Businesses that are based in the US but also conduct operations in other countries through various subsidiaries are known as US multinational organizations. All international businesses, whether they are based in a foreign country and operate in the US, or based in the US and operate abroad, are subject to unique challenges when it comes to corporate income taxes, but US multinationals are faced with some particularly complex challenges.
Four important things that every US multinational should know about their taxes are discussed below. Please keep in mind that every corporation’s tax situation is unique, and you should always consult with a skilled tax attorney regarding your specific circumstances.
Worldwide income is taxable
Unlike many foreign countries, which utilize a “territorial” system of taxation that only taxes corporate income sourced from within the country, the United States taxes the worldwide income of US multinationals. Your company will be required to pay taxes on both the income it generates within the United States, as well as foreign-sourced income from its international activities. Thus, in many countries, the income generated by a company’s foreign activities will be subject to a type of double taxation, first being taxed in the country of origin, and then taxed in the United States.
Foreign tax credits
Fortunately, there is a way to offset the double taxation you will face if your foreign-sourced income is taxed abroad. Generally speaking, if income the company generates abroad is subject to taxation in both the country of origin and the United States the company will be eligible for a US Foreign Tax Credit. Please note though that the Foreign Tax Credit rules are incredibly complex and there are many issues that must be considered when trying to determine whether your foreign-sourced income qualifies for the credit, or if other courses of action may be more beneficial. In some cases, it may be more beneficial to treat the foreign income tax as an itemized deduction. You should always have a qualified tax attorney advise you on your specific circumstances.
Income repatriation
As previously mentioned, the worldwide income of any US multinational company is taxable in the United States—not just domestic income. However, foreign-sourced income from your international subsidiaries is usually only taxable upon repatriation to the United States. As a result, it may intuitively seem advantageous to defer the repatriation of the income and allow it to pool overseas. While this is a good idea in principle, the IRS has anti-deferral mechanisms in place, namely, Subpart F of the Internal Revenue Code which requires that the pro rata share of most forms of passive income generated abroad by companies with 50% or greater US ownership (known as a “Controlled Foreign Corporation,” or “CFC”) be recognized at the time the income is earned. Thus, the US multinational will be required to pay taxes on that income without having actually transferred the income to the US.
Outbound asset transfers
While transferring assets between subsidiaries within the United States can usually be completed tax-free, every US multinational business should keep in mind that any assets they choose to transfer from the parent company in the US to an overseas subsidiary will likely be taxed on its way out. There are, however, some exceptions to this generality, so you should always carefully consider your options.
If you are a US-based business operating abroad, there are numerous unique nuances and challenges which you should be aware of and understand when it comes to your taxes. International business tax issues are incredibly challenging and complex, but I can help guide your company and ensure you are always compliant with any and all relevant requirements and regulations. Give me a call today to learn more.
Written by E. Morgan Maxwell
Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.
