Insights
Insights
Accounting
Overseas expansion
How to minimize tax liability and keep profits when expanding globally
A
s technology makes doing business overseas an option for more
and more companies, American
firms are exploring their international
options.
Once a business decides to open operations in one or more countries outside
the United States, the tax hurdles crop
up and executives are faced with complicated decisions concerning acquisitions, hiring employees, tax structure
and transfer pricing. Getting it right is
critical to protect a business from multiple layers of taxes and fines as both
the federal government and foreign
governments focus on enforcing complex international tax laws, says Doug
Eckert, member and international tax
practice leader, Brown Smith Wallace
LLC, St. Louis, Mo.
“U.S. businesses with international operations should develop a tax strategy
in conjunction with international expansion to minimize tax costs from the
beginning,” Eckert says.
Smart Business spoke with Eckert
about what businesses should consider
when expanding their operations beyond U.S. borders.
What should a business know when venturing beyond U.S. borders for the first time?
The greatest challenges a company
faces are personnel hiring outside of
the U.S. where human resource laws are
significantly different, managing foreign
customer expectations and managing
cross-border tax consequences, including transfer pricing, an area where significant penalties can arise for companies that do not transfer goods at ‘arm’s
length pricing.’
The initial business plan needs to take
into account each of these areas.
What key tax issues do companies face
when expanding internationally?
Once a company makes the decision
to expand outside of the U.S., it first has
to determine how it will distribute its
products or services, and whether to use
third-party distributors or its own employees to manage its foreign operations.
The initial determination of whether
a U.S. company needs its own foreign
subsidiary is often determined by its
customers. This usually occurs when
Interviewed by Kristen Hampshire
U.S. tax in the process. This process is
managed by setting up a tax-efficient acquisition structure and, in many cases,
pushing acquisition debt into the overseas operations. Managing foreign currency risk as part of this process is also
an important consideration.
An example of what not to do is to
enter into a structure in which crossborder payments, dividends and interest will be subject to withholding taxes.
In some situations, this could cause
the overall rate of tax to exceed the
U.S. statutory tax rate of 35 percent.
To avoid this, it is important to design
an acquisition structure that will allow
cash to be flexibly managed within the
structure in a tax-efficient manner.
Doug Eckert
Member
International tax practice leader
Brown Smith Wallace LLC
the customer requests that import taxes, duties and VAT (value added tax)
are managed by the U.S. seller. At this
point, a foreign subsidiary is generally
required to manage these taxes within
the local country.
Then several key questions arise.
Should the company be a corporation
or branch (income or loss is subject
to immediate U.S. taxation) of the U.S.
parent? How should the company be
funded, whether through debt or equity?
How can profits be transferred tax efficiently to the U.S. parent?
The U.S. has the second-highest corporate tax rate in the world. Careful
international tax planning is required
in order to repatriate overseas profits
to the U.S. to avoid paying the disparity
between the U.S. and foreign tax rates,
or even more. Governments are ready
and willing to take your money if you
don’t plan carefully.
What challenges does a business face
when making an international acquisition?
The ultimate challenge is how to repatriate earnings to the U.S. to service the
acquisition debt in a tax-efficient manner and avoid paying the incremental
What new legislation could impact a company’s international tax position in the
next year?
In 2010, Congress enacted several new
tax laws that impede the ability of U.S.
multinational corporations to credit
foreign taxes paid. The most significant
of these laws are the ‘foreign tax credit
splitter rules’ and the ‘covered asset acquisition rules.’
The foreign tax credit splitter rules
preclude foreign taxes from offsetting
U.S. taxes until the related foreign earnings are subject to U.S. taxation. The
covered asset acquisition rules deny
U.S. companies from taking a portion of
their foreign tax credits in cases where
the value of the foreign assets is stepped
up to fair market value. This generally
occurs in the context of an acquisition.
Both of these rules narrow the options
available to U.S. corporations to avoid
paying the difference between foreign
tax rates and the U.S. tax rate when repatriating funds to the U.S.
Essentially, these rules will likely increase U.S.-based multinationals’ U.S.
tax liability. Given this legislation and
the current complexity of U.S. international tax law, companies should talk
with a professional to understand how
these tax rules interplay.
Ultimately, all these rules come down
to a large modeling exercise to minimize your global taxes. <<
DOUG ECKERT is a member and international tax practice leader at Brown Smith Wallace. Reach him at (314) 983-1268 or
[email protected].
Insights Accounting is brought to you by Brown Smith Wallace LLC
© 2011 Smart Business Network Inc. Reprinted from the May 2011 issue of Smart Business St. Louis.