Going Global: Tax & Compliance Considerations for U.S. Businesses Overseas

Thinking about expanding your business beyond U.S. borders? In this episode, we explore the key tax and compliance challenges that U.S.-based companies face when operating internationally. From foreign tax obligations and reporting requirements to navigating international trade laws and local regulations, our experts break down what businesses need to know to stay compliant and competitive abroad. Whether you're just starting to explore global markets or already operating overseas, this episode is packed with practical insights to help you avoid costly mistakes.

About Our Guest
William Roberts is the International Tax Counsel with Mauldin & Jenkins, LLC. He has over 20 years of tax experience, primarily focused on International taxation. He specializes in directing and implementing diverse global outbound and inbound tax strategies, compliance and reporting initiatives, for large and middle-market companies.

About Our Host
Brent Ullrich is a Partner with Mauldin & Jenkins, LLC, with over 15 years of experience in many areas of taxation and industries, most notably in healthcare, real estate, private equity, technology and professional services. He also serves as the Firm’s Tax Strategy and Research Leader, which offers technical guidance and identifies planning opportunities for the firm to support clients on complex issues across a range of technical tax areas.

Learn more about our International Taxation services here: https://www.mjcpa.com/services/tax/international-taxation/

Transcript

Introduction

Speaker 01 0:02

Welcome to Beanstalk, MJ's podcast where we are sharing and showcasing our areas of expertise through conversations with practice leaders on their knowledge and experience. Welcome to today's episode of Beanstalk. We are going to dive into a favorite topic of mine, international tax. And to do that, we're welcoming the uh leader of our international tax practice, William Roberts. Welcome, thank you for being here.

Speaker 02 0:29

Thank you, Brent. Thanks for having me.

Speaker 01 0:30

Yeah, you know, I obviously international tax, we can talk for days about the issues that surround it, right? So but the goal I think today is just, hey, what are what are the high-level things we need to be thinking about?

Speaker 02 0:42

Right.

Speaker 01 0:43

And you know, later on I think we'll dive into specific issues here or there, you know. But uh I mean really from the outset, it's it's hey, I know I want to expand abroad.

Speaker 02 0:52

Right.

Speaker 01 0:53

What are the first questions as a business I need to be asking?

Speaker 02 0:56

Okay.

Speaker 01 0:57

You know, once I've made kind of made that leap in my head.

Speaker 02 1:00

Right, right. And and you know, that's and that's the thing too. The first thing you really need to be asking yourself is not a tax-related question. It's really why why do I want to go overseas? Am I starting to sell more products overseas? Do I have more clients overseas? Do I have people requesting my services from overseas countries? And so you have to ask yourself, okay, why do I want to go overseas? And a lot of those questions are very legitimate because you don't just want to go over there because you want to say, oh, I want to set up you know operations in France. You have to have clients, customers, all that going over there. So that's really one of the first things you have to ask yourself. Um, you know, why do I want to go over there? And you know, there's different things you need to consider over there. What are my choices of vanity? You know, what sort of political you know, risk do I have to think about? You know, what are the legal requirements? You know, who do I staff it? Uh, you know, who do I staff it with? You know, it's one thing to say, you know, I need to set up an organ, you know, an organization in some third world country that's always you know under civil war. Uh that's great, and all but if you need somebody from the U.S. that's going to go and supervise that, it might be difficult to try to do that. So the first questions you really kind of have to ask yourself is why do I want to go overseas and how am I going to do this? Has nothing to do with tax.

Differences Between Opening Up Shop Abroad and in the U.S.

Speaker 01 2:04

So yeah, right. And I mean, suffice it to say, the considerations for opening up shop in the U.S. and abroad are very different, right? So what what are good examples of the differences, right? I mean, employee-related, what what.

Speaker 02 2:17

You know again, it's like uh you know if you think about your employees here, you know, they have certain requirements, they have certain legal aspects, certain legal laws apply to them in the sense that you know, maternity type leaves, well, I guess it's birth birth-related type leaves in different sorts of vacation periods and stuff like that, and different kinds of incentives to bring you know people onto your job. Over in overseas, they have different regulatory requirements. They have, you know, some places you it's hard to fire folks. Um, in some countries, your your manufacturing employees have to be on part of your board or have to be, you know, having you know conversations and making you know, helping decision making, the kind of stuff, and they don't have that will you know termination. So a lot of those type of issues come into play. Uh, you know, the length of PTO sometimes can be here in the U.S., we you know, four weeks is kind of standard over a year, but it could be seven or eight. So a lot of the types of, you know, just employee you know, issues you have to think about, social security taxes. Uh, you have to pay different Social Security regimes, uh, whether they're foreign persons or not, U.S. people that go overseas, if they're there long enough, you'll actually actually have to pay U.S. Social Security and foreign social security. So you have to think about okay, how long is this person going to be there? So trying to determine are you gonna hire locals, employees, are you gonna hire local contractors? So uh you don't really have employees, you could hire, instead of hiring employees, you could what use use an employee of record, which basically says somebody else hires them for you and you lease them so you don't have all these employment issues to worry about. Or if you send people overseas, uh you know they're gonna want an expatriate package. You know, it's it's not gonna be the situation where I can charge, you know, I can pay them $100,000 here overseas. You may have to pay them $200,000 for company housing, you know, benefits, travel expenses, because they're gonna be away from the house and away from home and loved ones. So, you know, you and plus the idea of going overseas and being away from the U.S., uh, you know, is it's tough pill to swallow for some folks, so you have to compensate them for that.

