TAX ISSUES U.S. COMPANIES FACE WHEN CHOOSING TO DO BUSINESS ABROAD

2. TAX ISSUES U.S. COMPANIES FACE WHEN CHOOSING TO DO BUSINESS ABROAD Presented by:Ryan L. Losi, CPA Executive Vice PresidentPiascik & Associates, P.C.

3. Agenda/Outline • Introduction • Where will you transact business • What business will you transact • How will you transact business • Which business form will you transact through • Compliance requirements • Cash flow and treasury requirements • Social issues to address • Other tax issues to address • Brief example

4. THE MARKET • Determine which Region(s) of the world the Company’s products and/or services should be offered • Determine which Country(ies) within each Region the Company’s products and/or services should be offered

5. THE TAX SYSTEM • Obtain a thorough understanding of the type of income tax system the foreign country employs which will generally be one of the following: • Territorial System – based on the connection between taxpayer’s income and that country (many European Countries) • Credit System – based on the connection between taxpayer and the taxing country (U.S. System)

6. THE BUSINESS ACTIVITIES • Based on having a thorough understanding of the country’s income tax system, determine WHAT and how the Company will do business in the foreign country. Will there be the following activities: • Sales and/or Distribution Activities • Use of independent Sales Force • Use of Company Sales Force • Use of local or U.S. Expatriates or combination • Manufacturing & R&D Activities?? • IP/Entrepreneurial Activities – Who will own this?

7. THE STRUCTURE • Determine which business form the Company will use to transact within the foreign jurisdiction (i.e., foreign branch, foreign partnership, or foreign corporation) • To determine the best business form the Company should: • Have five (5) year revenue and profit/(loss) projections • Determine its long term strategy regarding its profits (i.e., reinvest vs. repatriate) • Determine which section of the Internal Revenue Code the Company will be subject to • Analyze and plan how this impacts other countries of interest • Determine the compliance requirements for each business form for the following: • Local foreign jurisdiction • U.S.

8. THE COMPLIANCE • Determine where the books and records will be maintained and the following: • Is a local accountant necessary to maintain the books and records as well as satisfying the local compliance requirements • Who in the U.S. will be responsible for maintaining this relationship and collecting the required information for U.S. reporting • What process(es) or procedures will be initiated in order to ensure that the information that is required from the U.S. side is obtained and that it is accurate • In what currency denomination will the books and records be maintained

9. THE CASH • Understand and determine how the U.S. Company intends to get cash into the foreign location(s) and/or get cash out of the foreign location(s) • Obtain a thorough understanding of the income tax withholding laws/requirements that the foreign country employs • Thoroughly understand the Income Tax Treaty(ies) (assuming one exists) between the U.S. and foreign country

10. THE WORKERS • Obtain a thorough understanding of the type of social system that the foreign country employs • Determine if your company will fall under its jurisdiction • Determine what type of Company representatives you will have on the ground • Independent representatives/consultants • Employees (U.S. or foreign or combination) • Determine if Company representatives be treated and paid as employees of the U.S. company or the foreign entity, and how will that impact the business from a tax and legal standpoint • Determine the employee withholding requirements for each foreign jurisdiction

11. THE WORKERS (CONTINUED) • Obtain a thorough understanding of the labor laws that the foreign country employs • Determine who will administer Payroll • Thoroughly understand the Social Security Treaty(ies) (assuming one exists) between the U.S. and foreign country • Develop a Formal Expatriate/Foreign National Compensation Program in order to prevent undue negative issues

12. OTHER TAX ISSUES • Determine if there are any Transfer Pricing Agreements that need to be put into place between the U.S. and the foreign jurisdiction • Obtain a thorough understanding of any other taxing systems a foreign jurisdiction may employ such as the following: • Value Added Tax (VAT) • Goods and Services Tax (GST) • Tax Holidays • Foreign Economic/Enterprise Zones

13. THE ADVISORS • Understand the competencies and responsibilities of each outside advisor(s) your Company employs: • International Tax Accountant(s) • International Tax Attorney(ies) • International HR Advisor(s) • International Business Advisor(s) • International Banker(s)

14. EXAMPLE • Value Added Tax (VAT) - In general, in a B2B transaction, value added tax is charged to the end user of most products or services. The place of supply of services determines where the supply is subject to VAT. • Under current rules, the place of supply of service is generally at the location of the service provider. However, for telecommunications services the location of the supply of service is the location of the recipient of the services. • If the service supplier is located in the EU and is located in the country where the recipient is located, then the service supplier is required to collect VAT on services. If the telecommunication services are provided to a recipient in another EU country then the recipient is required to account for the VAT tax and the supplier is not obligated to collect the VAT.

15. EXAMPLE • VAT tax changes in 2010 • The EU Council of Ministers recently adopted a VAT Directive that makes major changes to the rules governing the place of supply of services to ensure that VAT on services accrues to the country where the services are used. • The new rules will require the charging of VAT on business-to-business services at the place where the customer is located. • The new rules may require companies providing services in EU countries to collect VAT for customer based on the VAT rate for those services at the customer’s location. • How will VAT be collected and distributed to various countries? This issue will need to be determined by the EU Council of Ministers.

16. THE PLAN • Develop a plan that is flexible and friendly that allows your Company to grow internationally while at the same time allowing you to effectively manage your GLOBAL TAX RATE and risk of doing business in each jurisdiction

17. INTEREST CHARGE DOMESTIC INTERNATIONAL SALES CORPORATION (IC-DISC) – THE LAST REMAINING EXPORT INCENTIVE Presented by:Ryan L. Losi, CPA Executive Vice PresidentPiascik & Associates, P.C.

18. An IC-DISC as a subsidiary of an S corporation or another flow-through entity U.S. IC-DISC (Tax Exempt) Qualified Dividends at Reduced Tax Rate S Corp Commission U.S. Exports Foreign

19. An IC-DISC as a brother-sister entity of an S corporation or another flow-through entity U.S. Qualified Dividends at Reduced Tax Rate Commission IC-DISC (Tax Exempt) S Corp U.S. Foreign Exports

20. An IC-DISC should only be a brother-sister entity of a C corporation U.S. Qualified Dividends at Reduced Tax Rate Commission IC-DISC (Tax Exempt) C Corp U.S. Foreign Exports

21. An IC-DISC shares can be provided to a key employee who is not an owner of the operating company Export Sales Director/Manager U.S. Qualified Dividends at Reduced Tax Rate Commission IC-DISC (Tax Exempt) S or C Corp U.S. Foreign Exports

22. An IC-DISC shares could be owned by an IRA IRA U.S. Qualified Dividends Tax Deferred Commission IC-DISC (Tax Exempt) S or C Corp U.S. Foreign Exports

23. Although a listed transaction, a Roth IRA’s ownership of an IC-DISC shares can significantly reduce tax Roth IRA U.S. Qualified Dividends Tax Free (NO TAX) Commission IC-DISC (Tax Exempt) S or C Corp U.S. Foreign Exports