Spring 2015 issue of Horizons

CONSTRUCTION

wages in the U.S. Taxes are withheld on certain payments to ensure that the taxing jurisdiction receives their share of the payment or income. If withholding taxes will affect you, determine if there is a tax treaty between the country in which the income arises and the country in which the recipient of the income resides. Additionally, identify which article of the treaty the income falls into, as each income source has its own set of tax rules. Tax treaties often reduce or eliminate certain withholding taxes – however, up front steps such as completing certain documentation often must be taken in order to receive the benefit of reduced withholding. Careful tax planning can help reduce the impact withholding taxes have on your cash flow. Value-Added Tax A value-added tax (VAT) is an indirect tax charged on goods and services that is turned over to the government of the foreign jurisdiction at every stage of production. More than 140 countries have implemented a VAT and it is very likely that you will encounter it as you expand globally. In fact, of the 34 member countries of the Organization for Economic Co-operation and Development (OECD), only the U.S. does not have a VAT. It is important to know that you may need to register your company as a VAT trader in a foreign jurisdiction so that you receive a VAT number and are able to offset any output VAT (tax paid when you buy goods) with input VAT (tax collected when you sell goods). Keep in mind that each country has a different VAT number and system, so you will need to register with each country in which you’ll be operating. Transfer Pricing Another component of international business is transfer pricing. It is important to understand U.S. and local transfer pricing rules when you are involved in cross border transactions with related entities, as well as when there are transactions between two entities in the same country.

Tax treaties provide guidance around which business activities create a permanent establishment and which may not. For example, Article V of the U.S.–Canada Income Tax Treaty allows that unless other permanent establishment clauses are met, a permanent establishment is not created in either country for a “building site or construction or installation project” unless the project lasts more than 12 months. Therefore, pay close attention to the specific activities listed in the treaty when planning how your international business will be carried out. You should also contemplate setting up an entity in the country in which you’ll be working. For example, by forming an entity locally, your U.S. entity can potentially avoid creating a permanent establishment. Withholding Taxes The possibility of double taxation arises when foreign withholding tax is applied to certain payments made by a customer located outside the U.S. to a U.S. recipient. Withholding taxes in the international concept are similar to W-2

A Case Study | A RubinBrown subcontractor client recently won a job to build out display cabinetry and high-end millwork for a large international retailer expanding their footprint in Canada by opening several new stores. While this particular client had done several smaller projects in Canada before, the withholding taxes that were required on their previous contracts severely hampered their cash flow. With the new contracts in hand, and before construction began, we worked with our client to develop a tax-planning strategy that provided a cash-flow stream that they were able to repatriate to the U.S. with little to no adverse tax consequences. In this particular instance, by forming and transferring substance (e.g. employees) to a new wholly-owned Canadian subsidiary, our client was able to avoid a permanent establishment for the U.S. company, reduce and, in some instances, eliminate withholding taxes and utilize transfer pricing to minimize their Canadian tax bill. A side benefit was that the U.S. employees who were working in Canada were able to simplify their personal tax situation.

page 34 | horizons Spring 2015