Speaker 01 4:23

Right.

Speaker 02 4:24

So there's all those issues. Um, yeah.

Assembling Your Local Team

Speaker 01 4:26

And then and I mean, uh in your experience, does your U.S. advisor help out with that, or is that something you need boots on the ground for, right? I mean, it is from an advisory perspective.

Speaker 02 4:35

Well, I mean, I think you know, the most important thing you can take away from our conversation about any of this, no matter what we talk about from here on out, is hire local country advisors. Hire an attorney that can help you through all the legal issues for employment, regulatory, because when you go overseas, you're subject to different sort of like OSHA type requirements. You're subject to different environmental protection type requirements. Uh, so all the legal issues that you could be facing, you'll need an attorney. And then also you'll need an accountant that's knowledgeable and you know, that's really knowledgeable in the local country tax laws and the accounting aspects, because you know, we have U.S. GAAP, which is a certain way we prepare our books, and most of your, you know, most people who know you know that are part of the business world know about U.S. GAAP, but there's something called IFRS over overseas, and that's a different international financial reporting standard that you have to convert books back and forth to, you know, so if you're when you're preparing like a 10K or a 10Q or something like that, you have to convert those financial statements into U.S. GAAP. And there's all those kind of different ways you can record things overseas as opposed to how you treat them for U.S. purposes.

Currency Risk Management

Speaker 01 5:40

Right. So I mean, really, I mean, not just obviously the costs of going abroad, but I mean there are administrative costs that come with just, hey, translating financials. You know, there's like hidden costs in there that you just don't consider, right? I mean, what other other considerations like in that realm do you do you?

Speaker 02 5:56

Well, I mean, okay, you know, you talk about financial uh you know, a lot of you know, when you go overseas, you have to conduct your business environment in their local currency. Yeah, if you luckily in the European block, there's you know, there's one, there's the euro, but then Sweden has its own, Denmark has its own currency, Iceland, I can't remember if Iceland has its own, but you know, different companies or different countries have different currencies that you have to think about. And the the volatility in those exchange rates, you know, can really affect the bottom line of your business. To give you an example, when I first started doing international tax, the the pound to dollar rate was basically one pound equals you know two dollars. Now it went down at one point as low as one to one. I think everything was I felt like a half off sale when I went to the UK. Now it's kind of middling and and you know creeping back up, and who knows where it's gonna be in the future. But that you know, that could affect your bottom line in the sense that, okay, I've got a contract for 100 million pounds. Let's let's let's bring it down, a million pounds, you know, that's back in the day, that would have been two million dollars.

Speaker 01 6:56

Right.

Speaker 02 6:56

And you would have said, well, that's that's a great windfall. You know, that same contract five years later could have been only worth uh $1.5 million. And so, you know, that affects, you know, and that's you know, if you have a long-term engagement or a long-term construction project, let's say, you know, what you think you're you're getting paid for, or even if you get paid in U.S. dollars, you know, the exchange rate when you receive those payments will affect a gain or a loss that you have to recognize not only in your financials, but there are tax aspects uh that you know, where you tax if you have an obligation, like a like a loan that's denominated a certain currency, and the U.S. dollar of that is let's say, you know, $100, and when you go to pay it off, it's you only had to pay off $90. Well, and that's a that's a taxable gain to you under the U.S. tax loss. Or if it's now you have to pay $110, that's a $10 loss to you. So looking at financial exchange gains and losses and mitigating that risk, uh, very critical. And if they're big enough or if you have enough volume, you you should really start you know getting a financial advisor uh on board to help you do financial hedging.

Speaker 01 7:58

Right, right.

Speaker 02 7:58

Uh try to hedge those transactions and hedge the volatility.

Speaker 01 8:00

So you know, in that and just going back to your political risk thing, right? I mean, you want a an exchange rate that is going to be at least fairly consistent. And if it's not, then you want to hedge your bets.

Speaker 02 8:11

That's right. I mean, they're hyperflation hyperinflationary currencies like the you know, Venezuela. You know, at one point, you know, if you'd have had an investment in Venezuela, you know, 20 years ago, it would have been you know worth whatever it's worth, but now it's basically you know worthless because,

Speaker 01 8:24

Inflated out of stuff.

Speaker 02 8:25

Yeah. Yeah. So that's you know, and there are definitely countries with currencies like that. Now we have different accounting tactics and tax tactics to kind of mitigate that and smooth it out, but for the most part, you know, that's that's a huge risk.

Foreign Entities and Local Tax Landscapes

Speaker 01 8:37

Yeah. Um, going into kind of the tax aspects, right? I mean, you know, the we have obviously our U.S. tax the way the way we're gonna tax these entities abroad. I mean, can you speak a little bit about how do I set up an entity abroad? Is it gonna be subject to you know tax abroad? It'll be subject to tax here. I mean, what are the considerations that go into just setting up, just setting up shop?

