Accounting and Tax Considerations for Businesses Abroad
Are you running a business in a foreign country?
How about considering expanding your US-based business overseas? Whether you are already running a business in a foreign country or testing the waters with expansion, it’s important that you understand the accounting and taxation of businesses abroad.
Knowing the regulations your business is subject to can help you reduce your tax bill, comply with all regulatory agencies, and give your business a strong foundation for growth.
Understanding Accounting for a Business Abroad
Accounting for businesses abroad involves maintaining detailed records of the money your business receives and spends. Despite living abroad, most US business owners are subject to the same taxation requirements as domestic US citizens. The international component of businesses abroad can make accounting more complicated.
Since your business is abroad, you have some flexibility in how you maintain accounting records. The two guiding accounting standards are the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).
These two regulations have overlapping components in the presentation of the financial statements.
Regardless of which accounting regulations you follow, you still need to keep clean records of all income and expense items. This can be done by enlisting the help of an expert or investing in accounting software.
Understanding Taxation for a Business Abroad
The taxation for abroad businesses is complex, requiring a translation of all income and expense items from the foreign currency into the functional currency.
There are two translation methods: the current rate method and the temporal method.
The current rate method translates most of the financial statement items based on the current exchange rate.
The temporal method, which is also known as the historical method, utilizes the functional currency of the parent company. This is not applicable if your business isn’t considered a subsidiary.
Understanding the different types of taxes your abroad business is subject to can help you avoid overpaying.
US citizens living abroad are required to report their gross worldwide income on their US tax return and pay corresponding taxes.
In addition, you may be required to report and pay income taxes in the country your business is operating in. This can create a double taxation scenario if you aren’t leveraging tax treaties and credits.
Also knowing the country’s regulations, such as visa processes, economic and political climate, and incorporation will need to be taken under consideration.
A few of the common business taxes you might need to pay include Excise Tax, Corporate Income Tax, Goods and Service Tax, Value-Added Tax, Consumption Tax, GILT Tax, and Payroll Tax.
The taxes your business must pay depends on your operations, locations, and financials, making it important to contact an international accounting expert.
A clear understanding of the taxes your abroad business must pay ensures you aren’t overpaying each year.
Considerations for Accounting and Taxation for Businesses Abroad
Most countries have international tax treaties and agreements with the US. These are in place to avoid excess taxation of your business income.
It’s important that you understand which treaties and agreements apply to your business. The IRS has a great resource that lists the different tax treaties that the US has with foreign countries.
However, tax laws are constantly changing. This makes it beneficial to work with a professional that can help you navigate which international tax treaties and agreements you can utilize.
Hiring a professional can not only eliminate the risks of misreporting taxes but can also free up time in your busy schedule. As a business owner, you most likely don’t want to spend hours reading through tax treaties from two decades ago.
Working with a professional also ensures compliance with both local and international laws. This is critical, especially if you are using a business visa to reside in a foreign country. Trouble with any regulatory agencies jeopardizes your ability to live abroad and puts your business at risk.
DIY vs. Working with a Professional
So, should you try and handle reporting your abroad taxes on your own or enlist the help of an expert?
Countless abroad businesses face this dilemma. Going through the pros and cons of each option can help you determine which route is best for your business.
DIY Business Taxes Pros and Cons
One advantage of doing your own business taxes is saving on professional fees. The complexity of international taxation often drives up the prices of an accountant. In addition, you can potentially file your returns quicker, giving you peace of mind that everything is taken care of well before the deadline. This is because accountants often juggle dozens of clients on a first-come-first-serve basis. If your information came in later, you could be waiting.
There are some disadvantages to doing your own taxes. The first disadvantage is filing potentially incorrect information. There are dozens of different deductions and credits your business may be able to take. Missing just one can result in overpaying. Moreover, it can be difficult to sort out any letters from regulatory agencies without working with a professional.
Working with a Professional Pros and Cons
Like doing your own business taxes, there are advantages and disadvantages of working with a professional.
The clear advantage is having professional guidance throughout the entire process. You don’t have to worry about reading every treaty or making sure you attach all necessary documents. Instead, you can sit back and relax, leaving the filings to a professional.
The disadvantage of working with a professional is the cost. The average cost for an international return can vary based on the filing requirements. However, many abroad businesses generally find that the pros significantly outweigh the cons of working with a professional.
Making the Decision
When are you ready to hire a professional? There are a few key indicators that can hint that you could benefit from hiring a professional including:
• You are confused about which taxes you are subject to.
• You have received a letter from a regulatory agency in the past.
• You want to maximize your tax savings.
• You don’t have time to file your own taxes.
If you decide that hiring a professional is the best route for your abroad business, it’s important that you find a trusted tax professional with international tax experience and cross-border issues.
Before you hire a professional, be sure they have the necessary experience, availability, and knowledge to handle your abroad business tax filings. It’s best to ask if they have any certifications or educational background in inbound and/or expound taxation.
You can also check the IRS.gov website for those who are registered and credentialed with the Internal Revenue Service.
Conclusion
The accounting and taxation of your abroad business can be more complex compared to domestic businesses. This is why it’s important to work with an expert that can uncover favorable tax treaties and agreements, ensuring you are paying the lowest tax possible.
Meet Our Guest Blogger: MaCara Santiago
MaCara Santiago
I’m MaCara I’m the CEO & Founder of Legacy Accounting Partners and Around the World Ledger. I’ve been in the tax industry since 2015. My educational background is in accounting with a concentration in international taxation.
In 2020 while traveling extensively I started Around the World Ledger, a boutique accounting firm for women-owned brands and inspiring global entrepreneurs, who want more freedom and less stress when it comes to their finances. We take a holistic approach when it comes to finances with a heavy emphasis on financial literacy.
We particularly specialize in international taxation of US Citizens living abroad, and foreign nationals living or doing business in the US, including those who live in US Territories.
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