International Tax Compliance (Setup and Ongoing)
International tax compliance is an increasingly difficult burden for global companies. Tax rules and regulations, reporting requirements, and tax return deadlines are demanding, vary between countries, and change frequently.
It can difficult for business to coordinate with local authorities, especially when they don’t have in-country expertise or dedicated staff. As a result, international tax compliance risk increases. Fortunately, there are solutions.
Here are some of the international tax compliance challenges your business may face and how you can overcome them.
International Tax Compliance Standards
Businesses and individuals operating internationally must adhere to very staunch rules and regulations. They’re needed as they create visibility, prevent tax fraud, and help mitigate issues with overseas transactions and financial earnings, but they’re far from easy to understand.
Unfortunately, there isn’t one universal tax compliance standard. The two most prevalent are the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS).
However, many countries use their own methods and then transfer information to one of these two systems. As an example, Canada uses Enhanced Financial Account Information Reporting and then transfers data to the system used by the host country.
Consequently, it is imperative global companies rely on experts with a robust understanding of international tax compliance standards to support their activity.
How FATCA & CRS Differ
Both standards are similar in their overarching goal of cross-border compliance. The principle difference is the U.S. uses FATCA, while other nations use CRS.
According to the IRS, the purpose of the Fair Accounting Tax Compliance Act is to “ensure visibility and transparency for the Internal Revenue Service, especially as it pertains to U.S. citizens’ foreign investments and income resulting from non-U.S. organizations”. In some cases, there is also a tax withholdings component on foreign investments and income.
FATCA requires U.S. taxpayers living in the country who hold foreign financial assets with an aggregate value of more than $50,000 to comply. Those living abroad must comply if they hold more than $200,000 in assets.
Assets include foreign financial accounts and foreign non-account assets held for investment such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons, and interests in foreign entities. Of course, there are also exceptions.
The Common Reporting Standard is a global initiative which also supports visibility and transparency for foreign-held accounts. However, regions that adhere to this standard also automatically exchange information with other tax authorities.
Currently, 109 countries have agreed to become signatories of the CRS. Nonetheless, the progress of each region regarding the adoption of associated legislation and reporting requirements may vary.
According to OECD, as of February 2020 over 4000 bilateral exchange relationships were activated within jurisdictions committed to the CRS. This is an ongoing process with more relationships anticipated.
Why the U.S. Resists CRS
Essentially, U.S. international tax compliance experts suggest FATCA achieves the same purpose as CRS and the standard was implemented earlier. Additionally, many express concerns over privacy and confidentiality due to the mandatory exchange of financial affairs.
Regardless, U.S. companies must adhere to CRS standards if they are required in the jurisdiction.
Both Relatively New Standards
Most of FACTA went into effect in 2013, with a few additional requirements taking effect in 2014.
CRS was adopted by some regions in 2016 and by early 2017 more than 100 countries and jurisdictions committed to the CRS standard.
However, not all tax preparation companies understand the intricacies of these new standards. As a result, businesses need to rely on an international tax compliance expert who not only understands the differences between the standards but also which to use in a particular region.
Non-compliance can hinder or stop operations in a foreign nation. Companies may also face serious penalties if they do report financial assets or if they report them inaccurately.
The OECD recommends each country imposes “significant penalties on account holders that fail to provide a self-certification, or on reporting financial institutions that do not take appropriate measures to obtain a self-certification upon account opening.” These penalties will vary by country, but they’ll likely be similar to FATCA.
Non-Compliance under FATCA carries a “$10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets.”
Clearly, international tax compliance is very complex and non-compliance is often costly. No company can afford financial and reputational non-compliance repercussions.
Cutting-Edge Technology Vital
International tax compliance experts rely on first-rate technological solutions to ensure compliance as it is virtually impossible to keep pace with change and financial standards manually.
Monitoring local laws, compiling data from multiple sources, producing reports, and submitting them to the appropriate authorities in a timely manner requires the best possible software and hardware. Few companies can afford the time and personnel it takes to do the job well. Plus, complexity increases as a company expands into each new foreign region.
However, not all tax preparation companies have the resources needed to manage international tax compliance properly. It is important to partner with an international expansion expert that specializes in tax compliance and offers other related services.
Every region has specific international tax compliance requirements which can be very difficult to decipher. Luckily, relying on an in-country expert can simplify the process.
They operate in the region and deal with laws and regulations daily. They also monitor regulatory changes to ensure compliance. Fortunately, Blueback Global is connected with the expertise your business needs.
Multi-Faceted Approach Required
International tax compliance works hand in hand with other services such as accounting. Typically, a suite of integrated tax technologies reduces costs and improves quality. It also provides valuable data that is very useful in decision-making. Companies must also determine the best possible tax structure to avoid double taxation risk and to qualify for incentive programs.
Big businesses often have extensive tax resources that small and medium-sized businesses can’t afford to access. Fortunately, Blueback Global offers expert advice and efficient, cost-effective tax compliance services, including co-sourcing and outsourcing options.
We’ll start with a thorough examination of your tax jurisdictions and needs. Let us help you establish an international tax compliance system that ensures global compliance, proper reporting, and timely tax returns.
Our international tax professionals work seamlessly across borders so you avoid significant penalties and maintain a favored tax position. Contact us for a free consultation.