uninformed
companies that are engaged in cross-border
business.
International tax consultants can meld the
U.S. and the foreign tax sides of a company’s
business into a coherent tax and business
strategy. They are well-versed with the
issues, trends and changes involved in
international tax planning, and track them
continually.
What is the key to an effective international
tax strategy?
To do international tax planning properly, a
company has to develop a global tax strategy
that facilitates its global business objectives.
The starting point is developing a solid understanding of a company’s business and financial position, its international operating strategy, and where and how it intends to operate
outside the U.S. With this knowledge, an
international tax consultant can help a company develop an overall global tax strategy
that makes good business sense and is practicable. International tax planning for specific situations can then be approached in a
coherent manner, taking into account the
company’s broader global tax and operating
strategies.
Do international tax rules provide incentives
for companies?
Yes, there are significant cross-border tax
incentives available in the U.S. and abroad. A
key U.S. incentive for exporters is the IC-DISC (Interest Charge Domestic International Sales Corporation). Although this incentive
has existed for more than 35 years, many U.S.
companies aren’t aware of it or may not realize that they qualify. It can significantly
reduce the U.S. tax by 50 percent or more on
income from sales of certain export products
and from certain international services. The
IC-DISC rules are highly complex, however,
so an experienced international tax consultant can help a company identify and capture
the maximum IC-DISC export tax benefits.
What risks exist for companies that do not
develop effective international tax strategies?
Companies that are not familiar with international tax rules, cross-border transfer pricing requirements and double tax treaties are
much more likely to suffer unnecessarily
high global tax costs, including increased tax
compliance burdens and tax penalties. For
example, many less-developed countries
don’t have a good international tax treaty network, so it takes careful cross-border tax
planning to minimize tax burdens, including
high foreign corporate tax rates and high
withholding taxes applied to a wide spectrum of ‘outbound’ payments from such
countries. The same holds true with transfer
pricing. The U.S. has had fairly well-developed transfer pricing rules for many years,
including potential transfer pricing adjustment penalties and interest charges, but
developed and developing foreign countries
also now have their own sets of transfer price
rules. So, it’s no longer just a matter of being
focused on the IRS side of the transfer pricing equation, but also making sure that foreign transfer pricing problems are not created. An experienced international tax adviser
can assist a company in establishing a tax-effective cross-border transfer pricing strategy that helps ensure that U.S. and foreign tax
and transfer pricing landmines are not inadvertently stumbled upon.
DOUG WRIGHT is a partner in Burr Pilger Mayer LLP’s International Tax Practice. Reach him at (925) 296-1044 or [email protected].
