Tax

1
Tax Accounting Issues in Going GlobalHow to
Take Your Company InternationalMassachusetts
Software Internet CouncilJanuary 23,
2003Douglas J. CroninPartnerInternational
Tax Services
2
Cornerstones
Tax
Accounting
Legal
Treasury
3
International Accounting Basics

• Transactions denominated in a foreign currency
  translated at the spot rate on the transaction
  date
• receivables and payables brought to current rate
  on date of financial statements
• foreign exchange gain or loss recognized in PL
• Financial statements of foreign subsidiaries
  translated at current rate
• translation gain or loss carried to shareholder
  equity

4
International Tax Basics

• The United States taxes resident corporations on
  the worldwide income of the legal entity
• foreign tax credit to eliminate double taxation
• dividend payments from foreign subsidiaries taxed
  when paid
• Income of foreign companies may be taxed in the
  host jurisdiction in a variety of ways
• Income tax treaties coordinate tax systems of the
  treaty partners with the goal of eliminating
  double taxation

5
What's all the fuss about taxes?
Extraterritorial Income Exclusion
Foreign Tax Credit
Double Taxation
Hybrid Entities
PFIC
VAT
Joint Ventures
Subpart F
CFC
Thin Capitalization
Hybrid Instrument
Transfer Pricing
Check the Box
Withholding Tax
Permanent Establishment
Tax Haven
6
Evolution of International Business
Export
License
Joint Venture
Foreign Sales Office
Wholly Owned Distribution Subsidiary
Wholly Owned Manufacturing Subsidiary
7
Export

• Generally attracts no foreign income tax
• Typically subject to US income tax
• Extraterritorial Income Exclusion (EIE)
• May be subject to import duties and/or value
  added tax (VAT)
• Sales denominated in local currency will result
  in foreign exchange gain or loss.

8
License

• Sale vs. license of intangible property
• Withholding tax
• remitted by licensee but assessed on licensor
• rates can be in excess of 30
• potential to claim foreign tax credit
• impact of income tax treaties

9
Joint Venture

• Legal form and domicile
• corporation vs. partnership
• local law requirements
• liability concerns
• Expected profit level and cash distributions
• Outbound transfers of intellectual property
• Subject to US tax even if no consideration
  received

10
Foreign Sales Office

• Choice of international entity
• branch vs. corporation
• local law requirements
• liability concerns
• Attitudes of local customers
• Disclosure of financial results (statutory
  filings)
• Compensation of sales office
• buy/sell or commission based
• transfer pricing

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Foreign Sales Office

• Taxation
• representative office and permanent establishment
• branch and corporation typically subject to
  similar taxation in host country
• use of start up losses
• deferral of taxation of profits
• Staffing
• skills of local workforce
• employees vs. contractors
• cost associated with expatriates