Speaker 02 8:58

Right. I mean, and that's and that's you know, I think to me, the second question you have to ask yourself after, you know, why do I want to go overseas? What's the reasoning? That not just willy-nilly, hey, I think it'd be great to have a place in you know, France. Uh, it's you know, it's what type of entity do you want to use, right? And you have your typical their version, you know, the local country versions of corporation, local country version of a partnership, a branch, an LLC. And just like in the U.S., different types of entities will incur different types of taxations. Um, you know, for example, so and I think a lot of a lot of the times it's not, it's kind of just kind of small differences. But if you're setting up shop over in Europe, just like you would here, you're you're subject to corporate taxes. Um, state and local taxes generally isn't too prevalent in a lot of places, but if you go to Switzerland, for example, they have can't, you know, they have cantonal tax. So they basically there are different states in Switzerland apply in addition to their local tax, in addition to their their federal tax. You can have municipality taxes. So let's say you, you know, in the big city of London or France, you know, they may have their own tax, you know, their own taxes, Singapore. You know, there are different taxes that are at the municipal level.

Speaker 01 10:04

I feel like there are a lot of value-added taxes outside of the U.S. too, right? I mean,

Speaker 02 10:07

That right.

Speaker 01 10:07

And it's taxed on, I don't I don't I mean, is it taxed on services? Is it taxed on goods? Is it is it everything?

Speaker 02 10:13

Yeah, that VAT is basically a glorified sales tax, right? And it applies at various rates. They're generally double what our U.S. sales tax rates are, but they apply to different goods and services, and they have different rates, you know, just like just like us, you know, they they do tax advantage VAT rates. But VAT is definitely something that you have to, if you're going overseas and you're selling products, uh, you will have to register for VAT. You will have to collect VAT and remit it to the local, you know, the VAT authorities. Um, so yeah, so income taxes, VAT taxes, and there's special taxes you got to think about too, right? You know, there's you know at one point there was a Germany reunification tax that helped rebuild Eastern Germany. You know, it's kind of been scaled back and you know, highly selective of like corporations, but yeah, you had to pay that tax. Um, and so there are other taxes that you have to think about besides just those income taxes and VAT taxes. There, you know, and then there's Social Security taxes that you have to withhold on your foreign, you know, your foreign workers. So just like in the U.S., you have all these foreign taxes you get to think about.

Speaker 01 11:13

Yeah, you're really making me want to set up shop abroad. You know, just I feel like the tax is gonna be all of it.

Speaker 02 11:18

Yeah. I mean, just you know, just think about it. It's just like going to another state, except for they don't speak English. Well, actually, most foreigners, you know, most foreign business folks do speak English a lot better than we speak English, so that's always a good thing. And I think you know, a lot of a lot of the foreign companies, they've that is one of their hiring requirements. I will say that they have to be you know fluent in English um in addition to their local country language, and then maybe one other one, you know, might be like your French and German, German, uh, Italian, that kind of thing so.

Speaker 01 11:44

Generally you're gonna find a comparable tax system where you are similar to the U.S., not exactly the same.

Speaker 02 11:50

Right.

Speaker 01 11:51

You know, the that's local tax.

Speaker 02 11:52

Right?

Alleviating Double Taxation

Speaker 01 11:53

So so how does that impact my domestic tax, right? I mean, I I own this, you know, I own a business that's in the Eurozone somewhere.

Speaker 02 12:03

Right.

Speaker 01 12:04

You know, it's making money, it's taxed there.

Speaker 02 12:06

Right.

Speaker 01 12:06

How's that taxed here? Or I mean, and what what you know, what are the considerations that we need to have when we're when we're setting it up?

Speaker 02 12:13

Right. And you know, that's that's that's the the lovely thing about U.S. taxes is the U.S. taxes you on your worldwide income. So what that means is no matter where you earn it, and this applies to individuals, corporations, partnerships, worldwide income is a U.S. taxable concept that wherever you earn it, however you earn it, whatever source it comes from, you are taxed on that. So let's say you earn a million dollars in France, and France taxes you on that income. Well, the U.S. also says, hey, we're gonna tax you on that as well. So let's say I don't know whether the French tax rate is off the top of my head, but let's just say it's it's higher than ours, right? It's 25%. So if you earn a million dollars, France taxes you at $250,000, and then the U.S. will tax you at let's say top rate at 21%. So you're looking at you know 25, 46% tax rate on your worldwide tax rate so.

Speaker 01 13:02

Probably not the best turn on investment.

Speaker 02 13:05

Right. Then you ask yourself, why the heck am I even going overseas? Well, uh, you know, luckily, you know, this is why you hire your local advisor overseas, is they can help you take advantage of any local country issue, you know, laws that can help mitigate that tax or lower the tax rate uh or exempt it, you know, whatever. And then, you know, there's there are income tax treaties between two countries that will help alleviate double taxation. And then if that doesn't work, um, you know, we have the U.S. offers you a foreign tax credit that you can take for foreign taxes paid on your foreign on the income earned in France. Um, so there's there's different ways of doing that uh to lower your tax rate. And really, you know, going back to the entity choice in your in the local country, that will really affect how you're taxed in the U.S.

