Going Global: How to Report Your Foreign Operations for Tax Purposes

April 01, 2022

Doing business globally can include having a subsidiary, office, investment or simply a bank account located in a foreign country—all of which require appropriate disclosure to the IRS. In this video, we’ll examine why reporting on foreign operations for tax purposes is an important matter for technology and life sciences start-ups doing business abroad.


Matthew Halpern:My name is Matthew Halpern. I specialize in cross-border transactions and multinational entity structures.

Reporting on foreign operations for tax purposes is an important matter for many of my technology and life sciences clients. I always like to start off a conversation with my clients by gaining a better understanding of their operations, organizational structure and customer locations. Often times, I find my clients have already been doing business on a global scale. Perhaps their global operations are small, maybe a few online orders or shipments, but other times they are fully operational, already servicing customers with foreign offices and employees. Many of these foreign operations are simply cheaper cost centers and back offices.

Since the U.S. taxes its citizens, residents and entities on a global scale, the IRS requires an abundance of disclosure. Whether you have a subsidiary, office, investment or simply a bank account located in a foreign country, there is some form of disclosure and by no means are they simple.

For instance, investing in a foreign partnership does not necessarily mean that entity is treated as such, domestically. There are various default rules which create hybrid entities. A hybrid entity is one where the U.S. tax classification is different from its local classification. This may create what are called controlled foreign corporations, or (“CFCs”). CFCs are taxed differently from a U.S. corporation. Often times there are income inclusions to the shareholders without the physical repatriation of cash. The tax effects vary depending on the type of shareholder as well as the overall structure and operations of the organization. The U.S. does allow a variety of elections that can be made to treat the foreign entities as partnerships or disregarded entities to better align the original intention of the taxpayer’s structure of operations.

Often times, I see a U.S. technology company opening a back office in India or some other European country which has low costs when compared to the U.S. This foreign entity generally defaults to a corporation from a U.S. tax perspective and automatically falls subject to the CFC tax regime. This can essentially tax the profits of its back office, again in the U.S.

Another situation occurs when a client has operations in a foreign jurisdiction but without creating a legal entity. This often creates what’s called a branch or a permanent establishment. These operations are generally taxed by the local authorities and then combined from a tax perspective with the U.S. operations.

These examples can create an effect where the same income is taxed in multiple jurisdictions. Luckily, the U.S. allows a foreign tax credit which can offset some of this double taxation effect, however there are many rules and restrictions regarding claiming the credit.

Some of my life sciences clients, for example, want to take advantage of another country’s favorable research and development credits, such as Australia. Instead of creating a legal entity in Australia, they may just open up an R&D department & office. By hiring local employees to work out of this office, generally creates a branch/permanent Establishment which may be taxable as a separate entity from an Australian perspective.

Transcribed by Rev.com

Have Questions or Comments?

If you have any questions, we'd like to hear from you.

More in This Series

Startups: Tax Implications of Hiring Independent Contractors vs. Employees

In this video, you’ll learn about the three worker classification tests, filing requirements, and more in order to make an accurate worker classification/determination and avoid possible tax and legal exposure.

Cybersecurity Risks and Solutions for Life Sciences Startups

Cybersecurity poses a significant risk to life sciences startups that handle personal identifiable information. In this video, you’ll learn about the risks facing your business and how you can protect your clients and systems.

When Do I Need to Get an IRC Sec. 409A Valuation for My Stock Options or Stock Grants?

A 409A valuation is used by private companies to assess the fair market value of their stock. In this video, you’ll learn when a 409A valuation is necessary, the length of time in which it is valid, and which events trigger the need for an update

Capital Raising: What Are My Options—and How Do I Approach Investors?

In this video, you’ll learn about various options for raising capital, tips for creating your potential investor list, and how to approach investors.

What Technology and Life Sciences Companies Need to Know about being Acquired by a SPAC

Becoming a public company through an acquisition by a SPAC is an alternative to the traditional initial public offering (IPO). In this video, you’ll learn some key considerations that a technology or life sciences company should keep in mind before being acquired by a SPAC.

What Tax Considerations Does My IPO Trigger?

Is your company preparing for (or have you recently had) an IPO? In this video, you’ll learn about the impact that an ownership change under IRC Sec. 382 can have on the utilization of net operating loss (NOL) carryovers and other factors that can influence your tax burden.

Medical Device Companies: Consideration for Consignment Inventory and Related Sales Process

Many medical device companies have chosen to deploy a consignment inventory and sales approach for their related products. In this video, you’ll learn about the advantages and disadvantages of this strategy for both the company and third parties, as well as best practices to consider

What Technology and Life Sciences Companies Need to Know About Transfer Pricing—from Start-ups to Large MNEs

In this video, you will learn why transfer pricing is an important focus point for many multinational enterprises in the technology and life science industry.

Capital Raising: Are Financial Instruments Classified as Liabilities or Equity?

In this video, you'll learn about the different accounting ramifications for financial instruments issued to investors by start-ups and why it’s important to properly structure financial instruments upfront for accounting purposes.

Financing for Entrepreneurs: What Are Issuance Costs?

In this video, you’ll learn about “issuance costs” and how to properly account for them based on the type of funding that was raised.

Does My Start-up Need an Advisory Board?

In this video, you'll examine the ways how an advisory board differs from a board of directors; why you might consider forming an advisory board; how you can attract and retain advisory board members; and how you can enhance the effectiveness of the advisory board for your start-up.

What Technology and Life Sciences Companies Need to Know About SOC 1 Reports

Brenda DeSaro explains what a SOC 1 Report is, discusses why companies need to be concerned about these reports even though they likely outsource this work to third-party providers, and outlines a best practices approach.

Entrepreneurship: Behind the Numbers

John Pennett talks about the ingredients for successful entrepreneurship—from early to late-stage enterprises—with “Behind the Numbers” host and senior director at CFGI.