International Taxes Are No Day at the Beach

By Bill Iannarelli, CPA on September 25, 2015
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Bill Iannarelli, CPA

What you have to report and what you have to pay all depends on if and when you take the plunge.

International tax issues can sometimes be categorized by how differently people frolic at the beach. Here are some examples:

“Treaty Filing:” Just the toes.

Lots of the folks at the beach never go in any deeper than getting their feet wet. Could be a kid who sticks a toe in and gets freaked out by the waves, or a more mature person who wanders to the water’s edge to cool off just a bit then heads back to the comfort of a beach chair.

These folks are like businesses that may ship products or sell services into another country without ever establishing a more permanent presence. The obligations of the business in the country where the products or services are used will be governed by a tax treaty, if one exists, between its home government and the destination country. For businesses selling into the U.S., these activities typically will generate an information-reporting obligation at the federal level. Those businesses also need to be aware of potential state tax obligations that may be triggered by their activities, if sales cross certain thresholds.  

“Branch Filer:” Wading in a bit deeper.

Other people will wade in about waist- or chest-deep and go no farther. Maybe they don’t want to get their hair wet, or they don’t want water in their ears. It could be that salt water stings their eyes too much. Whatever the reason, they know their limits and stay within them.

These swimmers are similar to businesses that might lease or build some type of warehouse or other permanent structure in the U.S. or have some other type of significant presence in the states (such as an office or employees), but not create a separate legal entity in the country. They would treat the operations in the U.S. as a “branch” for tax purposes. Branch treatment typically isn’t the ideal situation for most businesses. When it does make sense, the key is to plan from the outset to treat U.S. operations as a branch and operate accordingly going forward. This operation will usually face tax obligations at the federal and state level in the U.S.

“U.S. Legal Entity:” Taking the plunge.

review-of-us-and-state-tax-structuring

Most folks who head for the water eventually get comfortable enough to take the plunge and dive in. For many who enjoy the beach, the plunge is the whole reason for going.  

Top 100 CPA firm Freed Maxick assists international businesses as they expand into the U.S. Contact us to learn about how we can help you avoid the pitfalls and realize the benefits of doing business in the U.S.Most businesses that are growing across borders are best served by planning for the plunge from the start and executing on that strategy as operations ramp up. For a non-U.S. business establishing a presence in the U.S., there are 3 main reasons why forming a U.S. entity beats operating a U.S. branch. First, a U.S. entity is better positioned to handle U.S. employment issues. Second, a U.S. entity can often manage legal liability more effectively than a branch. And lastly, the tax rules for U.S. entities are somewhat less complicated than those that apply to branch operations.

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