Expanding overseas? Some tax facts

Are you tired of reading about large U.S. corporations that “game” the tax system to lower or eliminate their U.S. tax bills by shifting income to so-called “tax havens” in places that sound more like vacation destinations than business opportunities?

Have you wondered aloud whether you could lower your taxes with overseas operations?

If so, you are asking the wrong question. The right question is: “Could my business benefit from going global?”

With Internet connectivity, almost any business can be a global business. At some point, every entrepreneur will face the same trepidation Columbus faced: If I take my business across the ocean, will I find gold or fall off the edge?

Expanding BusinessFor those looking for validation that it is better to keep their business local, there is no shortage of valid concerns. Examples include:

  • Language barriers
  • Unfamiliarity with local customs, business practices and etiquette
  • Unfamiliarity with local laws and politics
  • Difficulty in identifying a trustworthy business partner

On the other hand, 95 percent of the world’s consumers live outside the United States according to the Office of the U.S. Trade Representative. More than a few may be potential customers.

It is a good bet that your competitors are offering – or thinking about offering – their products or services in overseas markets. A competitor from overseas may already be calling on your customers.

Doing business in cyberspace can be relatively simple. But before your business actually sets foot on foreign soil, you need to get the lay of the land. In other words, you need a business plan.

Laws vary in every country, and labor laws are a prime example.

U.S. employers enjoy a relatively free hand when it comes to hiring and firing employees. In other countries, you could find it quite difficult and/or expensive to terminate employees, shut down a facility or even discontinue a product line. Be sure to consult an attorney familiar with local labor laws before you begin a search for foreign employees.

Your U.S. patents will be difficult, if not impossible, to enforce in foreign jurisdictions. As soon as you begin to distribute your product in some markets, copycats will appear offering knock-offs. Be prepared to spend some cash on knowledgeable patent attorneys to protect your franchise.

If you are going to do business with suppliers and customers in other countries, you will encounter foreign currency questions. The best solution is to conduct all business transactions in U.S. dollars. Foreign currency transactions introduce a new element of risk into your business – exchange rate fluctuations.

Your banker can help you manage exchange rate risk but at an additional cost to your business. If at all possible, avoid transactions in foreign currencies.

Finally, there is the tax law. You should never enter into an overseas business expansion for the sole purpose of saving taxes.

But if overseas expansion makes good business sense, then you will want to take advantage of all available tax-savings opportunities.

Every country has its own tax laws, and some are quite different from those you are familiar with in the United States. Many countries rely heavily on a value-added tax, or VAT, in addition to a business income tax. Think of a VAT as a sales tax imposed at every step in the business process, not just at the point of final sale to the consumer.

The U.S. government will tax your worldwide business income. If you are taxed on that same income in another country, the U.S. allows a credit against your tax bill for all or part of the foreign income taxes you pay.

If you establish a separate business entity in another country, profits earned by that entity may escape U.S. taxation, unless and until the profits are repatriated to the United States in the form of a dividend or otherwise.

Large multinational businesses often set up special-purpose entities in low-tax countries – the so-called tax havens – in an attempt to allocate profits to these jurisdictions. Suffice it to say that aggressive multinational tax planning can be quite expensive. It is best left to those who can afford it.

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