The Ins and Outs of Cross-Border Taxation
Published on by Michael O'Hara in International Business
Understanding Outbound Transactions
Cross-border taxation can be divided into various categories based on the type of the transaction, with the highest division being “Inbound vs. Outbound.” Inbound refers to non-U.S. persons (and in this case, “persons” meaning both individuals as well as entities) having U.S. income. Outbound is the opposite, referring to U.S. persons having non-U.S. income. In today’s post, we’re focusing on outbound transactions (watch for a post on inbound transactions coming soon).
There are several ways a U.S. company can operate outside the United States. At the highest level, they can operate as either a foreign corporation or a foreign branch – and each has different U.S. taxation implications:
Foreign Corporation
- Before the Tax Cuts & Jobs Act, a U.S. entity was only taxed on the distributions they brought back to the U.S. from the foreign corporation.
- Now, foreign corporations are subject to a new tax called “GILTI” (Global Intangible Low Taxed Income) unless they are able to meet the high-tax exception.
Foreign Branch
- A branch is connected to the U.S. parent organization, and its income will be included in the U.S. taxable income unless the country it’s in has a tax treaty with the U.S.
- A potential disadvantage to opening a foreign branch is that the U.S. parent company is liable for any legal problems or debt that the foreign branch incurs.
As noted above, the United States has income tax treaties with numerous foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries may be eligible to be taxed at a reduced rate or exempt from U.S. income taxes on certain items of income.
3 Things to Consider
Before moving a business outside the United States, there are 3 critical things to consider:
- Trade Restrictions | Some, like tariffs, quotas, and embargoes are more obvious. Subsidies and standards are more subtle, so be sure you have an in-depth understanding of how they can affect your bottom line.Tariffs – A tariff is a tax placed on imported goods. This is the most notable category, as well as the most current topic of recent news. There are two kinds of tariffs: a protective tariff is used specifically to make foreign good more expensive to protect domestic industries from competition. Revenue tariffs are used to raise money for the government.
Quota – A quota is a limit on the import quantity of a specific good.
Embargo – An embargo stops all imports and exports either of a specific project or from a specific country.
- Winding Down or Dissolving a Business | In the United States, it’s relatively simple to dissolve a company – but that’s not the case in all countries. Certain countries require rigorous steps to close a business in their country.
- Culture | Culture varies widely from country to country, and marketing strategies that work in one country may not appeal to those in another. Be sure you have an in-depth understanding of cultural differences and how they may affect your venture.
To be successful in a foreign business venture, it’s imperative that you do your research on all aspects of business first, so the hurdles mentioned above do not take you by surprise. An international tax expert can help you navigate the ins and outs successfully. Contact Barnes Dennig’s International team to discuss your business plans and how to make smart choices for your business and your bottom line.