Speaker 01 13:52

So I can I choose how I'm taxed in the U.S. based on how basically how I'm set up in the in in the other you know country.

Speaker 02 14:00

Right.

Speaker 01 14:00

Well, I mean, obviously it will impact how I'm taxed in the U.S. But I mean what are the what options are available?

Speaker 02 14:06

Right.

Speaker 01 14:06

Right. So like how can I you know in a given situation where I'm going over there, I probably know I'm gonna invest in that entity, I'm gonna lose some money.

Speaker 02 14:15

Right.

Leveraging Losses

Speaker 01 14:15

Or you know, tax I won't have taxable income. I have losses. I mean, is there is there a strategy there to where I can use those losses in the U.S.? Or you know, walk me through that.

Speaker 02 14:25

Yeah, no, yeah, you can, I mean, if you're gonna have losses, generally the idea of if you have an entity making losses, you want them to flow directly through to you, right? And so you can do a couple things. One, you can set up a branch, which is basically you have a sales office or an unincorporated entity and losses will flow directly through to the your U.S. return. You can set up a partnership where the and just like any just like a U.S. partnership, the losses come straight to you. Or let's say you don't want you don't you don't want to do that because under certain you know regulatory laws, they say if you're gonna build this product, let's say if you're gonna build this ultra chemical that you know could be dangerous, they want you to have it in a you know a court for a court a corporation, right? Um so you think, well, I'm stuck with this corporation. Well, that may be true for foreign country purposes, but we have something called check the box in the U.S. tax regime, which basically means as long as your entity is not a what's what we consider a per se corporation, like a public company or you know, corporate like a U.S. Inc., you can make a check.

Speaker 01 15:24

It has to be taxed.

Speaker 02 15:25

Yeah, it has to be taxed as a corporation. Then you can make a check the box election. And what I what I mean by check the box is there's literally a form that says, How do you want this entity to be taxed? And you check the box and you say,

Speaker 01 15:34

Yup.

Speaker 02 15:34

I want this corporation to be taxed as a disregarded entity. Or if I have one owner, if I have two owners of this corporation, I check it as a partnership. But the point is, is you can take this entity for local purposes, it's still a corporation, still legal liability protection, all that good stuff. But for a U.S. tax perspective, all those losses come back. And there are different things you have to think about. Well, once it turns profitable, then you have to worry about, okay, well, now if I if I want to defer income, then you know, uh then I need to think about that. Uh, but that kind of leads to me, that's a perfect segue, though, into U.S. taxation of these entities, right? Because again, you know, not only do you have to worry about these, the not worry about, but think about the flow through. If you do have a corporation um and you don't make the check the box election on it to be a flow through, you know, you used to be able to defer income that was generated by that former corporation.

Speaker 01 16:26

That was my next question. Is all right, well, we've got losses.

Speaker 02 16:28

Right.

Ownership Thresholds and Phantom Income

Speaker 01 16:28

Right. We maybe we can take advantage of it, maybe we can't, depends on our situation. But now we got income and we want it back home to either invest here or anywhere else, right? How do we get it back? What's you know and and how yeah, what's the what's the what what are tax efficient strategies or just kind of things to think about.

Speaker 02 16:44

Right.  

Speaker 01 16:44

You know, as we're doing this.

Speaker 02 16:46

Right. You know, back in the old days, you would say, well, let's let's keep the brand, let's, you know, it's a branch while it's generating losses, but now that it's generating income, we want to defer that. We don't back on the uh on our return, so we would, you know, uncheck the box and make it a corporation again.

Speaker 01 17:00

I feel like that's kind of changed to that.

Speaker 02 17:01

Yeah, well, that's kind of changed too. And here's the thing you know, nowadays, before, you know, like I said, you you would general partnerships branches flow through. Corporations used to be, oh, money kept there, it stays there. Now, with these and what we call anti-deferment regimes, which is Subpart F, we can talk about in here a second, and guilty, pretty much all the income that a foreign corporate, if it's a controlled foreign corporation, all the income that that controlled foreign corporation earns is coming back to the U.S., whether you like it or not.

Speaker 01 17:31

So cash cash is sitting abroad.

Speaker 02 17:33

That's right.

Speaker 01 17:33

But the IRS is saying, no, no, no, that's your cash already. We're gonna tax it.

Speaker 02 17:37

That's right. If if you if you're if you're if you have a CFC, you're subject to these two regimes, and let's say you are in $100 million, all that money is coming back to you on your in your gross income on your tax return, whether or not cash comes back to you. Yeah. Um, now, luckily, that's in year one, let's say in year two, you uh you want the cash back or you need the cash back. They won't tax you again twice on that.

Speaker 01 17:59

Right.

