A Guide to Filing Taxes for an International Business Corporation
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Multinational companies carry tremendous financial and economic clout. They influence social and fiscal policies worldwide. There are 60,000 multinational corporations worldwide, controlling more than 500,000 subsidiaries. The size of your international business corporation is irrelevant. All businesses must follow IRS rules for income tax on worldwide gains and income.
When operating on domestic and foreign soil, you must follow the taxation rules of all countries where you conduct business.
There are many areas where U.S. and foreign international business corporations face similar tax problems. This includes the classification of the business entity.
A partnership business in one jurisdiction may be a corporation in a different jurisdiction. This may cause different tax classifications. Investments, including pension plans, may qualify for a tax deferral in one area and be taxed in another.
If you are a U.S. taxpayer or a non-U.S. taxpayer investing or moving to the United States, you face similar tax issues. This guide provides the information you need when filing international business taxes.
File International Business Corporation Taxes
You must file U.S. tax returns and global corporate taxes if your organization conducts international business. The IRS allows companies to offset the extra tax burden.
International companies may file for a foreign tax credit. The credit allows U.S. businesses with a foreign tax obligation to defray their U.S. tax responsibility. This also applies to taxes on income from companies in a foreign location.
Multi-International Firm Rules
You must follow federal government rules when determining your foreign business tax. There are special requirements for multi-international firms earning income in foreign countries.
Income representing a regular return on physical assets is 10% per year on the depreciation value of assets. This amount is exempt from U.S. corporate income tax.
Global Intangible Low Income Tax (GILTI) is income above a 10% return. This income is taxed yearly at half the 21% U.S. corporate rate on domestic income, which is 10.5%. The business receives an 80% credit on foreign income taxes it pays.
The 80% credit eliminates GILTI taxes for U.S. corporations. The only exception is foreign country income tax which is less than 13.125%. The GILTI tax will increase to 62.5% of the corporate rate after 2025, which is 13.125%.
Income on passive assets, including bonds and other shiftable assets, is taxable at a 21% corporate rate under the IRS Code Subpart F. The business receives 100% credit of foreign income taxes on specific areas of income.
Corporations can pool credits within income categories. The company can use excess foreign GILTI credits in high-tax countries to offset U.S. taxes on GILTI in low-tax countries.
Companies cannot claim credits on the 10% return that is exempt from U.S. tax for offsetting U.S. taxes on GILTI or subpart F income.
Most companies in the G7 use a territorial system. This exempts most foreign-derived intangible income (FDII) from foreign income tax. Other countries do this only if the foreign country’s tax system is like that of the home country.
The domestic tax rate usually applies to foreign multinational corporations operating inside borders. This applies to the U.S. and most other countries.
There are often rules about income shifting into low-tax countries. This includes thin-capitalization rules.
The rules limit corporations attempting to deduct interest payments to low-tax countries. This is a way companies reduce domestic profits.
Organization for Economic Co-operation and Development (OECD)
At the OECD held in October 2021, there were 137 jurisdictions in agreement on an outline for new international tax rules. The rules specify what countries can tax out of multi-international corporation income.
The agreement establishes a minimum global tax of 15%. This increases the tax liability of companies in low-tax jurisdictions.
Large companies will pay more tax in counties where they have customers. They will pay lower taxes in countries with headquarters, employees, and operations.
The new rules establish an income inclusion rule. This determines when a company’s foreign income must be included in the parent company’s taxable income.
Multiple new rules take effect under this agreement, including a tax treaty framework. This allows companies to tax payments falling into a low tax rate. The regulations contain two “pillars.”
Pillar one changes where large corporations pay their taxes. Pillar two sets forth the global minimum tax, which increases tax revenue globally. The projection is for pillar one to become effective in mid-2023 and pillar two in 2024.
Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act (FATCA) is a set of regulations helping the U.S. combat tax evasion. The rules apply to businesses within the U.S. and American companies doing business around the globe.
FACTA is a compromise. It allows participating countries to collect and exchange financial data with the United States. The goal is to prevent the hiding of money in foreign locations.
The 8.7 million Americans living outside the U.S. must file U.S. tax returns. They must report their income and the places their money is kept. This disclosure is mandatory.
Under FACTA, the IRS’s Large Business & International Division focuses on two campaigns. Campaign 896 deals with offshore private banking and the underreporting or failure to report foreign assets on Form 8938. The penalty for failure to disclose information leaves your business subject to a 30% withholding rate on U.S. source payments.
The IRS reports more than 330,000 taxpayers with foreign accounts over $50,000 did not file form 8938 between 2016 to 2019. The minimum penalty per taxpayer is $10,000.
Campaign 975 deals with the FACTA filing accuracy. At this time, the IRS has only reviewed the 2016 tax year. The IRS plans to increase its reviews and audits of U.S. foreign account holders.
If your company has accounts you did not show on prior tax filings, you need to contact an international business tax specialist to learn the steps to minimize penalties.
Relief From Penalties
The IRS is granting pandemic-related relief from some 2019 and 2020 international information return penalties. The September 30, 2022, deadline for requesting relief is fast approaching.
“Penalty Relief for Certain Taxpayers Filing Returns for Taxable Years 2019 and 2020” explains the available relief. Penalty relief is available for 2019 tax year returns filed before August 1, 2020, and 2020 returns filed on or before August 1, 2021.
The IRS only provides a short period to obtain these waivers and does not give details on when the refunds will issue. This waiver is a change from the IRS’s history of aggressively pursuing foreign-owned U.S. corporations, foreign trusts, and foreign corporations.
The IRS may waive penalties if the taxpayer shows reasonable cause for failing to file a timely return or provide information.
You do not qualify if penalties are part of a closing agreement, offer in compromise, court order, or due to a fraudulent return.
Contact an international tax professional if you need help filing your request before the September 30th deadline.
International Business Corporation Tax Challenges
There are numerous challenges when filing taxes to ensure your international business corporation meets all tax obligations nationally and internationally. Staying current on tax law is time-consuming but essential to avoid penalties.
International Tax Consultants are knowledgeable about changes in regulations and tax rules. Get a jump on the tax season, and contact us today to schedule a consultation.