Academic journal article Journal of Accountancy

Tax Aspects of Global Expansion

Academic journal article Journal of Accountancy

Tax Aspects of Global Expansion

Article excerpt

The form of the business should be a major factor.

Companies wishing to do business worldwide must analyze the many tax issues involved in going global. A key one--which has to be decided first--is the form of the organization that will conduct the business. General economic factors, such as risk management or market penetration, often are the primary criteria a company's decision makers factor into their analysis. However, because different organizational structures involve different tax consequences, a company should consider tax effects as part of the analysis. Central to this analysis is the foreign tax credit (FTC), which comes into play regardless of the form chosen.

In general, the IRC taxes domestic corporations on their worldwide income, regardless of where they earn it. So that income is not taxed twice, a company is allowed to claim an FTC for income taxes paid or accrued to foreign countries (up to the amount of the U.S. tax imposed on the foreign income). In effect, companies are allowed to credit foreign tax against the U.S. tax on the foreign income.

FORM OF OPERATIONS

Several possible organizational forms may be used for foreign businesses, depending on the type of business involved.

Exporting. An already existing domestic business can supply a foreign market through direct exports. Export sales generally do not result in foreign tax. If a company has an FTC available, income from export sales may be effectively taxed at only half of the normal U.S. rate. At the same time, U.S. companies without excess FTCs may be able to set up foreign sales corporations (also known as FSCs) to reduce the taxes on export sales.

Licensing arrangements. When dealing with technology, companies may have many business reasons for licensing the information in foreign countries rather than providing the technical services directly. Royalty income from licensing arrangements with distributors and producers in those countries is subject to U. …

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