Speaker 02 17:59

So that's good. So automatic conclusion, and so the the parameters of this are what's a what's a control foreign corporation, right? A control foreign corporation is basically a foreign corporation that's owned greater than 50% or value of vote or value by U.S. shareholders. So it could be like 50.0001% owned by U.S. shareholders, and U.S. shareholders are shareholders, U.S. persons, obviously, that own 10% or more of uh of stock of that corporation. So for example, you own 50% of a corporate of the foreign corporation, I own 50% of the corporation. You and I are both U.S. shareholders, and this foreign corporation is now CFC.

Speaker 01 18:35

Sure.

Speaker 02 18:36

So now that when this.

Anti-Deferral & "Shenanigans": The Goal of Subpart F

Speaker 01 18:36

So now we're subject to all these rules.

Speaker 02 18:38

Yeah, so now when CFC, you know, now anything it earns, it's gonna come back to our returns. You get out of that $100 million, you get $50 million, I get $50 million. I feel like it's an over moment, right? Yeah, yeah. You get $50 million, you get $50 million. And so, and whether or not we actually get cash, we have to report that on our income. So it kind of seems unfair. But what this what was happening was is Subpart of F was people were playing shenanigans with with their tax entities, right? They would say to myself, okay, if I sell this widget overseas, I'm gonna get taxed at, let's say, back in the old days, tax rate 30-something percent tax rate, 35%. But if I send it through a Bermuda company or a low-tax company, and they on sell it to my customers in France, well, guess what? All the trapped income, all the real trapped income is now in that low-tax jurisdiction company country and,

Speaker 01 19:25

As long as I don't send the cash back, I can just.

Speaker 02 19:28

Right, yeah, right. And so, I mean, yeah, and so then you know the tax rate on that was so much lower. And then when you bring the cash back, you know, it's you know, there are different ways to repatriate it. But you basically were reducing the amount of income uh the tax that would be payable in the U.S. And so that's when they said, okay, all these shenanigans, they call it Subpart F now, and that brings it all back.

The OB3 Era: Navigating the Shift

Speaker 01 19:46

So walk me at a high level through the new regime, right? I mean, it's it's fitty, it's GILTI. You know, we won't get into beat, but you know, kind of what what do those mean for for us as as domestic taxpayers?

Speaker 02 19:57

Right. So so back to for CFCs, um, you know, Subpart F is calculated at the CFC level, right? So whatever it earns, it can just it can get um you know Subpart F income and it comes back to you automatically. GILTI, again, anything that's not Subpart F income.

Speaker 01 20:13

GILTI, which stands for

Speaker 02 20:14

Yeah, GILTI means Global and Global Intangible Low-Tax income, which basically means nothing.

Speaker 01 20:19

Pass the test.

Speaker 02 20:20

Yeah, it basically means nothing. And now, you know, uh they also are have renamed it, and I won't go into all the all the details, but they've made some changes to it under the OBBBA or OB3 is what combo you know being referred to now.

Speaker 01 20:31

Yeah.

Speaker 02 20:31

But OB3 basically has kind of uh taken away some things and now they call it basically fiddle, uh they call it necktie, which is basically uh we're not gonna get into that, but let's just call it GILTI for purposes because a lot of people are still gonna have a lot of time trying to figure out you know what to use the new vernacular. But anyway, so basically, if you have income that's not Subpart F, pretty much everything is coming back to you. Um so for especially in 2025 or 2026, everything you earn overseas is coming back to you uh with no sort of uh delay in that. Um and what that means is so you get the money back, but you get a deduction for that uh uh on that income. And after you do all the calculations and deduction, basically you are now getting taxed at a rate of 14% as opposed to 21%. So there is uh value in that sense. And what that's trying to do is uh the Trump administration is trying to bring your IP back to the U.S.

Speaker 01 21:25

 True.

Speaker 02 21:25

Even though GILTI and it has intangible tax in there, but for the most part, it it didn't it was really everything, you know, for lack of trying to get into terms of art and all this kind of stuff. Everything that's in there is coming back. Uh and again, that was by design because they wanted Trump, the Trump administration wanted uh to bring IP back to the U.S.

Speaker 01 21:44

So did the new act, did it impact? I mean, uh you know, I I I read a little bit about it, but did it impact this significantly at all?

Speaker 02 21:50

Yes, it did, it did, because again, you know, back in the day before GILTI came into play, you tried to work your way in, you tried to avoid Subpart F unless you wanted to have Subpart F because it was not you know, tax is neither good nor bad. It's dependent on what sort of tax attributes you have to do.

Speaker 01 22:07

How long can you avoid it?

Speaker 02 22:07

Yes. Well, well, and here's the thing, too. You know, it used to be back in deferment, it was gonna come back at some point and be taxed in U.S. return. It's just used to have the option of deferring when that event would happen. Right. But don't worry, everything is taxed in the U.S. at some point. Um now it's just everything all at once. But back in the day, you would say, well, I try to avoid Subpart F income so that all my income stays there. Or if I have some expiring foreign tax credits that I could benefit from Subpart F foreign source income, then I would say, okay, well, let's let the Subpart F income come on through so we can take advantage of our favorable tax attributes. Um and so planning, I used to get offended by some having Subpart F generated for a tax period, but then I get thinking, wait a minute, we've got expiring foreign tax credits. Let's bring some foreign source income back in. So, well, you know, why don't we find ways to.

