Business owners are faced with an enormous amount of rules and regulations. We may understand and even appreciate the reasons behind the laws, but that does not reduce the burden or lessen our stress. Recently there has been much discussion about offshore tax avoidance schemes and the efforts to curtail the perceived abuse through the implementation of more restrictive tax laws and agreements with foreign governments. Perhaps we think this has nothing to do with our businesses.
But what do we really need to know as small business owners operating in a global economy?
It does not matter whether your business is large or small; it is likely that in the near future you will be subject to a special US rule or regulation because of an international transaction or an interaction with a foreign individual.
Perhaps an investor or an owner of your business is a nonresident alien or your company is owned by a foreign parent company. What are the reporting requirements for transactions between US companies and related foreign entities or foreign investors? What if you are only purchasing goods or services from a nonrelated company located overseas?
Business owners are often surprised that US tax withholding is required in many situations where payments are being made to non-US individuals or companies. The same payment made to a US resident might not trigger any withholding. If tax is not withheld when it is required to be withheld, the business making the payment becomes liable for the amount not withheld, plus applicable penalties and interest. With a typical withholding rate of 30% or higher, this can be quite costly to a business owner if it is no longer possible to seek reimbursement from the payee.
In addition, there are significant penalties for failure to file certain information returns. Informational return reporting requirements range from disclosure of foreign bank accounts to reporting transactions with affiliated foreign companies. There may be no tax involved with the particular return, but the penalties for non-compliance are high.
Although certain withholding and reporting requirements have existed for many years, the recently enacted Foreign Account Tax Compliance Act (FATCA) laws have increased the volume and complexity of the rules. This has been combined with increased enforcement efforts by the US government.
Our staff can help you identify and address any US tax withholding and filing requirements. If you are operating abroad, we can work with your foreign accountant to minimize your combined tax liability as permitted by law. If you need a foreign advisor, we can refer you to a reputable tax advisor in the appropriate foreign country.
Over the next few weeks we will address some of the withholding requirements for payments to nonresident aliens and foreign entities. Next week we will focus specifically on withholding issues related to business transactions with foreign individuals and entities.