It’s important to understand the basics before you or your business crosses borders
In today’s economy, many businesses wind up crossing international borders much sooner than they expected—often without even realizing it. It’s not uncommon for growth-oriented entrepreneurs to charge ahead believing that it’s easier to ask for forgiveness than permission, but that philosophy can lead to fines, penalties and taxes that could have been avoided when it comes to international taxes. If you understand these basic concepts about income tax treaties, you’ll be better equipped to understand when to ask permission and how to do it.
- Tax Treaties Have 2 Main Goals: In short, tax treaties provide guidance regarding potential tax benefits and reporting requirements when residing or doing business in a foreign country.
- Avoiding Double Taxation: This may be hard to believe, but not every government thinks it’s entitled to tax all of your income. Nations negotiate tax treaties in order to determine where income should be taxed and to make sure that the same income is not taxed both at home and abroad.
- Avoiding Tax Evasion: This goal sounds more like what you expect from governments. While treaties may ease a tax burden by preventing double taxation, they will almost always assign some sort of information reporting obligation to an individual or business when in a foreign country. A treaty also typically includes protocols that govern the sharing of tax information between governments.
- Residency: Step 1 when it comes to figuring out where you have to report information or file taxes is figuring out where you are a resident. Spoiler alert— For individuals, it’s not always where you live.
- Individuals: Most treaties determine if an individual is a resident for tax purposes by counting the number of days spent in the country. At the same time, a treaty can also describe specific exceptions that allow someone to live abroad and maintain tax residency in the country that they think of as home. For example, Canadians who spend significant time in Florida may become U.S. residents for tax purposes, but the treaty between the countries will allow for a “closer connection” exception if one follows certain rules and files certain forms.
- Businesses: Corporations and other types of businesses typically follow a more incremental process toward tax residency. Many enterprises first cross a border when they ship a product or deliver a service electronically into another country. Others might send a salesperson to a trade show in another country where that person closes deals on site. This can be followed by warehousing product in the second country, employing citizens of the country to manage operations there, and eventually opening an office or outlet that might establish tax residency for the business in the foreign country. A treaty can detail the obligations of the business at each of these stages.
- Immigration: Corporations rarely face immigration issues applicable to the business, but they almost always face immigration issues when employees work in other countries. A tax treaty can spell out what special visas and work permits may be needed in order for an employee to work in the host country. As for acquiring those visas and permits, an attorney who focuses on immigration issues may be the best resource for a business sending workers into another country.
The United States currently has tax treaties with about 60 countries. If you are a businessperson in the U.S. or one of those countries, it’s critical to understand the requirements of the relevant treaty before doing business that crosses the border. If you have operations in a country without a U.S. treaty, it’s important to understand how the Internal Revenue Code will treat the income you generate--both in the U.S. and abroad. As noted above, this is an area where engaging professionals before you start can save you money and hassles, while seeking forgiveness after the fact can lead to significant fines and penalties in addition to taxes. A consultation with an international tax professional is a must for any business with plans to operate across borders.