International Taxation for US Businesses
The USA is one of the very few countries in the world that levy tax on the income generated by US corporations in foreign countries. Though, if properly managed, a lot of international tax can be saved using legitimate methods. There are provisions for the penalty of thousands of dollars every day for every delay if international taxation is not filed within the limits, which I believe no business wants.
On top of that, there is some serious scrutiny around the foreign assets and failing to comply with the requisites regulations or missing on the deadlines can be pernicious for business and founders/directors reputation.
Controlled Foreign Corporation
Controlled Foreign Corporation (CFC) is a registered corporate entity which operates various jurisdictions/ countries other than/apart from the one where the owner(s) resides. CFC laws work in corollary with tax treaties providing how taxpayers report their foreign income. A CFC might be beneficial for businesses where the cost of establishment, foreign branches or partnerships in a is on a low-key even after the tax implications—or when the global exposure could help the business grow.
US Tax Rates on International income
Presently, the persisting tax rate of income above 10% of the return is 10.5% (half of the US corporate tax on domestic income) till 2025 and 13.13% afterwards, along with 80% tax credit on income tax paid in foreign. On income via the passive assets and on some specific form of easily transferable assets, it is a whopping 21% with 100% tax credit on income tax paid in foreign.
Formalities Involved for International Taxes
There are several complications in tax filings and compliances for international income. For instance, identifying the type of income on the basis of its sources like Subpart-F income (passive income & specific kind of easily shiftable profits), income from royalties, the income representing a normal return from tangible assets, Global Intangible Low Tax Income (GILTI), etc. Then on the basis of this identification, you also need to bifurcate which part of the profit is taxable and which is exempted.
If that was not enough headache, then you also need to calculate and claim tax credit from on GILTI, which is also no child’s play because that is where the real tax saving comes from where you have to also consider the depreciation on the assets and accounting standards followed. And I have not even mentioned the special provisions regarding the income generated from intellectual properties, like Foreign Derived Intangible Income (FDII) in the USA or Patent Boxes prevalent in Europe.
On top of that, to curb ill-practices of tax evasion and tax avoidance using accounting chicanery by the corporates, the Department of The Treasury and the Internal Revenue Services have very strict tax surveillance and scrutiny systems and the slightest mistake can land you in some serious legal trouble.
We have more than 5+ years of experience in the arena of business and financial consultancy and we have the fortune to be working with some top-notch organisation like Paperboat Apps, Numiv Research, VSV Wins Group, Kiddopia USA, Inc. etc and while inter alia handling their federal and international tax matters, we have gained 10+ experience on how to ensure expeditious filing process, coordinate with various authorities and fetch accurate information, how to effectively calculate and claim tax credits, how to avoid any scrutiny by IRS, etc with our personal favourite niche being the international tax on income from intellectual properties.
We have handled various complex tax issues, to list a few:
- Foreign Subsidiary Company Reporting (Form 5471, GILTI and 8865 reporting)
- Foreign Holding (Form 5472)
- Having assets abroad (FinCen 114, 8938)
- US Branch tax of a foreign company (1120F, 5471)
- Transfer Pricing Issues and Efficiency & Tax Optimization Planning (TP Study and Arms length pricing)
- Foreign Disregarded Reporting (Schedule C entities having a foreign owner)
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