Speaker 01 22:53

So that that's where the conversation has shifted is is what sort of character are we looking at?

Speaker 02 22:57

Right.

Speaker 01 22:57

Versus timing, because the timing seems like it's taking care of itself, right?

Speaker 02 23:01

Right, right. And it's all it all comes in, and so again, there's no deferment. But now I will say the only time you can really kind of avoid deferment now is if you are in a jurisdiction that is uh what we call high tax jurisdiction, and what that means is you're the the effective tax rate on that income is greater than 90% of the U.S. tax rate. So if you have any if you have foreign income that's subject to a rate greater than 18.9%, for example, let's say it's 25%, then that's not GILTI income. It is GILTI income, but you don't have to bring it back because it's high taxed.

Speaker 01 23:33

Yeah.

Speaker 02 23:34

That is the only time you can really say, okay, well, I'm gonna wait till I bring that money back.

Speaker 01 23:38

Okay.

Speaker 02 23:38

And then there are ways to bring that back tax-free as well so.

Speaker 01 23:41

I don't I don't want to get into too much of the details. Um every now and then when we start talking international tax, not you and me, but just when I start reading about it, my eyes gloss over a little bit.

Speaker 02 23:50

Right.

Permanent Establishment: The "Nexus" of International Tax

Speaker 01 23:50

So But you know, I you we hit on you hit on a few things, you know, tax treaties, foreign tax credits. How you know, how does that like interplay with you know these deductions? I mean, uh are there ways to take advantage of the treaties, to take advantage of foreign tax credits? I mean, it sounds like there's still a lot of planning to do, right? I mean .

Speaker 02 24:09

Right. You know, it's it's planning, yeah, planning is is more limited than it used to be, but but it's still out there.

Speaker 01 24:14

Yeah.

Speaker 02 24:14

And you know, as far as you know, taxes being subject to taxes on your foreign operations, you know, the first step you need to think about is is there anything my local tax advisor can do to lessen my my foreign tax impact? And the next step, if that can't happen, then is to look at a treaty. Um and now a treaty will help you reduce your tax, you know, your double taxation on there. But the point is you can't be subject to taxation in the foreign country. So, in other words, if you have what they call a permanent establishment, which is a you know bricks and mortar operation, meaning like you have a sales office or you have a manufacturing facility, then you're automatically subject to taxation in that foreign country. Uh and it's not always just bricks and mortar like Canada has, uh, the U.S. Canada income tax has a situation where if you're in the other each other's country for greater than 183 days and you get 50% of your gross income comes from that other, you know, comes from Canada, then you're subject to having what's known as a services PE. So you don't even have to have a bricks and mortar operation, you have a services PE. And why that's important to having a permanent establishment or PE is that you are now taxed on on all the income attributable to that PE. So you're paying local country tax, federal, you know, federal, local, state, VAT, all that kind of good. Well, you can be subject to that irrespective. But my point is, is you the whole the whole trick about planning is try to avoid having a PE. So if you're gonna set a manufacturing facility over there or a COC, you're probably there.

Speaker 01 25:39

You're probably there.

Speaker 02 25:39

You're there. But let's say you're a U.S. company and for some reason you don't want to go to France, you don't you don't feel like dealing with France or the UK or Japan or wherever you want to go overseas and you say, well, I just want to sell product in there. And so therefore, if you don't have a permanent establishment and there's no other, you know, no other attributional permanent establishment clause, then you can sell goods and products in there, I mean goods and services in there, and not be subject to that foreign country's local tax jurisdiction. Um, now that that is something you need to carefully plan into because there's a lot of time requirements. If if you start the basically, it's kind of like a state and local concepts. The more and more touch points you have with a country, a foreign country, the more and more likely it is to take it.

Speaker 01 26:20

Yeah, it's akin to like a Nexus issue.

Speaker 02 26:22

Yeah, it's kind of permanent establishment and Nexus are very similar concepts, it's just foreign versus state. Um, so now if you have a PE or you don't have a PE, you know, if let's say you have a PE or you have a foreign operation, or let's say you just want the treaty to apply to you, you just want treaty protection from something. And and you know, the reason I said is because also even if you do or don't have a PE, and you know you have dividends, interest rents, or royalties that are not related to that PE, the foreign country withhold will withhold taxes on that, just like we will withhold taxes on payments going overseas so that we can ensure that you're not as,

Speaker 01 26:56

We're not getting our share.

Treaty Protection: Eligibility and "Shenanigans" (LOB)

Speaker 02 26:57

Yeah, everybody's getting their share of foreign taxes. Well, the foreign, you know, the treaties will then mitigate that by lowering or mitigate, you know, or lowering or effectively reducing the withholding rates just like they would income tax rates.

Speaker 01 27:09

And there are countries that are have obviously more beneficial treaties than others.

Speaker 02 27:12

Right.

Speaker 01 27:12

So I mean it is a consideration of well, how how can we transact between here in Germany is probably different than here in Italy.

Speaker 02 27:19

Right?

