In this virtual world, the internet and latest technology has opened up countless opportunities for business owners and entrepreneurs to take their business operations to the international market. Today’s business world is global and having a specific physical location is not a requirement anymore. So, what if someone wants to live and work abroad with US nationality to carry out and manage several business operations? It would be a great idea to expand a business to the international market but before packing a bag to travel for another country for business purpose, everyone should aware of his/her tax responsibilities as a US expat entrepreneur or self-employed.
In this article, we have complied the top tips for US residents looking to kick start business abroad so they can take the tax liability to a minimum.
Make Sure Your Business Is Tax-compliant
Before getting started with a new business overseas, make sure it is tax compliant. Because of a better transparency on global financial transactions, the FATCA and IRS are better able to enforce US. taxation of non-U.S. transactions meticulously. A US expat living and working overseas should also submit foreign bank account report if the total amount of their combined balances is over $10,000. If you are not doing the same, then chances of getting penalized from the IRS would be there because they know your account balances and transactions conducted too.
Know the CFC and CFP Reporting Requirements
Businesses and corporations controlled by the US citizens outside the America are known as Controlled Foreign Corporation (CFC) for the taxation purposes when there is need to file us expat tax return by a US resident living and working abroad. According to the taxation rules of America, CFCs are responsible to report their revenues by using Form 5471 and Controlled Foreign Partnerships (CFPs) should report their incomes on Form 8865. Foreign sources earnings are being taxed by the IRS just as an individual U.S. shareholder is taxed. Similarly, incomes earned by the CFPs are to be taxed by the IRS as a US minority shareholder is taxed. Every US resident business owner running a business overseas should create these reports as per above mentioned requirements to help the IRS determine exact taxable income of the US expat.
Aware of Other Tax Reporting Requirements
When a US resident even as a partner or employee signs authority fir a corporate financial account, the corporation needs to file a FBAR to reveal that bank account to the Treasury Department of America. In case of not filing a FBAR, it can end up with penalties even if there is no tax obligation. That is the reason, one should be aware of all the tax reporting requirements to prevent such erroneous incidents.
Local Taxation and Its Interactions with US. Taxation
Depending on the territory, the tax benefits of a US based retirement plan could be condensed or removed by local taxing authorities. Moreover, joint tax agreements can regulate the tax benefits of such retirement plans. Joint tax treaties can also have an effect if US expat must pay the United States Self Employment Tax of 15.3% that usually cover costs of social security and medical. The SCT (Social Security Totalization) agreement signed with different countries may exempt the US tax from this kind of tax if they are already paying the similar tax in country, they are living in. All these taxes paid in another country will allow US taxable entrepreneurs to sponsored retirement benefits by the government of country where the business is running its operations.
Tax withholding on foreign vendors
When carrying out business operations with overseas vendors, a US expat business owner may be liable to withhold tax. For example, at the time of making payments to a foreign vendor for products or services, a US expat should request the vendor to fill out Form W8 to reveal the amount paid. As the form is not filed with internal revenue services while filing the income tax return but, must be there in the file in case they ask you to provide one. In case the form is not available, the US expat who is paying the amount is required by the IRS to assume that the service provider or vendor is a US resident, and deduct backup withholding with a percentage of 28.
IMPORTANT: The contents of this post do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person.