Expanding a U.S. business internationally is complicated, and it has become even more so, under the Foreign Account Tax Compliance Act (FATCA) and the Tax Cuts and Job Act (TCJA). Whether you are considering your first business overseas or thinking about expanding an operation you already have, you need specialized knowledge to arrive at the best solution for your business.
There are many questions that arise for business owners when it comes to doing business overseas:
- What business model do you choose?
- What types of business entities work well?
- How will your business (and you) be taxed in the U.S.?
- What if you send people to work overseas?
- Or if you hire locally within the country?
AN OVERVIEW OF THE U.S. APPROACH TO INTERNATIONAL TAXATION AFTER TCJA
The primary idea behind the TCJA changes was to tax all accumulated foreign profits in certain U.S. owned foreign corporations. There are three significant changes to understand here:
1. The U.S. corporate tax rate is now 21%. That puts the U.S. in a more competitive position somewhere in the mid-range relative to other countries’ corporate tax rates.
2. The deferral of U.S. taxation of foreign profits is virtually eliminated by TCJA. Although the legislation for this tax was passed in December 2017, the taxation of accumulated foreign profits was retroactive to January 1, 2017.
3. The introduction of FDII and GILTI. This is the carrot and stick approach in the TCJA legislation. The carrot is called FDII, Foreign Derived Intangible Income. This provides for a deduction which results in a lower U.S. effective tax rate on foreign source sales and services income for U.S. C-Corporations. The stick is called GILTI, Global Intangible Low-Taxed Income. This is an annual tax on the current year earnings in a foreign corporation.
PLANNING FOR OVERSEAS EXPANSION OF YOUR BUSINESS
Your business plan to expand overseas should start with your reasons for doing so. You should also consider the various U.S. business models, entity selection choice, and tax issues related to your choice. Consideration of other countries’ models, entity and taxation are equally important, but beyond the scope of this article. Your business plan should include planning opportunities to minimize U.S. taxation. For this be sure to hire U.S. tax and legal professionals who are well-versed in international tax and business, along with seeking counsel from tax and legal experts in the local country. Contact Phoebe Trumpler, CPA, Shareholder at The International Group of Kerkering, Barberio & Co to discuss planning opportunities.
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