When it comes to global commerce for U.S. companies, taxes come in two basic forms — those paid to the IRS and those paid to foreign countries in which you conduct business.

 

There will also probably be some mixture of fees in the form of tariffs, duties, or other types of taxes levied by the importing entity. Whether you pay these fees or require your overseas customers to pay them, you will have to account for them if you are involved in the transaction.

 

It’s highly recommended that you consult the services of a qualified accountant familiar with international tax laws. Below, please find a few guidelines and resources to assist you.

 

U.S. Taxation of Foreign Income

 

The non-partisan Tax Foundation in Washington D.C. explains that the United States requires U.S. businesses to pay a 35 percent federal corporate tax rate on their income — no matter where it is earned — in the U.S. or overseas.

 

In addition, businesses that earn profits in foreign countries are subject to the tax laws of those countries. This means that if your company earns a profit in another country, you might have to pay taxes to that country. In order to take advantage of the credit for foreign corporate taxes paid, your company must report those payments on IRS Form 1118.

 

For example, if you earn foreign income subject to taxation both in the U.S. and abroad, here is an example of how it works: Let’s say you earn $100 in profit in England. You would pay $23 to Great Britain based on that country’s corporate tax rate of 23 percent.

 

When you bring that money back to the U.S., you would pay an additional $12 to the IRS. This represents the 12 percent difference between England’s corporate tax rate of 23 percent and the 35 percent corporate tax rate of the U.S.

 

Delaying Payment to the IRS

 

Your company can delay (but not avoid) paying the additional taxes to the U.S. by not repatriating (returning) profits to the U.S. This requires you to reinvest your foreign profits in the ongoing activities of your foreign subsidiaries.

 

If you eventually bring those profits back to the U.S., taxes will be due as illustrated above.

 

Foreign Taxation

 

Product sales in foreign countries are taxed by those countries based on tax treaties between the U.S. and foreign governments.

 

To learn more about whether your overseas profits would be taxed by foreign countries, you can check the Tax Treaties section of the IRS website.

 

In general, whether you are subject to foreign taxation depends on how much business you do in that country — in other words, how much profit you make.

 

In addition, in many cases you must have a “permanent establishment” in that country. This means that if you do not have equipment or personnel in that country you may not be subject to income tax in that country.

 

As you might imagine, there are exceptions. That’s why it is important to be aware of the implications of any tax treaty between the U.S. and the country in which you plan to do business.

 

Tariffs, Duties, and Taxes

 

In addition to tax on income earned overseas, there are rules about other types of taxes — often called tariffs, duties, or fees — levied by foreign countries on products that U.S. companies export to those countries.

 

As with taxes on profits, the rules governing tariffs, duties, and other types of fees can get complicated. For that reason, Export.gov suggests you may want to obtain help from a commercial specialist in the country in which you plan to do business.

 

Some countries also impose a value-added tax (VAT), on products imported into their territories.

 

It makes sense to know what you are getting into before diving into a new country. Export.gov provides helpful basic information about tariffs and taxes on a country-by-country basis.

 

You can find also your Harmonized System or Schedule B number through a search engine maintained by the Census Bureau. Your Schedule B number determines tariff rates and, more importantly, whether your product qualifies for any preferential treatment under a FTA (Free Trade Agreement). Once you have your Schedule B number, you can determine the tariff rates on your products here.

 

Do you have any other resources or tips to recommend? Please share in the comments section below.