You were probably thrilled when you opened up a new market and made your first international sale. But that sale also created a new set of responsibilities. Your international tax liability can affect everything from your accounting methods to your pricing structure.
An international business attorney from Sequoia Legal can work in tandem with an international tax accountant to put your business in the best position possible. With our international business experience and in conjunction with tax planning professionals, your business can save money while maintaining tax compliance.
What Is International Tax Planning?
International tax planning requires tax professionals to review international tax laws and regulations in multiple countries and find the best way for you to structure your business and finances to:
- Satisfy international tax obligations and reporting obligations;
- Minimize tax burdens;
- Ensure tax compliance;
- Reduce the risk of tax penalties.
As you might expect, tax laws vary from country to country. There are also tax treaties that work across borders. Your tax plan is your map for navigating these tax burdens.
Benefits of Global Tax Strategy Optimization
You might be tempted to focus solely on only one or two countries, such as your home country and your primary foreign market when planning your taxes. But since each country has its own set of tax laws, planning your taxes for one country might expose you to higher taxes in another country.
A global tax strategy works to optimize your taxes by balancing your obligations across multiple countries. By approaching your taxes globally, your business can:
- Optimize your tax liabilities across all the countries where you do file;
- Identify cost reductions in reporting, filing, paying, and withholding tax;
- Structure your bookkeeping and accounting so that you can easily meet your reporting requirements;
- Reduce the risk of non-compliance in a jurisdiction where you do business;
- Smooth international expansion by complying with international accounting principles, international tax laws, and international tax rules;
- Implement an optimal approach to transfer pricing policies.
The alternative to international tax planning is to approach your taxes around the world on a country-by-country and year-by-year basis. This approach leaves you exposed to overpaying taxes. Your business may even risk tax penalties in not just one but multiple jurisdictions.
How Will an International Business Attorney Help You?
An international tax planning attorney, along with their network of experts, can provide you with international tax planning strategies that help:
- Structure investments, customs compliance, transfer pricing, and tax withholding;
- Identify markets for expansion;
- Streamline accounting and financial processes;
- Guide you on legal structures, tax arrangements, cash flow management, dividend and payroll payments, income reporting, and tax filing.
Additionally, your international tax planning lawyer should have experience working with multinational corporations on a range of commercial issues.
These issues include:
Sequoia Legal provides all of these services.
Top 13 International Strategies for Tax Planning
A tax planning strategy does not replace your accounting and finance team. Instead, it provides them a blueprint for structuring your company's internal processes to ease compliance with international tax laws. Some steps to take during international tax planning include:
1. Prepare Your Company for International Regulatory Changes
Tax laws and regulations change regularly. When you need to comply across multiple international tax jurisdictions, you might need to deal with changes in international tax reporting and payments several times per year.
Some international tax planning considerations to keep in mind include:
- Mandatory e-filing of tax returns and supporting documents in many countries.
- Tax treaties and other international agreements that attempt to account for payments to tax authorities in other countries.
- New policies from the OECD to introduce a global minimum tax, close gaps in tax rules across jurisdictions, and address tax avoidance through tax havens.
- Updated reporting requirements in the European Union, including mandatory disclosures and reporting of cross-border transactions.
To prepare for these changes, you need an international tax practitioner who stays up to date on the global tax landscape. You also need to implement structures within your company so that you can adapt when your tax position changes.
2. Prepare for the Global Minimum Tax of 15%
Jurisdictions create tax havens by using tax incentives to attract companies to the jurisdiction for:
- Banking
- Finance
- Investment
- Manufacturing
Multinational corporations seek the most favorable international tax law.
Countries are now in the process of negotiating tax treaties that will level the playing field and ensure that all taxable income gets taxed at a minimum rate regardless of:
- The company's location;
- Where the transaction occurred;
- The type of transaction, to ensure the same rules apply to e-commerce companies.
The challenge faced by companies is that the tax rules and even the percentage charged by tax authorities are still in the negotiating stage.
The terms under negotiation include:
- How countries determine when a company's foreign income will be included in the taxable income of the parent company.
- How taxpayers manage the taxation of cross-border transactions.
- How countries can tax transactions that would otherwise get "undertaxed".