Speaker 01 27:19

Just based on our relationship with that country.

Speaker 02 27:23

That's right. We have about 66 treaties in effect right now. So not every country out there in the world has a treaty with the U.S. And in particular, if you're going into uh Central America or South America, we don't have very many treaties with them. Russia, that that's no longer there, although we do have treaties with uh some of the Kazakhstans and all the other parts of the of the USSR, former USSR. So you gotta look at when you're going overseas, you have to ask yourself, okay, I really think this would be great to go in this country, but this country over here has a treaty and it's just right next to the border, so I could, you know,

Speaker 01 27:56

I can I can avoid a lot of uncertainties.

Speaker 02 27:58

That's right. If I set up my if I set up shop here in this country that has a treaty, I can set up and just go into here uh that doesn't have a treaty, then that's more beneficial. Now, so that brings up uh another, you know, another set of issues. Treaty protection isn't automatic, right? You can't just say, oh, that treaty applies to me, you know, don't withhold or lower my tax rate. First, there's like four different things you need to consider. One, are you a resident? Okay. Uh do you have a do you not have a PE or do you have a PE? And then you know, if we're talking about dividend withholding tax rates, do you meet the special qualification for that 0% withholding rate as opposed to 30% or the 10% as opposed to 25%? And then the last thing, you know, we were just talking about the two different countries. But the last thing, though, is there's something called a limitation on benefits treaty article. And what that means is you're trying not to play games with the treaties. You're not, you're not, you're not trying to do shenanigans. So, in other words, you're not trying to set up, you know, you're in this country that doesn't have a foreign tax treaty, but you know, you don't want to get taxed on the U.S., whatever. And so you set up a company just in this country.

Speaker 01 28:57

Just a conduit right.

Speaker 02 28:57

That has a treaty.

Speaker 01 28:59

Yeah.

Speaker 02 28:59

And you know, with when it basically has nothing in it, right?

Speaker 01 29:02

Sure.

Speaker 02 29:02

And all it does is receiving payments at a 0% withholding rate, and then you're shipping it back to you. If the, you know, you have to look through that. And if the if the foreign country, you know, if the two countries realize, hey, look, the beneficial owner of this payment is not one of us country people, but it's a third party.

Speaker 01 29:19

There are probably legitimate ways to set that up, right? But it's just it's gotta be, it's gotta have some sort of economic substance.

Speaker 02 29:24

Yeah, it's gotta have yeah, and that that's that's kind of a concept that's been kind of outdated, but now it's coming back more and more in international tax. But that could be a subject of another podcast. But um, yeah, so there's all this treaty, you know, the treaty is not automatic. The thing, the key thing to take away from treaty, it's not automatic, you have to qualify for it. Um, and then there's not every country has treaty. Yeah. So so after that, you know, I know we're kind of getting, but after that, if you don't get the foreign tax treaty uh working for you, and the local country laws aren't working for you, your advisor is doing a great job and he's just not been able to get you there, then we have the U.S. foreign tax credit. Um, and what that means is like we said earlier, you know, the U.S. taxes you on your worldwide income, and so you could potentially pay that $46, you know, thousand dollars, then $100,000 you're own in France. Well, luckily the U.S. offers you a foreign tax credit. You don't have to take it, you can still deduct foreign taxes, but if you get if you allege take the foreign tax credit, you basically, you know, just you can credit your foreign taxes against your U.S. source income.

Speaker 01 30:24

Needless to say, lots of issues, lots of opportunities, lots of options, right? I mean, there they're the the landscape is hey, you need a local advisor, right? You need a U.S. advisor that knows what they're doing, you know, that can interpret the trees, can interpret, you know, your your the nature of your foreign earned income, right? I mean, uh, you know, are are there any other U.S. considerations, reporting requirements? I mean, anything like that that we also need to consider.

Speaker 02 30:50

Yeah. I mean, there's definitely, you know, with all with all the operations, there's always a form, right? No matter what you do, there's there's a related form that goes with it. If you have the CFC, like we know we said, uh, you have to file a form, and you know, when I first started those forms, it's called a form 5471, not to get too detailed but that form was like maybe 10 pages long when I first started. Now a fully completed one can be 50 to 60 pages long without without real statements attached to it.

Speaker 01 31:15

And if they don't file them.

Speaker 02 31:16

Right.

Speaker 01 31:17

Pretty big penalties.

Speaker 02 31:18

Yeah, similarly, you know, $10,000 here or there, you know, .

Speaker 01 31:22

Per per page, sometimes. Well, I mean per form.

Speaker 02 31:24

Yeah, per form, right.

Speaker 01 31:25

Per subform.

Speaker 02 31:26

Right. And you know, you know, give an example of what some of these penalties can be. There's something called an F-bar. And what that means is if you have, it's for it's basically if you have a foreign bank account over $10,000, you have to file these F-bar returns or these F-BAR information over reports that says, okay, I own these foreign accounts overseas. Uh, a lot of times you legitimately have to have, like I said, when we were talking about earlier, you legitimately have to have a foreign bank account so that you can conduct operations in your local country. But let's just say you're a mom and pop logging company in Washington, and you know, you're earning millions of dollars, and you're like, huh, I'm gonna put this in a Swiss bank account and avoid U.S. taxation on it, or you know, avoid uh, you know. Well, and then this is kind of a real world example.

