Year-end international tax considerations
TAX BLOG |
As we move past the tax filing deadlines and towards year-end planning, taxpayers should be aware of several important international tax considerations. Here are some of the key issues you may wish to consider:
- Review cost sharing agreements. The Tax Court’s Altera decision continues to demand attention. Despite the IRS appeal of the ruling, taxpayers with stock-based compensation in their cost-sharing arrangements should consider filing protective amended returns for prior open years to preserve potential refund claims and assess the potentially significant financial statement implications of this decision.
- Planning for payments between foreign subsidiaries. An exception to the law that allows a foreign subsidiary to pay another foreign subsidiary without triggering income to U.S. shareholders had expired but was extended in 2016 through 2019. While the extension was welcomed, in the absence of a permanent exception, taxpayers should consider their planning alternatives in order to mitigate potential income inclusions arising from payments between foreign subsidiaries.
- Intercompany loan planning. Under current law, a loan, guarantee, or equity investment in a U.S. company by a related foreign subsidiary can result in an income inclusion to a U.S. shareholder of the foreign subsidiary. Many taxpayers have informal open accounts between a U.S. company and a foreign subsidiary and these balances may trigger an income inclusion under these rules. Taxpayers can minimize adverse impacts by reducing or eliminating U.S. investments or guarantees by foreign subsidiaries before the end of the year. The IRS is very active in this area and taxpayers under audit should expect formal IRS inquiries around intercompany balances.
- Exporters should consider a DISC. The United States provides incentives to boost exports of some domestic goods. Taxpayers may exclude tax commissions paid to a domestic international sales corporation (DISC) for supporting overseas sales. DISCs involve little cost, but a new legal entity must be established and all shareholders must elect DISC status before the tax year begins.
- BEPS and CbCR preparedness. The IRS has issued final regulations requiring annual country-by-country reporting (CbCR) by certain U.S. taxpayers. Some taxpayers may be subject to earlier CbCR filing deadlines outside the U.S. as some countries have already implemented regulations requiring CbCR for fiscal years commencing Jan. 1, 2016. Affected taxpayers should carefully assess the financial and administrative impact CbCR may have on their compliance function immediately.