Again, preparing for the global minimum tax laws will require tax planning that anticipates the taxing structure and creates the infrastructure to deal with it.
3. Get Informed About the New BEPS Rules
Base erosion and profit shifting (BEPS) happen when companies use loopholes, tax havens, and other tax avoidance strategies to minimize or even eliminate their tax liabilities.
BEPS strategies are good for companies that can use them. But they give some companies an unfair competitive advantage. They also deprive countries of needed tax revenue.
The BEPS rules are policy proposals that include 15 actions to reduce the incentives for tax avoidance. No entity can force countries to adopt these rules. As a result, the countries where you do business might adopt all, some, or none of these proposals.
This level of uncertainty will make compliance difficult until countries choose the policies they intend to implement.
4. Distribute Income to Reduce Tax Liability
Multinationals can use transfer pricing to shift income from one country to another. Essentially, a subsidiary buys goods or services from the parent or another subsidiary. The amount paid by the subsidiary moves money from a high-tax jurisdiction to a low-tax jurisdiction.
This, in turn, either defers or reduces the company's tax liability until the money gets repatriated into the high-tax jurisdiction.
5. Capitalize on Offshore Jurisdictions for Tax Efficiency
Tax offshoring happens when a company moves some operations to a jurisdiction outside of its home country. Businesses should look for ways to streamline operations and reduce costs, including tax costs. When a business has an opportunity to reduce its tax burdens by offshoring, it should consider doing so.
But you should keep in mind that countries understand the impact of offshoring on their tax revenue. As a result, many countries have considered changing their laws to create disincentives for offshoring. And they have also sought to actively pressure popular offshoring destinations into reconsidering their tax laws that encourage offshoring.
6. Explore the Benefits of Using Tax Havens and Foreign Tax Credits
It's important to take tax havens and foreign tax credits into account when locating your operations. In offshoring, companies often have at least some non-tax reasons for relocating their operations, such as reduced costs for labor or raw materials. Tax havens, however, offer low tax rates and tax credits to attract companies that are specifically looking to reduce their tax burdens.
Tax havens often offer another benefit. These countries frequently have the strictest banking privacy laws. With their low taxes and strong banking privacy, these jurisdictions have heavy pressure from major economic powers over their taxes. As a result, you should have a flexible tax plan in case the tax haven's laws change.
7. Delay Tax Payments Legally with Tax Deferral
Subsidiaries can delay tax payments by holding foreign income in a foreign country rather than sending it to the parent company's country of origin. The subsidiary will pay taxes, but the parent will not pay until the income gets repatriated.
8. Centralize Ownership for Tax Optimization
Companies with centralized ownership put all their taxable assets and revenue into a single basket. More importantly, they move money and goods across borders, exposing them to taxation. Companies with international holding companies can keep revenue and assets where they get used and receive the most favorable tax treatment.
For example, suppose that you manufacture and sell goods in Central America. You could set up a subsidiary or international holding company in Costa Rica to ensure your revenue does not need to get repatriated to the U.S., where it would get taxed by the IRS.
9. Exploring Income Conversion from Capital Gains to Ordinary Income
Your tax plan should account for the different tax treatment of different types of revenue. Specifically, sales income, dividends, capital gains, and interest income could all require specific treatment, depending on your jurisdiction.
Your tax planning professionals can research tax laws and identify the types of revenue that provide the most favorable tax treatment.
Once identified, you can have your accounting and finance departments enter into transactions with your international subsidiaries and holding companies to convert your revenue into the most desirable type.
10. Prevent Double Taxation
Double taxation in the U.S. happens when the IRS taxes corporations and their shareholders for the same earnings. In international tax law, double taxation has a different meaning. Two jurisdictions can claim the right to tax a single transaction when:
- One country claims to be the home country, and another claims to be the location of the transaction;
- Both countries claim to be the home country;
- Both countries claim to be the location of the transaction.
A tax plan can reduce the risk of double taxation.
11. Consider the Differences in Tax Regulations with Regulatory Arbitrage
Market arbitrage takes advantage of different values placed on assets that allow someone to buy on one market and sell on another market at a profit. Regulatory arbitrage is similar. It leverages the different regulatory treatments of the same entity or transaction by different jurisdictions.
