As 2013 draws to a close, CFOs, tax directors and controllers should take a last look at their global structure and international operations. The following are five key questions they should be asking before year-end to surface potential tax risks and opportunities.
Do I know what my people are doing outside United States? The pace of developing a global presence these days can make it difficult to keep tabs on your people. If they have and exercise the authority to negotiate or conclude contracts or are engaged in a profit-making activity in a foreign location, you may be creating a taxable presence or permanent establishment in that jurisdiction. Developing a plan for your non-U.S. people can help limit non-U.S. corporate taxes and lessen the administrative burden of operating internationally. The year’s end is an opportune time to review and evaluate the character of those activities to determine if a tax presence has been, or likely will be, created in such a location. If so, consider the nature of the presence you want – for instance, a representative office, a branch of the U.S. company, or an incorporated subsidiary. In any event, filing obligations can be identified by a year-end review, which can set the stage for planning the creation of a tax presence in the following year.
An emerging issue for technology companies: the increasing use of servers located in the United States and many foreign jurisdictions by multinational taxpayers to engage in business activities with their customers – that is, cloud computing. In many cases these servers have taken over activities performed by employees on the ground a few years ago. Are permanent establishments being created by these activities? There is limited guidance on the topic in most jurisdictions, but the issue is getting increasing scrutiny by tax authorities. Enterprises engaging in these activities are well advised to seek counsel in the jurisdictions involved, take any appropriate steps to mitigate the risk and stay apprised of developments.
Am I borrowing from our foreign subsidiaries? As your global structure generates cash outside the United States, it’s tempting to want to access that cash back here. But borrowing from your controlled foreign subsidiaries (CFCs) can be treated as a taxable dividend. Certain investments in U.S. property by a taxpayer’s CFC can be considered a repatriation or dividend to the U.S. shareholder from the CFC.
The last day of the year is generally one of the quarterly test dates for determining the existence of such investments. You should evaluate the situation before that date so you can take steps to eliminate the investment before the testing date if you want to avoid or reduce the repatriation and associated tax costs.