The easy answer: an integrated database solution to global withholding compliance.

• Author: Garcia, John P.
• Position: Compliance tips

As more companies even relatively small ones--go global, setting up businesses and customers is almost always the lint older of business, Many of the administrative functions, such as tax compliance, follow later sometimes much later. Often, foreign affiliates are created to facilitate business overseas. A myriad of business transactions flow from this global effort, These transactions often have tax consequences, which are not immediately apparent.

While there are many tax consequences that can result from a global business, we'll address withholding taxes, which apply to many transactions, and the rules and the withholding tax rates are always changing for example, 23 of 30 Organization for Economic and Co-operation Development countries routinely apply withholding requirements on a final, or creditable, basis to payments of dividend and interest income to investors (www.calepa.org/OECD.pdf).

To gain insight on this dilemma, it's necessary to discuss some of the realworld scenarios. This includes the risks and opportunities generally describing how withholding lax works on a global basis and describing why the integrated database approach is the best solution for withholding tax compliance.

Let's use two typical intercompany scenarios.

The Intercompany Loan Balance

Your domestic company purchases product from a third-party manufacturer for ultimate delivery to a foreign subsidiary; The sale to the foreign subsidiary creates an intercompany payable between the domestic company and the foreign subsidiary. If this intercompany balance is not paid within a reasonable time frame, say 60 to 90 days, it may become a loan subject to interest.

The loan interest would be subject to withholding tax depending on the relationship between the domestic entity and foreign jurisdiction. Withholding tax on interest it often between 5 percent and 30 percent. Assume that the balance has never been paid and the foreign tax authority has commenced an income tax audit and it questioning the intercompany payable of die domestic company.

The risk: The auditor will determine that the intercompany balance is a loan, and assess an arms-length interest rate with an associated withholding tax. The auditor will also likely assess penalties and interest on the under withholding. This does not even take into account the U.S. tax exposure. Also, the auditor might be reluctant to allow an interest expense deduction.

The result is the foreign affiliate pays the withholding...