International Tax Planning for US Businesses

International tax planning is essential for firms operating in multiple jurisdictions. Strategic planning is crucial to navigating cross-border tax rules and minimizing tax liabilities. Firms usually face complexities regarding taxes as they expand globally. 

With well-structured international tax planning strategies, firms can smooth their global operations and manage cross-border transactions. This guide explores the techniques, challenges, and opportunities of international tax planning and reveals the best M&A advisory for tax planning.

What is International Tax Planning?

International tax planning refers to the management of cross-border financial activities and arrangements. These are intended to minimize tax liability exposure, prevent double taxation, and capitalize on tax opportunities. 

It requires detailed knowledge of the international tax system, its treaties, policies, and different legal tax avoidance methods. International tax planning, at times referred to as international tax systems, is a type of foreign tax planning designed to give effect to principles that operate under several tax jurisdictions

This type of planning requires a solid grasp of international tax treaties, local tax codes, and economic relationships between countries. While often confused, it’s important to distinguish:

  • Tax avoidance: Legal use of tax strategies to reduce tax liabilities.
  • Tax evasion: Illegal practice of not paying taxes owed.

Done right, international tax planning promotes lawful financial optimization while keeping firms compliant.

The International Tax Competitiveness Index

The International Tax Competitiveness Index (ITCI) aims to measure how a country's taxation system complies with two significant tax policy features: competitiveness and neutrality. ITCI’s 2023 report lists the United States in 21st place. 

As noted in the report, the Organization for Economic Co-operation and Development (OECD) cites corporate taxes as most damaging to an economy's growth. In contrast, personal income and consumption taxes are less harmful. 

Here is the ITCI ranking for the United States:

Overall RankOverall ScoreCorporate Tax RankIndividual Taxes RankConsumption Taxes RankProperty Taxes RankCross-Border Tax Rules Rank
2165.0222242935


Key Benefits of International Tax Planning

Why should businesses care about tax planning internationally? Here’s what they gain:

  • Minimized Double Taxation – Companies with cross-border operations can avoid being taxed twice on the same income through the use of tax treaties and credits.


  • Lower Global Tax Burden – Strategic placement of operations in tax-friendly jurisdictions can legally reduce tax liabilities.


  • Improved Cash Flow – Efficient tax structuring keeps more capital available for reinvestment.


  • Stronger Compliance Posture – Proactive planning avoids costly mistakes and penalties.

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Strategies of International Tax Planning for Global Firms

International tax planning is a tax strategy that focuses on the relations between several jurisdictions for legal and economic double taxation. It also takes into account the complex requirements for tax compliance in different jurisdictions. In addition, international tax planning not only takes into account tax expenses, but also investigates non-tax expenses. This includes:

  • Tax incentives and the undue granting of exemptions for foreign revenue.
  • Using foreign tax reliefs.
  • Transposing tax agreements.
  • Compliance with non-avoidance rule policies.

Strategies of International Tax Planning for Global Firms

Strategy 1: Prepare for International Regulatory Changes

With the ongoing tax and regulatory changes, the global tax teams must be prepared for new challenges. The regulatory changes include:

  • According to the recent memorandum, the Organisation for Economic Co-operation and Development (OECD)’s Inclusive Framework has “no force or effect” in the U.S., which pulls the United States out of the agreement.  


  • The EU’s country-by-country reporting (CBCR) directive aims to improve the transparency of multinational firms. As per the directive, firms with revenue of more than €750 million should disclose their income tax reports. This applies to non-European multinationals doing business in the EU through subsidiaries. 


  • The United States Tax Cuts and Jobs Act (TCJA) keeps changing deductions, depreciation, expensing, tax credits, and other tax items that affect firms. Some provisions can also affect firms' taxes; hence, you should review how these provisions work.


  • To decide how much tax a firm needs to pay or whether it needs to pay it all, many countries have developed tax agreements with other countries to address double taxation.

Prepare for International Regulatory Changes

Strategy 2: Prepare for the Global Minimum Tax of 15%

According to the OECD proposal, there are two pillars of the reform. Pillar 1 is for firms that are $200 billion in profits and pay taxes. Pillar 2 introduces a global minimum tax of 15% and has four rules for firms doing €750 million+ in revenues:

  • Domestic Minimum Tax: This rule applies to countries where they could claim the first right to tax profits that are taxed below the rate of 15%.


  • Income Inclusion Rule: This rule determines when foreign income should be included in the parent company's taxable income. The minimum tax rate of 15% applies to the rule, which relies on financial accounting data rather than tax accounting data. 


  • Undertaxed Profits Rule: Under this rule, a country can increase taxes on a firm if it is taxed below 15% in another jurisdiction. If multiple countries apply for a similar tax, the profit is divided based on the location of tangible assets.


  • Subject to Tax Rule: This rule is used in a tax treaty framework in which countries pay taxes at a low rate of 9%.

Tax Strategies Under the TCJA

The U.S. employed a worldwide tax system in which it taxed domestic corporations' foreign income at a 35% corporate rate, which ranked third highest among OECD member countries.

