Trends & Developments - June 2013 - Corporate Tax Update – International Tax Planning Considerations

More and more companies are doing business with foreign suppliers and customers.  Conducting business outside the U.S., especially with related parties, often brings a host of different tax planning and compliance considerations.  Some of the more common include:

  • When dealing with foreign related parties make sure you document cross-border pricing issues.  This is referred to as "transfer pricing."  The IRS requires contemporaneous arm's length transfer pricing agreements, making sure transactions between related parties are at prices being charged to unrelated parties.
  • Consider the differences between selling a product vs. earning a commission or royalty.  There could be significant tax differences, depending on the nature of a transaction.  Some income generating activities could require withholding taxes, while others may not.  Check to see if the United States has a tax treaty with the country in which the other party is located (or resident of) and determine whether a transaction is exempt or subject to a reduce rate of withholding tax.
  • Have Forms 1042 and 1042-S been filed to report payments to foreign persons?  Have all taxes withheld from those payments been deposited with the IRS?
  • Have intercompany transactions been settled within the past 120 days?  If not, the IRS may require interest be charged on overdue receivables.
  • Is the U.S. company required to file IRS Forms 8865, 5471, 5472, or other forms to disclose the existence of international parents, subsidiaries or other related parties?
  • Have you considered whether any foreign company should make a "check-the-box election" regarding how the entity is classified for U.S. tax purposes?
  • Have deductions been claimed in the appropriate period?  Taxpayers that use the accrual method of accounting may be required to deduct certain costs on a cash basis (e.g., interest to a related party).

The takeaway is: doing business abroad often comes with greater tax costs, risks, as well as planning opportunities – with regard to both U.S. taxes as well as taxes to the one or more other countries.

Trends & Developments - June 2013 Issue

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