Where in The World is My Business? Taxable Presence and the Global Start-up
You Are Here – Or Are You? The Location of Your Business is a Critical Tax Issue
But each of these actions can trigger serious tax consequences, and greatly increase your exposure to the risk of double taxation. Plotting your business strategy without keeping a close eye on taxation invites a high tax bill, and the possibility of penalties if you cross a tax threshold. And you can easily cross that threshold – inadvertently and unknowingly – simply by making routine decisions about where to conduct business and where to deploy staff. Tax laws are complex, and you can easily put yourself at risk.
The problem for global entrepreneurs is this: While global business has become effectively geography-independent, tax remains stubbornly geographic. All over the world, in practically every jurisdiction, taxes are assessed based on the physical location of a business or a transaction. This has been the case for millennia. Throughout history, business transactions have been taxable in the place where they happen, and the business itself typically pays taxes where it “sits.”
The key concept in determining the tax exposure – and the resulting tax strategy – for a business is called “taxable presence.” The central question is this: Does a business have a taxable presence in a given location or not? The answer is determined by several factors, all of them related to the amount and kind of activity that a business conducts in that location, and the level of assets it maintains there. Taxable presence has implications, not only for global businesses, but for U.S. interstate businesses as well.
So, while from a business standpoint, it’s clearly a small world after all, and there are many reasons to set up activities overseas, the tax picture can be daunting. Even a simple, desirable-seeming business decision can be fraught with tax consequences. It can seem appealing to send employees abroad to spend time in some of the world’s technology hubs to get to know the culture in a target market while they do some software design and coding on site.. Such a move, however, creates tax issues – affecting the tax status of the employees themselves and creating tax consequences for the business. When intellectual property is involved, especially if it is of high value, things get even more intricate, as the question arises as to where the income from these intangibles will be taxed.
To avoid unpleasant surprises, both a venture and its individual founders and employees must carefully assess where a business activity might constitute a taxable presence – and whether a taxable presence is really needed in a given location. They need to structure their entity and its activity to minimize double taxation. Failing to do so can create a tax burden. And there are other consequences. Upon a future sale of shares of a company, it is not unusual for the purchasers to require that the seller set aside funds in an escrow account to cover potential tax liabilities arising from taxable presence issues.
Planning an international tax strategy is not something an entrepreneur can readily accomplish unassisted. Any global entrepreneur contemplating a cross-border business move – whether the borders are States or Countries – should consult with a tax professional to understand and make adjustments for the possible tax implications.
Table of contents
1. You Are Here – Or Are You? The Location of Your Business is a Critical Tax Issue
2. The Most Basic Question is How to Define Taxable Presence
3. State Tax Nexus is the Easiest Tax Threshold to Cross
4. A New Set of Tax Liabilities is Created by the Federal Standard of “Income Effectively Connected with a U.S. Trade or Business”
5. The Highest Level of Complexity is Represented by the Treaty Concept of Permanent Establishment
6. Founders and Employees Also Need to Ask a Personal Question: Should I Become a U.S. Tax Resident?