The company correctly characterizes and reports the asset or transaction in each jurisdiction. However, because of the gap in treatment by each jurisdiction, the company saves on its overall tax.
The key to regulatory arbitrage is to identify the countries with gaps in treatment. This means your tax planner must know the tax laws of various countries and how to set up your operations to take advantage of the regulatory gap.
12. Plan Ahead with a Proactive Tax Strategy
Many steps your company must take for an effective international tax planning strategy will take time to implement. By being proactive, you can save on the fees you would pay to international tax professionals to scramble at the last minute.
13. Dive into Corporate Inversion Utilizing Organizational Reversal
Corporate inversion happens when a subsidiary becomes a parent, and the parent becomes its subsidiary. This transaction typically occurs when the parent company has a high tax burden, and the subsidiary has a low tax burden.
After the transaction, the inverted parent (now a subsidiary) only pays taxes on the revenue that stays in its home country. The inverted subsidiary (now the parent) pays taxes on the corporate revenue in the lower-tax jurisdiction.
These transactions are not difficult. They can typically be handled through a swap of the parent's shares for the subsidiary's shares. But if the company is a corporation, it will need approval from its shareholders and board of directors.
The corporation will need to explain to shareholders what will happen and the benefits to both them and the corporation.
What Is the Difference Between International Tax Planning and International Tax Laws Compliance?
International tax compliance requires your bookkeeper to record transactions, file tax returns, and pay taxes to comply with international tax law.
On the other hand, international tax planning involves your international tax practitioners examining tax laws in various jurisdictions and creating a forward-looking plan to minimize your tax burden and optimize your tax benefits around the world.
Tax planning is a tool for maintaining your competitive position in the marketplace by reducing the risk of overpayment and providing a compliant structure for dealing with foreign income.
What Are the International Tax Rules?
There are no international taxes. All taxes are imposed and collected by countries or multi-country jurisdictions like the European Union. International tax rules are not laws that impose taxes on corporations. Instead, they are rules implemented by each jurisdiction to determine:
- Which cross-border transactions the jurisdiction taxes;
- When and how much a company must withhold for paying taxes in that jurisdiction;
- How the jurisdiction minimizes tax avoidance by foreign entities.
Unfortunately, these tax rules create a complex web that can trap taxpayers. But once you understand them, you can use them to create a plan.
What Are International Tax Responsibilities?
International tax responsibilities define all the legal obligations taxpayers have. These responsibilities include:
- Registering as a taxpayer and getting a taxpayer number;
- Maintaining records of taxable transactions;
- Withholding taxes as required by the jurisdiction;
- Preparing and filing accurate and complete tax returns;
- Paying taxes on time;
- Complying with tax laws and regulations, including refraining from tax evasion.
Taxpayers are not obligated to pay the maximum tax required. They can, and should, look for ways to reduce their tax burdens through tax planning.
Challenges Faced by Global Corporations in International Business Tax Planning
Tax planning for international businesses can pose challenges. These challenges are inherent in the nature of international transactions and tax systems, such as:
- Frequent changes in tax laws and regulations as jurisdictions revise and refine their tax systems;
- Complicated tax systems designed by jurisdictions to encourage or discourage certain practices or transactions;
- Dense tax laws written to close loopholes and prevent evasion techniques used by others;
- Variations across jurisdictions that can cause inadvertent violations when taxpayers follow practices allowed in one jurisdiction but prohibited in another;
- Unpredictability in how jurisdictions interpret their regulations and apply them to the taxpayer;
- Risk of penalties, collection actions, and enforcement lawsuits for non-compliance.
A tax planner with knowledge of tax laws and experience developing international tax planning strategies can help you overcome these challenges.
International Tax Planning Services from Sequoia Legal
International taxes create both a challenge and an opportunity. You will always need to pay taxes. But a tax plan can open the door to reducing tax liabilities and risks to your business.
Our team of attorneys from Sequoia Legal and our trusted network of partners can provide the knowledge and experience your business needs. Contact us to schedule a consultation with a seasoned attorney to discuss your business and the international tax issues you face.
