Don’t Get Caught in an Overseas Tax Trap

Smaller businesses keen on selling into the international markets should take a closer look at their own subsidiaries and the value-added tax in the countries in which they operate, a consultant says.

When the permanent establishment is a branch of the legal entity booking the sale, the potential tax liability can be “a huge percentage levied against a large number,” notes Harding. More troubling, if local authorities determine that a so-called permanent establishment neglected to pay its proper share of taxes, it’s likely that the company would have to pay hefty fines and interest, as well as the unanticipated back taxes.

Indeed, in many cases it may be worth the extra expense and administrative headaches to set up a legally separate foreign subsidiary if the company sales volume in a particular country supports such a move, says Harding. But U.S. parent companies shouldn’t let the “tail wag the dog” and permit tax management to trump operational and business goals, he warns.

Harding also asserts that too many U.S. companies leave money on the table when it comes to the value-added tax, which in some countries is called a goods-and-services tax. A VAT is an indirect tax imposed by most jurisdictions outside of the United States that is levied at every transaction point in the supply chain that adds value, rather than just on the retail sale. The VAT, which can range from 15% to 30% of the transaction, is eventually paid by the final consumer. However, it is the responsibility of manufacturers, distributors, and sellers to collect VAT reimbursements from government agencies.

Unfortunately, many U.S. companies that are eligible to reclaim VATs have their reimbursement claims rejected because they either miss the filing deadlines or submit forms that are not properly filled out. What’s more, while some U.S. companies apply for VAT reimbursements linked to international companies, they miss the opportunity to collect reimbursements for such things as hotel stays that are related to business trips.

Regarding VAT and imports, Harding says: “Don’t be the importer of record for sales made overseas unless it is absolutely necessary.” It’s not easy for a U.S.-based company to reduce import duties or claim reimbursements. Also, convincing a customer to be the importer of record may take some deal-making finesse. But it’s likely worth the trouble, the consultant adds.

Witness the sale of a construction crane by an American company to a Brazilian outfit. If the Brazilian company is willing to be the importer of record, the American company pays no import duties or fees to get the crane into Brazil. There really is no monetary disadvantage to the Brazilian company, says Harding, since any VAT is reimbursed. Still, many sales executives want to close the deal and don’t want to complicate matters by suggesting that their customer take on the administrative job of being the importer of record. Nevertheless, if the foreign company is fully VAT-registered with its government and compiles with all filing rules, it’s generally easier for a local company to collect the reimbursement.

 

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