Speaker 01 32:07

Right. 

Speaker 02 32:07

In the sense that, okay, this mom and pop logging operation, you know, had this couple million dollars statue in a Swiss bank account. IRS got wind of the fact that they weren't filing these F-bar returns, and they were penalized, you know, millions of dollars and tax penalties and interest. Sure. And jail time can also come with these things. So uh, you know, you look at you know the operations and you need to make sure that whatever you do, just think to yourself, there's a form here somewhere I'm missing.

Speaker 01 32:31

Yeah.

Speaker 02 32:31

Even if you give over $100,000 to a foreign corporation, yeah, that that's that's reportable as well.

Speaker 01 32:37

Over disclosure is not gonna hurt you.

Speaker 02 32:38

Yeah, over disclosure is not gonna hurt you. I mean, yes, right. So and then you know, then with the foreign tax credit, you know, you have to file a form there too. And you know, we we kind of briefly touched on that. But you know, those that foreign tax credit's a great, a great tool to help, you know, mitigate your taxes.

Speaker 01 32:53

Yeah.

Calculating Foreign Tax Credit

Speaker 02 32:53

Um, and it's not automatic. You can't just say, Oh, I'm gonna take a foreign tax credit on that, and then you're done. You literally have to go through it's very calculated, you know, it's a very mechanical and very complex calculation. Simple in in one sense, but for overall, it's basically you know, the maximum tax credit you can pretty much take is your foreign, your your U.S. income tax uh on your former source income. Yeah. So example, let's say you have a subsidiary that earns, let's say you set up a U.S. company that earns uh $100,000 in France again. I love France now.

Speaker 01 33:23

You love France.

Speaker 02 33:23

I love France. It's okay. It could be Japan, take your pit, Colombia, wherever, right? Um, so you earn $100,000 within that's the only that's the only income that's earned. Well, the tax rate on that $100,000 is 21%. You know, let's say let's just go with a full rate, and your U.S. tax burden is 21%. Well, if that foreign country also taxes you at 25%, you pay, you know, an additional 25%, you know, additional $250,000. Well, your tax rate, you know, tax rate could be 46%, but luckily the foreign tax credit will tell you that, okay, look, my U.S. tax liability is $21,000. That's my maximum foreign tax credit. If I pay more or less, if I pay less, then I pay an addition, that I pay the U.S. Treasury the difference. If I pay more, then I don't pay the U.S. Treasury anything. And I can take these foreign tax credits and I can carry them back or carry them forward.

Speaker 01 34:12

Yeah.

Speaker 02 34:12

So there is planning with that too. A lot of times you have expiring tax credits, and so you need to think about generating foreign source income. Uh again, I think that'd be a really good podcast uh topic. You know, something with talking about the G ILTI and the fitty and how that interacts with the foreign tax group.

Speaker 01 34:26

Hey, you've done my job for me. I was gonna ask you where where we should go next, you know, for the next uh podcast. So we'll keep that in mind.

Speaker 02 34:31

Right, right.

Speaker 01 34:32

But yeah, no, I think this is a good overview, right? I think it's hey, we've got a lot to consider abroad. That's right. We've got a lot to consider structurally from a tax perspective. You know, we've got obviously domestic considerations. And so, you know, uh your biggest piece of advice earlier on was like, hey, get if you're get a foreign advisor.

Speaker 02 34:47

Right.

The "Team" Approach: Business Strategy Over Tax Tactics

Speaker 01 34:47

That's what I mean, is there the last parting piece of advice that you can, you know, impart to the listeners, right? I mean, what what what is the overarching other than get an advisor? Is there something else that you want to kind of get out of?

Speaker 02 34:58

Yeah, I mean, I again, again, think about your reasons for going overseas and know that uh and and in all honesty, I really think the business aspects are are are what you need to really focus on and let your advisors minimize your taxes. Yeah, but you there are there's so many other uh aspects to going overseas than just taxes, and they're all you know regulatory people, site selection, all the kind of stuff you generally do in the U.S., but they're overseas, and that's where you need to focus a lot of your time in, but also work hand in hand with your advisors.

Speaker 01 35:29

Yeah, you need a team.

Speaker 02 35:30

That's right, you need a team. You can't just, you know, yeah. So that's I think to me that's probably the biggest takeaways.

Speaker 01 35:34

Go get a team.

Speaker 02 35:35

Go get a team. Right, that's right.

Speaker 01 35:37

All right, well, yeah, hey, that I think that was great. So thank you for joining us today. Like you said, we'll we'll be back for more in-depth things. Um but yeah, we're we're happy here to have William and his team uh dealing with our international issues. Um thank you for coming.

Speaker 02 35:50

Well, thanks for having me.

Speaker 01 35:51

And thank you for listening. Uh we hope you enjoyed this episode. Uh please do reach out to uh Mauldin & Jenkins and William's team for any international issues and obviously any other business issues that that we might be able to help with. Thank you.