Common International Taxation Issues

International Taxation Issues

As a U.S. business operating internationally, there are many reasons for you to search “international tax lawyer washington dc”. Tax-conscious businesses tend to perform better exactly because tax educates the operations of their various departments, not just the financial sector. One of the reasons may be that they are able to avoid costly litigations and tax penalties by abiding by the U.S. (and foreign) tax requirements.

The international market has expanded significantly in the past years, leading to business operations becoming more and more complex. By the same token, the scope of tax issues that can arise as a result is wider. If a business venture is completely new, business managers or even their financial advisors may not be aware of all challenges regarding taxation.

For all these reasons, this article will give an overview of the most common international taxation issues that businesses with global operations may face.

Increased U.S. taxable income due to transfer pricing adjustments

If you are a U.S. company wanting to establish a subsidiary in a foreign jurisdiction, you might provide the new subsidiary with intangible property (IP) such as processes, company policies and know-how, customer lists, etc. You might also provide services or sell goods between the parent and the foreign subsidiary.

US companies should bear in mind that transacting business with their foreign subsidiary must be done at “arms-length” to avoid transfer pricing penalties. That means that the companies must treat each other as if they were unrelated and charge fair price for the services/goods exchanged between them.

Understating U.S. taxable income while overstating foreign taxable income

When a parent company establishes a foreign subsidiary it is considered a separate entity. Unless the foreign subsidiary has US source income, it generally does not pay taxes in the US. Nonetheless, the Internal Revenue Code allows C Corporations to file a consolidated return with their subsidiaries, if they satisfy certain ownership and voting requirements.

When a parent company files a consolidated tax return, the finances of all members within that affiliated group is combined. In situations when a subsidiary is profitable while the parent company incurs losses, foreign operations may in fact be supported with the parent company’s expenses. This might be a valid strategy when a company has high profits and the other losses or to avoid taxes on intercompany distributions.

International withholding tax issues

US companies must be cautious when transacting with foreign taxpayers, specially when making payments of dividends, rents, interest, royalties or compensation for services. These types of income, called “FDAP” (fixed, determinable, annual or period income) require that the US payor withholds 30% of the amount to be paid at the source and submit it to the IRS. The withholding rate can be reduced by a tax treaty or by a specific provision of the Internal Revenue Code.

The payments made and tax withheld must be reported annually to the foreign taxpayer and to the IRS on Form 1042-S (Foreign Person’s U.S. Source Income). Failure to comply with the withholding and reporting requirements can cause severe consequences to the US payor, including being held liable for the tax that should have been withheld plus penalties and interest.

Get expert help with any and all international taxation issues

Brunoro Law boasts one of the most distinguished international tax attorneys – Paula Brunoro-Borokhov. Fluent in English, French, Spanish and Portuguese and licensed in the U.S. and Brazil, attorney Borokhov is well equipped to serve clients operating in different countries.

Should you need professional assistance with transfer pricing, withholding tax liability, cross-border tax or any other international taxation issue, premier legal advice and representation is a quick phone call way.

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