As the world becomes interconnected on a deeper and deeper scale, tax firms small and large must become experts in cross-border tax issues to serve their clients in the best possible manner. Here are 9 things to consider with cross-border tax returns:
- Be aware of the differences in cross-border transactions. Inbound transactions deal with foreign taxpayers doing business or investing in the U.S. while outbound transactions deal with U.S. taxpayers doing business or investing in other countries.
- Congress enforces passive foreign investment company (PFIC) rules. This is to prevent domestic taxpayers from deferring their income in outbound transactions.
- If you are a foreign based taxpayer, the treatment of your U.S. source income from inbound transactions will depend on whether the income is connected with a U.S. business or trade. This will determine whether income is taxed on a net basis or a gross basis.
- Default rules for taxing cross-border transactions are provided by the Internal Revenue Code (IRC). It is important to note, however, that a treaty between the U.S. and country of business will take precedent over those established default rules.
- The type of entity involved in the taxation and the timing of elections can drastically affect cross-border income, so it would be a good idea to consult a tax specialist.
- Be aware of what is considered business, and what actions will be considered for tax implications. Even things such as having an employee serve in another country may change the taxation that occurs.
- Don’t file your cross-border taxes separately. One may assume that income in Canada should only be reported to the Canadian Revenue Service (CRA) and U.S. income be relayed to the United Stated Internal Revenue Service (IRS) – this is not so. Both entities are allowed to share information on request, due to the tax treaty between them.
- Use a cross-border or international tax specialist to ensure that all global income is reported on each individual nation’s tax return forms.
- Maintain proper residency status, because if this is not handled properly the return will assume a false U.S. tax residency for a more generous tax refund. This could also even be borderline on unintended tax evasion. As previously stated, all residents are taxed on global income, and a tax professional who is not accustom to cross-border tax situations will rarely ask about cross-border income. Just another reason to consult a tax specialist.
In short, be prepared to face a number of sneaky cross-border tax blunders. Learn the frequently asked questions, be proactive ahead of time and contact a tax consultant. If you don’t plan for cross-border taxes, you and your wallet could suffer.
“Cross-Border Taxation”. Leibowics, Barry J.D., LL.M (https://www.thetaxadviser.com/issues/2013/mar/leibowicz-mar2013.html)