International tax compliance is important because investors need to understand the numerous international tax rules and requirements, when they engage in international business activities. The compliance penalties, overseas assets reporting, white collar crime, financial secrecy, and the development of an audit trail for offshore activities also requires a person to comprehend the importance of international tax compliance.
To develop an appropriate global tax compliance strategy, local regulations must be checked and well structured. In addition, there should be appropriate tools and resources for international tax risks management.
Tax treaties
Tax treaties are a great tool for international tax compliance, as they help to reduce double taxation, assist in international trade and investment, reduce avoidance and/or evasion, and stop tax evasion altogether… Unfortunately, even though their rules are generally great, they do become rather complex. So, if you would like to know more about how they work, consult a professional.
If you need help in complying with the provisions of a tax treaty, an international tax consultant can be useful. You must file all the forms that are required of you on time and subject to penalties; for example, just because you are able to claim the benefits of a tax treaty after it is in force, it does not mean that the treaty will apply to income you have already earned.
Tax treaties eliminate double taxation by specifying how the treaty partners will tax each other’s residents; treaties limit taxing rights over specified income earned by citizens and residents of the treaty partners in each other’s countries, and also include anti-abuse provisions against treaty shopping and tax evasion. It is the IRS that negotiates and reviews international tax treaties.
Foreign tax credits
Since multinational companies hire their employees from abroad, they have many international tax obligations. If they intend to remain compliant with all of foreign laws and regulations, they should definitely turn to an experienced tax professional for advice to avoid any costly mistakes.
Perhaps the most important international tax compliance task is whether foreign taxes paid are creditable. Creditable foreign taxes reduce a taxpayer’s US tax dollar-for-dollar, with any excess credit carried forward for up to 10 years.
However, not all foreign taxes are eligible as credits because only a levy that doesn’t replace US income, war profits or excess profit taxes, and that has a similar purpose as US income tax (income from wages, dividends, interest or royalties, for example) qualifies. To make the claim, attach evidence in the form of Form 1116.
Transfer pricing
Transfer pricing is a means adopted by multinationals to artificially maintain earnings tax-free, or at least at the lowest level possible. By fixing prices that accrue to one of its subsidiaries in a high-taxed country and charging them to another subsidiary in a low-taxed country, transfer pricing allows the MNC to abate or avert taxes. Since it is seen as a means of profit shifting and tax evasion, transfer pricing is widely restricted across jurisdictions. Therefore, a tax authority can override a company’s declared transfer price, thereby imposing taxes, penalties and interest.
That risk can be mitigated by following a complete transfer pricing compliance roadmap and making sure all controlled transactions are adequately documented (ie, detailing the facts and circumstances of the controlled transaction and the method used to determine arm’s length prices as well as a description of the company’s operations).
The IRS also requires a transfer pricing study to determine the arm’s-length pricing for sales of goods, services, intellectual property, and financing. Companies spend a lot of time and effort doing this so that they are in compliance with international taxes, thereby reducing the likelihood of tax authority disputes and, potentially, unwarranted audits.
Automating tax calculations
With tax compliance software automation, finance leaders can streamline their international tax compliance work processes. Regulatory changes can also be easily captured, requiring minimal changes to the control framework, saving time and cost that can be reinvested in organisational tasks and key business goals, or used to mitigate risks such as non-compliance and penalties.
From automated calculation of sales and VAT withholdings as well as exemption certificates to tracking transfer pricing and transfer pricing, the best international tax software solutions can automate compliance ways to ease the burden and make conducting multi-jurisdictional business easier than ever. Along with being able to fulfill e-filing requirements, goals and global regulations, these solutions for tax professionals enable performance dashboards for finance leaders tracking of timeliness of reporting, completeness of reports, and workloads.
Select a solution that can grow with you, one that enables cloud-based scaleability with data migration, configuration and training flexibility, and AI integration for real-time accuracy.