Spring 2012 issue of Horizons

Manufacturing & Distribution – continued

• Are there any restrictions on payments of debt principal or interest? • Would there be limitations on dividend payments or capital distributions? • What are the withholding taxes imposed on dividend and interest payments? Any incorporation or drafting of documents would likely require local country legal assistance.

Non-Income Taxation in Foreign Jurisdictions VAT

Additional foreign taxes to be aware of include value added taxes (VAT) and goods and services taxes (GST). More than 130 countries have a VAT or similar type of tax (including GST, consumption tax, etc). There are VAT systems in Canada, Australia, Asia, Central & South America, Europe, and Africa – many based on the European Union model. In fact, of the 34 member countries of the Organization for Economic Co-operation and Development (OECD), only the U.S. does not have a VAT! A VAT is a tax on consumer expenditures, collected on business transactions and importations, charged at each stage of the transaction on goods and services. This tax should not be a cost to a manufacturer as the amount that is paid in VAT is allowed as a credit against the amount collected from customers. The net VAT collected is remitted to the foreign government. If a U.S. business is not registered to do business in a foreign jurisdiction for VAT purposes, the VAT assessed on items purchased may not be able to be recovered. In addition, if the foreign government determines that the U.S. business should have collected VAT from a foreign customer, penalties may be assessed. Customs When importing goods into another country, the goods must enter into that country and be considered for customs and duties purposes.

This requires more time and effort to ensure that the proper legal entity is formed, funded and registered with the federal and local authorities. In addition, it will be necessary to file income tax returns as dictated by local law. When funding the new foreign legal entity, you must determine whether to fund with debt or equity. Care must be given to consider what is legally necessary for equity purposes. However, steps may be taken to structure the funding in the most tax efficient manner. Questions to consider: • Are funds needed on a short-term basis for start- up expenses? • Are there local law restrictions on the minimum capital required?

• Would there be limitations on the amount of interest that could be deducted for tax purposes?

Raise Your Expectations

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