The high tax rate led corporations to delay tax payments while transferring their earnings to lower-tax regions to reduce tax expenses.

U.S. persons and corporations undertaking foreign operations or direct foreign investments either directly or through U.S.-chartered corporate entities become subject to foreign income taxes. Taxes imposed by foreign countries could become an additional tax burden.

The primary method the U.S. tax system uses to address the possibility of foreign income taxation is the foreign tax credit (FTC). This credit reduces U.S. taxes by an identical amount for income taxes paid to foreign nations, but only up to the U.S. tax rate limit.

The Challenges of International Tax Planning

Challenges

Many countries have tax compliance laws that differ from one another, which poses a challenge for the firms. For example, handling double taxation is something where firms face income taxation in the parent company and its subsidiaries. Here are some other challenges of international tax planning:

  • Tax Planning by Multinationals: Multinational firms use sophisticated tax planning tools to shift profits to low-tax jurisdictions to reduce their overall tax burden.


  • Erosion of Tax Bases in High-Tax Countries: By transferring profits abroad, firms significantly decrease tax revenues in high-tax countries. This limits government funding for public services and infrastructure.


  • Rising International Market Distortions: With differences in tax regulations, some firms misuse them to gain unfair competitive advantages through tax avoidance.


  • Implementation of Anti-Avoidance Measures: Many countries, including Italy and EU member states, have introduced legal measures to counteract tax avoidance. These measures prevent firms from exploiting international tax mismatches.


  • Need for Corporate Tax Strategy Re-Evaluation: With stricter regulations in place, multinational firms must reassess their traditional tax planning methods and align them with new compliance requirements.


  • Enhanced Tax Information Exchange: The growing cooperation between tax authorities worldwide has made international tax violations more detectable, reducing opportunities for firms to hide profits.


  • Legal Risks and Compliance Challenges: Firms must ensure their tax strategies are legally sound, as non-compliance could result in disputes, financial penalties, and reputational damage.

Opportunities of International Tax Planning

Although international tax planning allows corporations to save on their taxes worldwide, it can lead to disputes with tax authorities if tax evasion or avoidance practices are utilized.

International tax planning has the feature of tax evasion when it breaches particular laws relative to the tax systems pertinent to the taxpayer. 

On the contrary, international tax planning is said to be tax avoidance when it does not contravene specific provisions, yet seeks to achieve other results different from what the law intends by exploiting the tax provisions.

Hence, international tax planning is valid only if its implementation ensures compliance with the relevant tax legislation and its intention logical without resorting to propaganda, formal instruments devoid of substance that result in tax expenditure manipulation.

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Why Choose MYCPE ONE for Tax Planning

MYCPE ONE M&A Advisory supports accounting firms in overcoming tax planning challenges related to mergers and acquisitions. Through our expertise, we help firms maintain compliance with changing tax regulations while optimizing their worth during transactions. 

Our specialized M&A platform delivers successful outcomes for firms expanding or transitioning, as well as those searching for suitable buyers. Our extensive industry knowledge, combined with a successful history of hundreds of completed transactions, enables us to connect firms with appropriate buyers who offer optimal conditions.

Case Studies

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Conclusion

Whether it is international tax planning for individuals or a firm, both benefit from successfully managing the intricate rules of cross-border taxation. Firms need to implement international tax planning strategies to reduce liabilities and boost financial efficiency amid dynamic regulations, global tax reforms, and compliance difficulties. 

Through meticulous planning, organizations safeguard against double taxation while benefiting from tax treaties and remain ready for regulatory modifications to attain compliance and maximize tax savings. Accounting firms can rely on MYCPE ONE's expert guidance for smooth transitions during mergers and acquisitions. International tax planning expertise enables firms to maintain compliance while securing sustainable financial achievements.

FAQs

Foreign firms are subject to net-basis income tax under §882 on any income connected with their firms.

If you are a U.S. citizen, your worldwide income is subject to U.S. income tax, regardless of where you live. You should also qualify for certain foreign earned income exclusions or tax credits.

If you are a U.S. citizen, your worldwide income is subject to U.S. income tax, regardless of where you live. You should also qualify for certain foreign earned income exclusions or tax credits.

The federal corporate tax rate in the US is 21%, along with a separate corporate tax on companies. The federal corporate tax rate in the US is 21%, along with a separate corporate tax on companies.

Christopher Rivera

Christopher Rivera

Christopher Rivera, Chris serves as a Director of Client Relations and Business Development at MYCPE ONE. He is an expert at leading and managing teams actively from the front. His expertise in sales, training, coaching, mentoring and influencing combined with his competitive nature makes him a strong leader. Chris has traveled through the length and width of the country and has spoken with more than five thousand CPAs, understanding their challenges and limitations. On the grounds of that, he can now easily provide opinions and solutions that can be immensely helpful to the professionals. He has also represented MYCPE ONE at a number of major accounting conferences and networking events.

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