United States persons (defined as any US citizen, permanent resident alien, entity organized under US laws, or any person in the US) who continue to seek and expand into foreign markets to maintain a competitive edge in their business should carefully consider the tax impact of foreign investment. A few of the considerations to keep in mind for international tax purposes are as follows:
Foreign Entity Structure
US persons who have established foreign legal structures or operations should consider both local (foreign) and US tax implications. Our firm can connect you with a qualified foreign firm, through our MGI network, to oversee local (foreign) tax filings. Depending on the established legal structure, US persons must consider international forms such as Form 5471 and Form 926 (foreign corporations), Form 8865 (foreign partnerships), and Form 8858 (foreign disregarded entities and foreign branches).
There are default entity classification rules for foreign entities. However, you can change the classification under the check-the-box regulation by filing IRS Form 8832. The check-the-box regulations can be strategically used to minimize the US persons overall tax rate. Since there may also be US tax consequences with a profitable foreign entity, we can help with an analysis to determine the most tax efficient entity structure at the onset. The structure impacts income, expenses, and foreign tax credits.
Foreign Bank Accounts
- The IRS requires US persons with a financial interest in, or signature authority to report foreign bank accounts with a balance of $10,000 or more. US persons must file a Report of Foreign Bank and Financial Accounts (FBAR). It is common to open foreign accounts to support foreign operations and many US persons may be unaware of the reporting requirement.
Foreign Independent Contractors
- As a US entity expands, they may make payments to foreign independent contractors or consultants to assist in expansion. In general, when a US company pays a foreign independent contractor or consultant the US entity must withhold 30% of the payment. It is important to obtain Forms W-9 and W-8 to determine who the beneficial owner of the payment is. Companies often overlook the required withholdings and/or required tax forms, which can lead to penalties for failure to file.
Options for International Tax Compliance
The penalties related to missing international forms can be substantial. Luckily, the IRS has several programs available for taxpayers who have missed the international reporting requirements such as the Streamlined Filing Compliance Procedures | Internal Revenue Service (irs.gov) and Delinquent International Information Return Submission Procedures | Internal Revenue Service (irs.gov). These available IRS programs can help mitigate assessed penalties and bring you into compliance.
Wright Ford Young & Co. is headquartered in Irvine, CA and is the largest single office CPA firm in Orange County. WFY is a full service corporate accounting firm offering audit, tax, estate and trust, and business consulting services to closely held company and family business owners. More information about our Firm can be found at www.cpa-wfy.com.